CIVIL CODE OF THE PHILIPPINES

TITLE IX
PARTNERSHIP
Chapter 1

GENERAL PROVISIONS

Art. 1767. By the contract of partnership two or more

persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing
the profits among themselves.
Two or more persons may also form a partnership for
the exercise of a profession.

COMMENT:
(1) ‘Partnership’ Defined
It is a contract whereby two or more persons bind themselves
to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves, or
in order to exercise a profession. (See Art. 1767). It is also a
status and a fiduciary relation subsisting between persons car-
rying on a business in common with a view on profit.
(NOTE: While strictly speaking the exercise of a profes-
sion is not a business undertaking nor an enterprise for profit
–– the law considers the joint pursuit thereof, for mutual
help, as a partnership.)

Fernando Santos v. Sps. Arsenio &

Nieves Reyes
GR 135813, Oct. 25, 2001

FACTS: The “Articles of Agreement” stipulated that the

signatories shall share the profits of the business in a 70-15-15

576
CIVIL CODE OF THE PHILIPPINES Art. 1767

manner, with petitioner getting the lion’s share. Issue: Was

there a partnership established?
HELD: The stipulation clearly proved the establishment
of a partnership. By the contract of partnership, two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing
the profits among themselves.

(2) Characteristics of the Contract

(a) The contract is consensual, because it is perfected by
mere consent, although such consent must be manifested
in certain cases by the proper formalities; bilateral or
multi-lateral, because it is entered into between two or
more persons; nominate, because it is designated by a
specific name; principal, because its existence does not
depend on the life of another contract; onerous, because
certain contributions have to be made; and preparatory,
in the sense that after it has been entered into, other
contracts essential in the carrying out of its purposes
can be entered into. (See 4 Sanchez Roman 519).
(b) There must be a contribution of money, property or in-
dustry to a common fund (credit, such as that evidenced
by a promissory note, or even mere goodwill — economic
goodwill or commercial credit, which is the sheer ability
to obtain funds on credit — may be contributed for both
credit and goodwill are considered properties — but not
mere “political credit” or personal influence, since this
may be contrary to good customs). (11 Manresa 273
and 2 Castan 644). (A license to construct and operate
a cockpit can be given as contribution to a partnership.)
(Baron v. Pajarillo, et al., C.A., 146-R, Nov. 29, 1956).
[NOTE: The “industry” contributed may be intel-
lectual or physical. (11 Manresa 273).]
[NOTE: A limited partner cannot contribute mere
“industry.” (Art. 1845, Civil Code).]
(c) The object must be a lawful one. (Art. 1770, Civil Code).
(d) There must be an intention of dividing the profit among
the partners (Art. 1767) since the firm is for the common

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Art. 1767 CIVIL CODE OF THE PHILIPPINES

benefit or interest of the partners. (Art. 1770, Civil Code).

(See Evangelista, et al. v. Coll. of Int. Rev., L-9996, Oct.
15, 1957).
In the case of Evangelista, et al. v. Coll. of Int. Rev.,
L-9996, Oct. 15, 1957, it was held by the Supreme Court
that where two people jointly borrowed from their father
a sum of money which, together with their own personal
funds, was used by them in buying real properties for
lease to third parties, such investment consisting of a
series of transactions and the management thereof be-
ing under one person for more than 10 years, the legal
entity created by them is a partnership. Similar results
had been arrived at in Duterte v. Rallos, 2 Phil. 509 and
Kial v. Estate of Saber, 46 Phil. 193.
[NOTE: The object must be for profit and not merely
for common enjoyment; otherwise, only a co-ownership has
been formed. However, pecuniary profit need not be the
only aim; it is enough that it is the principal purpose.
Thus, other ends — like social, moral, or spiritual objec-
tives — may also properly exist. (11 Manresa 264).]
(e) There must be the affectio societatis — the desire to
formulate an ACTIVE union (Fernandez v. De la Rosa,
1 Phil. 671) with people among whom there exist mutual
confidence and trust (delectus personarum).
[NOTE: Just because the terms “partnership and
“partners” appear in a contract between certain persons
does not necessarily mean that a partnership has been
entered into. (Paterson v. Eppler, 67 N.Y.S. {2nd} 498).]
A new personality — that of the firm—must arise,
distinct from the separate personality of each of the
members. (See Art. 1768).

(3) Historical Notes

(a) Under Roman Law, partnerships existed. Such partner
ships had, among other things, the following features:
1) There was no limit as to the number of partners.
2) In the Roman partnership (societas) one partner
was not considered the implied agent of the oth-

578
CIVIL CODE OF THE PHILIPPINES Art. 1767

ers. Thus, to bind others, a partner had to obtain

an express mandate (mandatum or authorization)
from each of the others.
3) The partners were liable jointly, not solidarily.
4) The partners had the right to the beneficium com-
petentiae, that is, they were held financially liable
only insofar as they would not be reduced to des-
titution.
5) The heirs (heres) of a deceased partner could not
succeed to the rights of the deceased, even by ex-
press stipulation.
6) A Roman partner could not retire in order to enjoy
alone a gain which he knew was awaiting him.
(b) Before the new Civil Code became effective on Aug. 30,
1950 (Lara v. del Rosario, L-6339, 50 O.G. 1957) there
were two kinds of partnerships in the Philippines, namely,
the civil partnership, and the commercial or mercantile
partnership. (Art. 1665, old Civil Code; Art. 116, par. 1,
Code of Commerce). While the first was engaged in civil
purposes, the latter’s object was to deal in mercantile
transactions. (Prautch, Scholes and Co. v. Hernandez, 1
Phil. 705, decided Feb. 10, 1903). Whether it was reg-
istered or not was not important — for the difference
lay in the ends desired, not the manner of organization
— although, in the absence of a clear showing as to
whether the object was civil or commercial, the form of
organization, that is, registration in the mercantile reg-
istry, was held indicative of its nature as a commercial
partnership. (Compania Agricola de Ultramar v. Reyes,
4 Phil. 2). While the civil partnership was governed by
the old Civil Code, the Code of Commerce controlled the
mercantile variety.
With the advent of the new Civil Code, the provi-
sions of the Code of Commerce relating to mercantile
partnerships, and the provisions of the old Civil Code
concerning civil partnerships have been repealed. (Art.
2270, No. 2). Therefore, without prejudice to the tran-
sitional provisions of the new Civil Code, the new Code

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Art. 1767 CIVIL CODE OF THE PHILIPPINES

now governs all transactions of all partnerships, whether

the object be civil or mercantiles.
[NOTE: Bar Exam Question — “What are com-
mercial partnerships?” (See the foregoing discussion).]

(4) ‘Partnership’ Distinguished from a ‘Corporation’

DISTINGUISHING PARTNERSHIP CORPORATIONS

FACTOR

(a) HOW CRE- (a) VOLUNTARY (a) created by the

ATED agreement of state in the
parties form of a spe-
cial charter or
by a general
enabling law
(The Corpora-
tion Code)
(b) HOW LONG IT (b) no time limit ex- (b) not more than
EXISTS cept agreement 50 years; (Sec.
of parties 11, Corp. Code),
may be reduced,
but never ex-
tended
(c) LIABILITY TO (c) may be liable (c) liable only for
STRANGERS with their pri- payment of
vate property their subscribed
beyond their capital stock
contribution to
the firm

(d) TRANSFER- (d) even if a part- (d) a transfer of

ABILITY OF ner transfers interest makes
INTEREST his interest to the transferee
another, the a stockholder,
transferee does even without
not become a the consent of
partner unless the others
all other part-
ners consent
(This is due to
the principle of

580
CIVIL CODE OF THE PHILIPPINES Art. 1767

mutual trust
and confidence
— the “delectus
personarum.”)
(e) ABILITY TO (e) generally, part- (e) generally, the
BIND THE ners acting on stockholders
FIRM behalf of the cannot bind cor-
partnership are poration since
agents thereof; they are not
consequently agents thereof
they can bind
both the firm
and the part-
ners
(f) MISMANAGE- (f) a partner can (f) a stockholder
MENT sue a partner cannot sue a
who misman- member of the
ages board of direc-
tors who mis-
manages: the
action must be
in the name of
the corporation
(g) NATIONAL- (g) a partnership (g) a corporation
ITY is a national of is a national
the country it of the country
was created under whose
laws it was in-
corporated, ex-
cept for wartime
purposes or for
the acquisition
of land, natural
resources and
the operation of
public utilities
in the Philip-
pines, in which
case the veil of
corporate iden-
tity is pierced
and we go to the
nationality of
the controlling
stockholders

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Art. 1767 CIVIL CODE OF THE PHILIPPINES

(h) ATTAINMENT (h) t h e f i r m b e - (h) the firm be-

OF LEGAL comes a juridi- comes a juridi-
PERSONAL- cal person from cal person from
ITY the time the the time it is
contracts be- registered in the
gins Securities and
Exchange Com-
mission, and all
requisites have
been complied
with
(i) DISSOLU- (i) death, retire- (i) such causes do
TION ment, insolven- not dissolve a
cy, civil interdic- corporation
tion, or insanity
of a partner dis-
solves the firm

(5) ‘Ordinary Partnership’ Distinguished from the ‘Conjugal

Partnership of Gains’

FACTORS ORDINARY CONJUGAL

PARTNERSHIP PARTNERSHIP

(a) HOW CRE- (a) by will or consent (a) created by op-

ATED of the parties eration of law
upon the cel-
ebration of the
marriage
(b) LAW THAT (b) in general, it is the (b) in general, it
GOVERNS will of the part- is the law that
ners that governs governs
matters like object,
length of existence,
etc.; the law is only
subsidiary
(c) LEGAL PER- (c) possesses a le- (c) does not possess
SONALITY gal personality any legal per-
(Art. 1768, Civil sonality distinct
Code) from that of the
husband or wife;
hence, it cannot

582
CIVIL CODE OF THE PHILIPPINES Art. 1767

sue or be sued
as such
(d) COMMENCE- (d) begins from the (d) commences
MENT OF moment of the precisely on
THE PART- execution of the the date of the
NERSHIP contract but a celebration of
contrary stipula- the marriage
tion is allowed — no contrary
(Art. 1784, Civil stipulation is
Code) allowed
(e) PURPOSE (e) formed for profit (e) not formed
particularly for
profit
(f) DIVISION OF (f) as a rule, profits (f) as a rule, prof-
PROFITS are divided ac- its are divided
cording to previ- equally (but
ous agreement; settlement can
and if there is provide other-
no agreement, in wise) (Art. 106,
proportion to the Family Code)
amount contrib-
uted (Art. 1797,
Civil Code)
(g) MANAGE- (g) as a rule, man- (g) as a rule, the
MENT agement is con- administration
ferred upon the and enjoyment
partners so ap- of the conjugal
pointed by the partnership
others; other- property belong
wise, all are to both spouses
equally consid- jointly (Art. 124,
ered agents of the Family Code)
firm (Art. 1803,
Civil Code)
(h) DISSOLU- (h) there are many (h) there are few
TION grounds for dis- grounds for dis-
solution solution
(i) LIQUIDATION (i) there may be di- (i) there will be no
OF PROFITS vision of profits liquidation or
even without dis- giving of profits
solution till after disso-
lution

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Art. 1767 CIVIL CODE OF THE PHILIPPINES

(6) ‘Partnership’ Distinguished from ‘Co-ownership’

(Community of Property; Tenancy in Common)

FACTORS PARTNERSHIP CO-OWNERSHIP

(a) CREATION (a) c r e a t e d b y (a) created by con-

contract only tract, law and
(express or im- other things
plied)
(b) JURIDICAL (b) has legal or ju- (b) has no juridi-
ridical personal- cal personality
ity (hence, it can-
not sue or be
sued as such)
(c) PURPOSE (c) for profit (c) collective en-
joyment (hence,
not necessarily
for profit) (Red
Men v. Veteran
Army, 7 Phil.
685)
(d) AGENCY OR (d) as a rule, there (d) as a rule, there
REPRESEN- is no mutual is no mutual
TATION representation representation
(although it
is enough for
one co-owner
to bring an ac-
tion for eject-
ment against a
stranger) (Art.
487, Civil Code)
(e) TRANSFER (e) cannot substi- (e) can dispose of
OF INTEREST tute another as his share with-
partner in his out the consent
place, without of the others
unanimous con-
sent
(f) LENGTH OF (f) no term limit is (f) must not be for
EXISTENCE set by the law more than 10
IF CREATED years (although
BY CON- agreement af-
TRACT ter termination

584
CIVIL CODE OF THE PHILIPPINES Art. 1767

may be renewed)
(hence, if more
than 10 years,
the excess is
VOID)
(NOTE: 20
years is the
maximum if
imposed by the
testator or donee
of the common
property.)
(g) PROFITS (g) may be stipu- (g) profits must
lated upon always depend
on proportion-
ate shares (any
stipulation to
the contrary
is VOID) (Art.
485)

(h) DISSOLU- (h) d i s s o l v e d b y (h) not dissolved

TION death or inca- by the death or
pacity of a part- incapacity of co-
ner owner
(i) FORM (i) may be made (i) no public in-
in any form strument
except when needed even if
real property real property is
is contrib u t e d the object of the
(Here, a public co-ownership
instrument is
required.)

(7) ‘Partnership’ Distinguished from ‘Joint-Stock Company’

FACTORS PARTNERSHIP JOINT-STOCK

COMPANY

(a) COMPOSI- (a) Essentially, an (a) Essentially, an

TION association of association of
persons capital (See Fi-
gueras v. Rocha

585
Art. 1767 CIVIL CODE OF THE PHILIPPINES

and Co., 13
Phil. 504)
(b) DIVISION OF (b) capital is NOT (b) although a
CAPITAL divided into special form of
shares partnership, its
capital is divid-
ed into shares,
like in a corpo-
ration

(c) MANAGE- (c) generally, in all (c) generally, in a

MENT the partners board of direc-
tors
(d) LIABILITY (d) partners may (d) liability of the
be liable with members is only
their individual up to the extent
properties after of their shares
exhaustion of if such is what
the partnership the statute pro-
assets vides (See Hibbs
vs. Brown, 190
N.Y. 167)
(e) EFFECT OF (e) t r a n s f e r e e o f (e) transferee of
TRANSFER partner’s share member’s
OF INTEREST does not be- shares himself
come a partner becomes a mem-
unless all the ber without any
other partners necessity of con-
consent sent from the
other members

(8) ‘Partnership’ Distinguished from ‘Social Organiza-

tions’

FACTORS PARTNERSHIP SOCIAL

ORGANIZATION

(a) CONTRIBU- (a) capital is giv- (a) no capital is

TION en in money, given although,
property, or of course, fees
services are usually col-
lected

586
CIVIL CODE OF THE PHILIPPINES Art. 1767

(b) L I A B I L I T Y (b) partners are (b) members are

FOR DEBTS liable only after the ones indi-
the partner- vidually liable
ship assets are for the debts
exhausted of the organi-
zation, debts
authorized or
ratified by said
members
(c) PURPOSE OF (c) organized for (c) organized usu-
OBJECTIVE gain, princi- ally only for
pally finan- social or civic
cial objectives
(d) PERSONAL- (d) a legal per- (d) not a legal per-
ITY son son

(9) ‘Partnership’ Distinguished from ‘Business Trusts’

When certain persons entrust their property or money to
others who will manage the same for the former, a business
trust is created. The investors are called cestui que trust;
the managers are the trustees. In a true business trust, the
cestui que trust (beneficiaries) do not at all participate in the
management; hence, they are exempted from personal liability,
in that they can be bound only to the extent of their contribu-
tion. (See Home Lumber Co. v. Hopkins, 107 Kan. 153; See
also Schumann-Heink v. Folsom et al., 328 Ill. 321).

(10) ‘Partnership’ Distinguished from ‘Tenancy’

(a) A partner acts as agent for the partnership whom he
represents; the tenant does not represent the landlord.
(This is true even if the rent is measured by the amount
of the tenant’s profits while conducting a business on the
premises, particularly if there is no agreement as to the
sharing in losses.) (Sc. 35 C.J. Landlord and Tenant,
Sec. 1, p. 955).
(b) A partnership is a legal person; no such person is cre-
ated in the relationship between landlord and tenant.

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Art. 1767 CIVIL CODE OF THE PHILIPPINES

(11) ‘Partnership’ Distinguished from ‘Agency’

(a) “Agency” may in one sense be considered the broader
term because “partnership” is only a form of “agency.’’
(b) An agent never acts for himself but only for his principal;
a partner is both a principal (for his own interests) and
an agent (for the firm and the others).

(12) ‘Partnership’ Distinguished from a ‘Joint Adventure’

(or JOINT ACCOUNTS)
(a) A joint adventure (an American concept similar to our
joint accounts) is a sort of informal partnership, with no
firm name and no legal personality. In a joint account,
the participating merchants can transact business under
their own name, and can be individually liable there-
for.
(b) Usually, but not necessarily, a joint adventure is limited
to a SINGLE TRANSACTION, although the business of
pursuing it to a successful termination may continue for
a number of years; a partnership generally relates to a
continuing business of various transactions of a certain
kind. (See 33 C.J., pp. 341-342).

(13) ‘Partnership’ Distinguished from a ‘Syndicate’

A syndicate (of American origin) is usually a particular
partnership, that is, it may have been organized to carry out
a particular undertaking or for some temporary objective. (See
Minot v. Burroughs, 112 N.E. 620; see also Gates v. Megargel
266 F. 811).

(14) Capacity to Become Partner

(a) In general, a person capacitated to enter into contractual
relations may become a partner. (40 Am. Jur. 140).
(b) An unemancipated minor cannot become a partner un-
less his parent or guardian consents. Without such con-
sent, the partnership contract is voidable, unless other
partners are in the same situation, in which case the
contract is unenforceable. (Arts. 1327, 1403, and 1407,
Civil Code).

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CIVIL CODE OF THE PHILIPPINES Art. 1767

(c) A married woman, even if already of age, cannnot contrib-

ute conjugal funds as her contribution to the partnership,
unless she is permitted to do so by her husband (See Art.
125, Family Code), or unless she is the administrator of
the conjugal partnership, in which latter case, the court
must give its consent/authority. (See Art. 124, Family
Code).
(d) A partnership being a juridical person by itself can, it is
believed, form another partnership, either with private
individuals or with other partnerships, there being no
prohibition on the matter.
(e) The majority view is that a corporation cannot become
a partner on grounds of public policy; otherwise, people
other than its officers may be able to bind it. (40 Am.
Jur., Sec. 22; See also Whittenton Mills v. Upton, 71
Am. Dec. 681). However, a corporation can enter into
a joint venture with another where the nature of that
venture is in line with the business authorized in its
charter. Thus, a corporation, like the Gregorio Araneta
Co., may act as a sort of “managing partner” of another
corporation, for the purpose of conducting a lawsuit in
line with the corporate business of the corporations con-
cerned. (J.M.T. Wason and Co., Inc. v. Bolanos, L-4935,
May 28, 1968).

(15) Some Cases

Sevilla v. CA
GR 41182-3, Apr. 15, 1988
FACTS: Lina agreed to manage the Tourist World Service,
Inc.’s Ermita office. She solicited airline fares, but did so for
and on behalf of her principal, Tourist Service, Inc. As com-
pensation she received 4% of the proceeds in the concept of
commissions. She conceded the principal’s authority as owner
of the business undertaking. In her letter she “concedes your
[Tourist World Service Inc.’s] right to stop the operation of
your branch office.”
HELD: Considering the circumstances, the parties con-
templated a principal-agent relationship, rather than a joint
management or a partnership.

589
Art. 1767 CIVIL CODE OF THE PHILIPPINES

Neither is there an employer-employee relationship

between Lina and the Tourist World Service. Lina was not
subject to control by the Tourist World Service, either as to
the result of the enterprise or as to the means used in con-
nection therewith. In the first place, under the contract of
lease covering the Ermita Branch, she had bound herself in
solidum and for rental payments, an arrangement that would
belie claims of master-servant relationship. In the second place,
when the branch office was opened, the same was run by
Lina payable to the Tourist World Service by any airline for
any fare brought in on the effort of Lina. Stated otherwise, a
joint venture, including a partnership, presupposes generally
a parity of standing between the joint co-ventures or part-
ners, in which each party has an equal proprietary interest
in the capital or property contributed, and where each party
exercises equal rights in the conduct of business.

Estanislao, Jr. v. CA
GR 49982, Apr. 27, 1988

FACTS: Eligio, Remedios, Emilio and Leocadio are broth-

ers and sisters, who are co-owners of a lot which was then
being leased to Shell. They agreed to open and operate a gas
station, with an initial investment of P15,000 to be taken from
the advance rentals due from Shell. They executed a joint
affidavit, where they agreed to help Eligio by allowing him
to operate the gasoline station. For practical purposes they
agreed that Eligio would apply for the dealership. Remedios
helped in co-managing the business.
Later, the parties entered into an additional cash pledge
agreement with Shell where it was reiterated that the P15,000
advance rental shall be deposited with Shell to cover advances
of fuel to Eligio as dealer with a proviso that said agreement
“cancels and supersedes the joint affidavit.” For sometime,
Eligio submitted financial statements regarding the operation
of the business to his brothers, but later he failed to render
subsequent accounting. So the brothers and sisters of Eligio
sued the latter for accounting and for payment of their lawful
shares.

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CIVIL CODE OF THE PHILIPPINES Art. 1767

The trial judge dismissed the complaint. Another judge

who took over from the first judge set aside the aforesaid
decision and rendered another decision in favor of the broth-
ers and sisters of Eligio. The Court of Appeals affirmed the
decision of the second judge. Eligio contends that whatever
partnership agreement there was in the previous joint af-
fidavit had been superseded by the “additional cash pledge
agreement.”
HELD: Said cancelling provision was necessary for the
Joint Affidavit speaks of P15,000 advance rentals starting May
25, 1966, while the latter agreement also refers to advance
rentals of the same amount starting May 24, 1966. There is
therefore a duplication of reference to the P15,000; hence, the
need to provide in the subsequent document that it “cancels
and supersedes” the previous one.
Other evidence shows that there was a partnership
agreemeet. Eligio submitted to his brothers and sisters periodic
accounting of the business. He gave a written authority to
Remedios to examine and audit the books of their “common
business.” Remedios assisted in running the business. They
bound themselves to contribute money to a common fund with
the intention of dividing the profits among themselves. The
sole dealership by Eligio and the issuance of all government
permits in his name merely complies with Shell’s policy and
the parties’ understanding of having only one dealer of Shell
products.

Dan Fue Leung v. IAC and Leung Yiu

GR 70926, Jan. 31, 1989

A partner shares not only in profits but also in the losses

of the firm. If excellent relations exist among the partners at
the start of a business and all the partners are more interested
in seeing the firm grow rather than get immediate returns,
a deferment of sharing in the profits is perfectly plausible. It
would be incorrect to state that if a partner does not assert
his rights anytime within 10 years from the start of opera-
tions, such rights are irretrievably lost.
The private respondent’s cause of action is premised upon
the failure of the petitioner to give him the agreed profits in

591
Art. 1768 CIVIL CODE OF THE PHILIPPINES

the operation of Sun Wah Panciteria. In effect, the private

respondent was asking for an accounting of his interests in
the partnership.

Ferdinand Santos v. Sps. Arsenio & Nieves Reyes

GR 135813, Oct. 25, 2001

For the purpose of determining the profits that should

go to an industrial partner who shares in the profits but is
not liable for the losses, the gross income from all the trans-
actions carried on by the firm must be added together, and
from this sum must be subtracted the expenses or the losses
sustained in the business.
Only in the difference representing the net profits does
the industrial partner share. But if, on the contrary, the losses
exceeded the income, the industrial partner does not share
in the losses.

Art. 1768. The partnership has a juridical personality

separate and distinct from that of each of the partners,
even in case of failure to comply with the requirements of
Article 1772, first paragraph.

COMMENT:

(1) Effect on Non-Compliance With Art. 1772, 1st Paragraph

(Registration With the Securities and Exchange Com-
mission)
Under Art. 1772, “every contract of partnership having
a capital of P3,000 or more, in money or property, shall ap-
pear in a public instrument, which must be recorded in the
offfice of the Securities and Exchange Commission.” Now then,
suppose this requirement has not been complied with, is the
partnership still a juridical person, assuming that all other
requisites are present?
ANS.: Yes, in view of the express provision of Art. 1768.
According to Dean Capistrano, member of the Code Commis-
sion, par. 1 of Art. 1772 “is not intended as a prerequisite for
the acquisition of juridical personality by the partnership, but

592
CIVIL CODE OF THE PHILIPPINES Art. 1768

merely as a condition for the issuance of licenses to engage in

business or trade. In this way, the tax liabilities of big part-
nerships cannot be evaded, and the public can also determine
more accurately their membership and capital before dealing
with them.” (Capistrano, Civil Code of the Philippines, Vol.
IV, p. 260).

Lilibeth Sunga-Chan & Cecilia Sunga

v. Lamberto T. Chua
GR 143340, Aug. 15, 2001

Art. 1768 explicitly provides that the partnership retains

its juridical personality even if it fails to register. Failure to
register the contract of partnership does not invalidate the
same as among partners, so long as the contract has the es-
sential requisites, because the main purpose of registration, is
to give notice to third persons; and it can be assumed that the
members themselves knew of the content of their contract.
In the case at bar, non-compliance with this directory
provision of the law will not invalidate the partnership con-
sidering that the total of the evidence proves that respondent
and Jacinto indeed forged the partnership in question.

(2) Consequences of the Partnership Being a Juridical

Entity
(a) Its juridical personality is SEPARATE and DISTINCT
from that of each of the partners. (Thus, in the partnership
“Sundiang and Castillo,” there are three persons: Sundiang,
Castillo, and the firm “Sundiang and Castillo”.)
(b) The partnership can, in general:
1) acquire and possess property of all kinds (Art. 46,
Civil Code);
2) incur obligations (Art. 46, Civil Code);
3) bring civil or criminal actions (Art. 46, Civil Code);
4) can be adjudged INSOLVENT even if the individual
members be each financially solvent. (Campos Rueda
and Co. v. Pac. Com. Co., 44 Phil. 916).

593
Art. 1768 CIVIL CODE OF THE PHILIPPINES

(c) Unless he is personally sued, a partner has no right to

make a separate appearance in court, if the partnership
being sued is already represented. (Hongkong & Shanghai
Bank v. Jurado & Co., 2 Phil. 671).

(3) Limitations on Alien Partnerships

(a) If at least 60% of the capital of a partnership is not
owned by Filipinos (or by Americans, for the duration
of the Parity Act), the firm cannot acquire by purchase
or otherwise agricultural Philippine lands. (Sec. 5, Art.
XIII, 1935 Const.) If land is neither timberland nor min-
eral land, it is for necessity agricultural — and would
include “residential, commercial, or industrial lands.”
(Krivenko v. Reg. of Deeds, 79 Phil. 461). Of course, if
the land was purchased during the Japanese occupa-
tion, at a time when the Constitution, being political in
nature, was suspended, the prohibition would not apply.
(Cabauatan v. Uy Hoo, L-2207, Jan. 23, 1951). Neither
would the prohibition apply with reference to lands
purchased before the effectivity date of the Constitu-
tion, or to those acquired by the exercise of the right of
conventional redemption — even if the redemption took
place after the Constitution took effect — as long as the
sale a retro had been made before said Constitution. To
hold otherwise would be to impair a vested right. (See
Secs. 2, 7, 10 & 11, Art. XII, The 1987 Phil. Const.).

Pedro R. Palting v. San Jose Petroleum, Inc.

L-14441, Dec. 17, 1966

ISSUE: Assuming that 60% of a partnership or

a corporation is controlled by American citizens, does
it necessarily follow that said entity can engage in the
exploitation and development of our natural resources?
HELD: No. For, it is still essential to prove that
the particular State in the U.S. of which the members or
stockholders (of the partnership or corporation concerned)
are citizens, allow reciprocal rights to Filipino citizens
and associations or corporations in said State. (See par.
3, Art. VI of the Laurel-Langley Agreement).

594
CIVIL CODE OF THE PHILIPPINES Art. 1768

(b) Foreign partnerships may lease lands provided the period

does not exceed 99 years (Smith, Bell & Co. v. Reg. of
Deeds of Davao, L-7084, Oct. 27, 1954), there being no
prohibition regarding lease. (Krivenko v. Reg. of Deeds,
supra).
(c) Foreign partnerships may be the mortgagees of land,
the mortgage to last for 5 years, renewable for another
years. However, they cannot purchase the same at the
foreclosure sale. (RA 133).

(4) Rules in Case of Associations Not Lawfully Organized

as Partnerships
(a) If an association is not lawfully organized as a partner-
ship (though it apparently carries on the business as a
partnership), it possesses no legal personality. Therefore,
it cannot sue as such. However, the “partners”, in their
individual capacity, can. (Lopez, et al. v. Yu Sefao, et
al., 31 Phil. 319).
(b) One who enters into contract with a “partnership” as
such (as when he borrows money therefrom) cannot, when
sued later on for recovery of the debt, allege the lack of
legal personality on the part of the firm, even if indeed it
had no personality. The reason is that the borrower is in
estoppel. (Behn, Meyer & Co. v. Rosatin, 5 Phil. 660).

(5) Distinction Between Partnerships in the Philippines

and Those in America
While Philippine partnerships have a juridical person-
ality, those formed in America generally do not have (except
for the purpose of insolvency proceedings). (Campos Rueda
& Co. v. Pac. Com. Co., 44 Phil. 916). However, it must be
stated here that in the United States today, two divergent
legal theories as to the nature of a partnership have been
developed by United States Courts, one adhering to the old
common law conception that a partnership is simply an ag-
gregate of individuals, and the other building up the newer
conception that a partnership exists as an entity distinct from
the partners.

595
Art. 1769 CIVIL CODE OF THE PHILIPPINES

(6) Partnership From the Viewpoint of Private International

Law
From the viewpoint of Private International Law, it is
clear that whether a partnership has juridical personality
or not depends on its personal law. The personal law of a
partnership is the law of the place where the partnership
was organized.

Art. 1769. In determining whether a partnership exists,

these rules shall apply:
(1) Except as provided by Article 1825, persons who
are not partners as to each other are not partners as to
third persons;
(2) Co-ownership or co-possession does not itself es-
tablish a partnership, whether such co-owners or co-pos-
sessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself estab-
lish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property
from which the returns are derived;
(4) The receipt by a person of a share of the profits of
a business is prima facie evidence that he is a partner in
the business, but no such inference shall be drawn if such
profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a
deceased partner;
(d) As interest on a loan, though the amount of pay-
ment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a
business or other property by installments or otherwise.

596
CIVIL CODE OF THE PHILIPPINES Art. 1769

COMMENT:
(1) Purpose of Art. 1769 (Rules for Determining Existence
of Partnerships)
To indicate some tests to determine if what may seem
to be a partnership really is one, or it is not.

(2) Requisites for Existence of Partnership

In general, to show the existence of a partnership, all of
its essential characteristics (See comments under Art. 1767)
must be proved; in particular it must be proved that:
(a) there was an intention to create a partnership
(b) there was a common fund obtained from contributions
(c) there was a joint interest in the profits. (See Fernandez
v. De la Rosa, 1 Phil. 669)
THEREFORE:
(a) mere co-ownership or co-possession (even with profit-
sharing)
(b) mere sharing of GROSS returns (even with joint own-
ership of the properties involved) do not establish a
partnership.

(3) Sharing of Net Profits

Sharing of NET profits is prima facie evidence that one
is a partner except in the five instances enumerated under
Art. 1769 (No. 4).
[NOTE: In the case of People v. Juan A. Alegre, Jr., (CA)
L-7244-R, Sept. 16, 1952, the Court of Appeals observed that
the payment of a commission on sales made by a partner does
not preclude (exclude) the existence of a partnership. In fact,
such a practice is oftentimes adopted in business circles as
an added impetus among partners in the sale and disposition
of goods that make up their common assets and property.]
Example:
D, to carry on a business, borrowed money from C.
It was agreed that D would return the money in install-

597
Art. 1769 CIVIL CODE OF THE PHILIPPINES

ments and that said installments would come from D’s

profits in the business. Is a partnership created between
D and C?
ANS.: No. (See Pastor v. Gaspar, 2 Phil. 592). A
difference must be made between LENDING money to
a business proprietor, and contributing money and IN-
VESTING it as CAPITAL in the business. (Dinkelspeed
v. Lewis, 50 Wyo. 380).

(4) Cases

Fortis v. Gutierrez Hermanos

6 Phil. 100

FACTS: Fortis was a bookkeeper in a partnership named

“Gutierrez Hermanos”, with a yearly salary amounting to 5%
of the net profits for each year. Fortis, however, had no vote at
all in the management of the business. Was he a partner?
HELD: No, for clearly this was a mere contract of em-
ployment.

Bastida v. Menzi and Co.

58 Phil. 188

FACTS: Bastida worked for Menzi and Co., as procurer

of contracts for fertilizers to be manufactured by the firm,
and as supervisor of the mixing of the fertilizers. However,
he had no voice in the management of the business except
in his task of supervising the mixing of said fertilizers. For
his services, he was entitled to 35% of the net profits in the
fertilizer business. Aside from this, he sued the firm for 35%
of the value of its goodwill on the ground that he had become
a partner thereof. Decide.
HELD: He was not a partner, but a mere employee with
no power to vote. While the parties had used the phrase “en
sociedad con,” the truth is that this should not be interpreted
to mean “in partnership with” but only as “en reunion con”
or “in association with.”

598
CIVIL CODE OF THE PHILIPPINES Art. 1769

Lyons v. Rosenstock
56 Phil. 632

FACTS: Eliser and Lyons were real estate dealers who

often associated with each other in their business deals, and
who owned together a certain parcel of land. With Lyon’s
consent, Wiser mortgaged the common land to obtain money
for the development of the San Juan Estate. Lyons however
expressed a desire not to participate in the project of develop-
ment. The business of Eliser prospered and later on Lyons
asked for a share obtained from the mortgage of the common
property, and that therefore, he and Eliser had been partners.
Decide.
HELD: No partnership was created, for Lyons himself did
not want to engage in the development project, the mortgage
of the common property being immaterial.

(5) Bar
Valderrama and Co., a general merchandise partnership,
has become insolvent for maladministration of the business
and entered into an agreement with its creditors to the effect
that the business should be continued for the time being under
the direction and management of an experienced businessman
appointed by the creditors, an arrangement to be carried
out until the claims of the creditors are fully satisfied. Can
you consider the creditors who are parties to the agreement
partners? Reasons.
ANS.: The creditors are not partners, for their only inter-
est in the sharing of profits is the receipt or payment of their
credits. (Art. 1769). Moreover, in a partnership, the partners
are supposed to trust and have confidence in all the partners
— this element is not present in the instant case.

(6) Proof Needed to Establish the Existence of a Partner-

ship
No definite criterion can be set up except that all the
characteristics of the contract must be proved as being present.
In one case it was shown that there was no firm name, no
firm accounts, no firm letterheads, no certificate of partner-

599
Art. 1770 CIVIL CODE OF THE PHILIPPINES

ship, no agreement as to profits and losses, no time fixed for

the expiration of the alleged partnership. The Court correctly
ruled that a partnership did not exist. (Morrison v. Meister,
180 N.W. 395). In another case, the testimony of the wit-
nesses regarding the existence of the partnership as well as
documentary evidence (letters) thereon resulted in the court’s
finding that indeed a partnership existed. (Kiel v. Estate of
P.S. Sobert, 46 Phil. 193). An attempt to prove the existence
of a partnership concerning the operation of a cinema house
upon a 60-40 basis proved fruitless because of insufficient and
contradictory evidences. There was no written agreement. Of
course, this was not essential. But its absence, together with
other circumstances and the fact that there was not even an
attempt to submit an accounting for the whole period, negates
the assumption that a partnership existed. (Salada v. Salazar,
et al., C.A., L-5258, Jun. 28, 1956). In still another case, the
court held that it is hard to believe that a partnership has
been formed without any book, any single written account,
or any memorandum concerning it. Moreover, if the business
licenses have been issued separately in favor of private indi-
viduals, how can we say that a partnership exists? (Padilla
v. Tomas Lim Hon, et al., C.A., L-163-R, Feb. 14, 1947).

(7) Partnership by Estoppel

If two persons not partners represent themselves as
partners to strangers, a partnership by estoppel results. Simi-
larly when 2 persons, who are partners, in connivance with
a friend (who is not a partner), inform a stranger that said
friend is their partner, a partnership by estoppel may also
result to the end that the stranger should not be prejudiced.
(See Art. 1769 [No. 1] and Art. 1825, Civil Code).

Art. 1770. A partnership must have a lawful object or

purpose, and must be established for the common benefit
or interest of the partners.
When an unlawful partnership is dissolved by a judi-
cial decree, the profits shall be confiscated in favor of the
State, without prejudice to the provisions of the Penal Code
governing the confiscation of the instruments and effects
of a crime.

600
CIVIL CODE OF THE PHILIPPINES Art. 1770

COMMENT:
(1) Lawful Object or Purpose
The object or purpose must be LAWFUL, i.e., it must be
within the commerce of man, possible, and not contrary to law,
morals, good customs, public order or public policy (See also
Arts. 1347 and 1348, Civil Code). Otherwise, the partnership
contract is VOID AB INITIO. (Art. 1409, Civil Code).
[NOTE: If a partnership has several purposes, one of
which is unlawful, the partnership can still validly exist so
long as the illegal purpose can be separated from the legal
purposes. (See 40 Am. Jur., pp. 144-145).]

(2) Query: Is a Judicial Decree Needed to Dissolve an Un-

lawful Partnership?
ANS.: No, for the contract is void from the very begin-
ning, and therefore never existed from the viewpoint of the
law. (See Art. 1409, Civil Code; see also People v. Mendoza).
However, there would be nothing wrong in having the court
dissolve the partnership. This will be good and convenient for
everybody; moreover, there may be a question as to whether
or not the partnership is indeed unlawful. This is particularly
true when the object was lawful at the beginning but has
later on become unlawful.
(NOTE: Under Art. 1830 of the Civil Code, one of the
causes for the dissolution of a partnership is “any event which
makes it unlawful for the business of the partnership to be car-
ried on, or for the members to carry it on in partnership.”)

(3) Instances When a Partnership Is Unlawful

(a) A partnership formed to furnish apartment houses which
would be used for prostitution. (Chateau v. Singla, 114
Cal. 1015).
(b) A partnership formed to create illegal monopolies or
combinations in restraint of trade. (See Art. 186, Rev.
Penal Code).
(c) A partnership for gambling purposes. (See Arbes, et al.
v. Polistico, et al., 53 Phil. 489).

601
Art. 1770 CIVIL CODE OF THE PHILIPPINES

(d) A partnership formed for the purpose of acquiring parcels

of land much in excess of the maximum allowed by the
Friar Lands Act. (Torres v. Puzon, et al., C.A., L-4474,
Sept. 28, 1950).

(4) Consequences of Unlawful Partnership

(a) If the firm is also guilty of a crime, the Revised Penal
Code governs both the criminal liability and the “forfei-
ture of the proceeds of the crime and the instruments or
tools with which it was committed. Such proceeds and
instruments or tools shall be confiscated and forfeited
in favor of the Government, unless they be the property
of a third person not liable for the offense, but those
articles which are not subject of lawful commerce shall
be destroyed.” (Art. 45, Rev. Penal Code).
(b) The partners forfeit the proceeds or profits, but NOT
their contributions, provided no criminal prosecution
has been instituted. (Arbes v. Polistico, 53 Phil. 489). If
the contributions have already been made, they can be
RETURNED; if the contributions have not yet been made,
the partners cannot be made to make the contribution.
(See 1 Manresa 279).
(c) An unlawful partnership has no legal personality.

Arbes v. Polistico, et al.

53 Phil. 489

FACTS: An organization, “Turnuhan Polistico and

Co.,” was engaged in conducting a lottery among its
partners-members every weekend. The members con-
tributed a weekly amount, all of which except a certain
amount were distributed in turn to the lottery winners.
Obviously, the court had no alternative except to declare
the partnership an unlawful one. Issue: Can the partners
get back their capital? their profits?
HELD: The partners can get back their capital,
for the law speaks only of the confiscation of profits
which certainly should not be returned, first because of
the express provision of the law on profits, and second,

602
CIVIL CODE OF THE PHILIPPINES Art. 1771

because to legally get profits, the action must be based

on a lawful contract or transaction, not an illegal one
like this.
Recovery of the capital indeed may be had, except
if the same can come under the category of “instruments
and effects of the crime.”

Art. 1771. A partnership may be constituted in any

form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall
be necessary.

COMMENT:
(1) Formalities Needed
(a) For VALIDITY of the contract (among the parties) as well
as for ENFORCEABILITY, NO FORM is required as a
general rule, regardless of the value of the contributions.
Therefore, the contract may even be ORAL. (Magalona v.
Pesayco, 59 Phil. 453). (Note that a partnership contract
is not one of those covered by the Statute of Frauds.)
Exception: Whenever real properties or real rights in
real properties are contributed — regardless of the value
— a PUBLIC INSTRUMENT is needed. (The contract
itself must be in the public instrument; moreover, there
must be an INVENTORY of the immovables. This IN-
VENTORY must be signed by the parties and attached
to the public instrument.) (See Art. 1773, Civil Code).
[NOTE: Without the public instrument, the partner-
ship is VOID. (Art. 1773, Civil Code).]
[NOTE: The inventory is important to show how
much is due from each partner to complete his share
in the common fund and how much is due to each of
them in the event of liquidation. (Tablason v. Bollozos,
et al., C.A., 51 O.G. 1966). Without such inventory, the
contract is void. (11 Manresa 278-279 and Art. 1773)].
(NOTE: The rules for limited partnerships are dif-
ferent.)

603
Art. 1771 CIVIL CODE OF THE PHILIPPINES

(b) For EFFECTIVITY of the partnership contract insofar

as innocent third persons are concerned, the same must
be REGISTERED if REAL PROPERTIES are involved.

(2) Problem
A partnership was formed orally though more than P500
was contributed in cash. Now then, under the last paragraph of
Art. 1358, contracts “where the amount involved exceeds P500
[such contract] must appear in writing, even a private one.”
Should the oral partnership formed be considered valid?
ANS.: Yes, because Art. 1358 applies only for the purpose
of convenience and not for validity or enforceability. Being
valid, the contract can be put in writing upon the demand
of any of the parties. (Art. 1357, Civil Code; see also Thunga
Chui v. Que Bentec, 2 Phil. 661; see also Magalona v. Pesayco,
59 Phil. 453).
[NOTE: Had real property been contributed, the oral
partnership would be void; and therefore not one of the part-
ners can compel the others to execute the public instrument.
(See Art. 1773, Civil Code).]

(3) Cases

Magalona v. Pesayco
59 Phil. 453
FACTS: Pesayco, a partner in an oral partnership for the
catching of fish, with cash as the only contributions thereto
refused to account for proceeds of the firm on the ground that
the agreement was not in writing. Is he correct?
HELD: No, because the oral partnership is valid, real
properties not having been contributed. (See also Fernandez
v. De la Rosa, 1 Phil. 671).

Borja v. Addison, et al.

44 Phil. 895

FACTS: H and W, husband and wife, owned conjugal

land registered in the name of H. When H became a wid-

604
CIVIL CODE OF THE PHILIPPINES Art. 1771

ower, H and the son S (of H and W) jointly administered the

property. H, without S’s permission, sold the land to X who
had no knowledge of the common ownership of the land. X
now seeks registration of the land, against the opposition of
the heirs of S. The opposition claimed that H had no right
to sell S’s share of the land.
HELD: X can register the land in his name because al-
though there may have been a partnership between the father
and the son, still this fact was unknown to third persons.
Moreover, since the contribution was in the form of land, a
public instrument was needed to constitute the partnership.

Agad v. Mabato
L-24193, Jun. 28, 1968

FACTS: On Aug. 29, 1952, a partnership was entered

into between Mauricio Agad and Severino Mabato “to oper-
ate a fishpond.” Neither partner contributed a fishpond or a
real right to any fishpond. Their contributions were limited
to the sum of P1,000 each. The partnership contract was in
a public instrument, but an inventory of the fishpond to be
operated was not attached to said instrument.
ISSUE: Is the contract of partnership valid?
HELD: Yes, the contract is valid, despite the lack of the
inventory. The purpose of the partnership was not “to engage
in a fishpond business” but “to operate a fishpond.” Neither
said fishpond nor a real right thereto was contributed to the
partnership, or became part of the capital thereof, even if a
fishpond or a real right thereto could become part of its as-
sets. Art. 1773 which states that “a contract of partnership is
void, whenever immovable property is contributed thereto, if
inventory of said property is not made, signed by the parties,
and attached to the public instrument,” is, therefore, NOT
APPLICABLE.

(4) Problems
(a) If two persons agree to form a partnership in the future,
does the partnership immediately arise from the moment
of said agreement?

605
Art. 1771 CIVIL CODE OF THE PHILIPPINES

ANS.: No. An agreement to form a partnership

does not of itself create a partnership. When there are
conditions to be fulfilled or when a certain period is to
elapse, first, the partnership is not created till after the
fulfillment of the conditions or the arrival of the term,
and this is true even if one of the parties has already
advanced his agreed share of the capital.
Moreover, “there is a marked distinction between a
partnership actually consummated and an agreement to
enter into a partnership at a future time. So long as an
agreement remains executory, the partnership is inchoate,
not having been called into being by the concerted action
necessary under the partnership agreement.” (Limuco v.
Calinao, L-10099-R, prom. Sept. 30, 1953, citing 40 Am.
Jur. 142, Sec. 27).
(b) A and B today orally agreed to form a partnership one
and a half years from today, each one to contribute
P1,000. If at the arrival of the period, one refuses to
go ahead with the agreement, can the other enforce the
agreement?
ANS.: No, because the agreement was merely oral
and executory. It is true that a partnership contract is
not governed by the Statute of Frauds but here, there is
merely an agreement to form a partnership in the future.
Since therefore the agreement is to be enforced after one
year from the making thereof, the same should be in
writing to be enforceable under the Statute of Frauds.
(Art. 1403, No. [2][a]).
[NOTE: In one case our Supreme Court ruled that
even if there was a prior agreement to form in the future
a partnership, still if one of those who had so agreed
refuses to carry the agreement and to execute the neces-
sary partnership papers, he cannot be obliged to do so.
For here, his obligation is one to DO, not to GIVE. This
is, therefore, a very personal act (acto personalisimo)
of courts may not compel compliance, as it is an act of
violence to do so. (Woodhouse v. Halili, L-4811, Jul. 31,
1953).]

606
CIVIL CODE OF THE PHILIPPINES Arts. 1772-1773

Art. 1772. Every contract of partnership having a capital

of three thousand pesos or more, money or property, shall
appear in a public instrument, which must be recorded in
the Office of the Securities and Exchange Commission.
Failure to comply with the requirements of the preced-
ing paragraph shall not affect the liability of the partnership
and the members thereof to third persons.

COMMENT:
(1) Purpose of the Registration with the Office of the Se-
curities and Exchange Commission
The registration is to set “a condition for the issuance
of licences to engage in business or trade. In this way, the
tax liabilities of big partnerships cannot be evaded, and the
public can also determine more accurately their membership
and capital before dealing with them.” (Dean Capistrano, IV
Civil Code of the Philippines, p. 260).

(2) Effect of Non-Registration

(a) Even if not registered, the partnership having a capital
of P3,000 or more is still a valid one, and therefore has
legal personality. (Art. 1768, Civil Code).
(NOTE: Of course if real properties had been
contributed, regardless of value, a public instrument is
needed for the attainment of legal personality.)
(b) If registration is needed or desired, any of the partners
of a valid partnership can compel the others to execute
the needed public instrument, and to subsequently cause
its registration. (Art. 1357, Civil Code).
[NOTE: This right cannot be availed of if the part-
nership is void. (Art. 1356 and Art. 1357, Civil Code).]

Art. 1773. A contract of partnership is void, whenever

immovable property is contributed thereto, if an inventory
of said property is not made, signed by the parties, and at-
tached to the public instrument.

607
Art. 1774 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Requirements Where Immovable Property is Contrib-
uted
(a) There must be a public instrument regarding the part-
nership. (See Art. 1773).
(b) The inventory of the realty must be made, signed by
the parties, and attached to the public instrument. (Art.
1773).

(2) Applicability of the Article

(a) Art. 1773 applies regardless of the value of the real
property.
(b) Art. 1773 applies even if only real rights over real prop-
erties are contributed.
(c) Art. 1773 applies also if, aside from real property, cash
or personal property is contributed. (But here, the inven-
tory need not include the personalty.)

(3) Registration in the Register of Property

The transfer of the land to the partnership must be duly
recorded in the Register of Property to make the transfer ef-
fective insofar as third persons are concerned.

Art. 1774. Any immovable property or an interest therein

may be acquired in the partnership name. Title so acquired
can be conveyed only in the partnership name.

COMMENT:
(1) Acquisition of Property Under the Partnership Name
Though the Article speaks only of immovable, same can
apply also to personalty because the partnership is a juridical
entity, capable of owning and possessing property. (Art. 46).

(2) Alien Partners

If the partnership has aliens, it cannot own lands,
whether public or private, or whether agricultural or commer-

608
CIVIL CODE OF THE PHILIPPINES Art. 1775

cial, except thru hereditary succession (by the partners who

in turn convey the same to the partnership) or when 60% of
the capital is owned by Filipinos (or Americans during the
duration of the Parity Amendment). (Art. XIII, Secs. 1 and
5, 1935 Constitution; Krivenko v. Reg. of Deeds, 79 Phil. 461
and Art. XII, Sec. 7, 1987 Constitution).
The same rule applies to the development, exploitation,
or utilization of public agricultural, timber or mineral lands.
(See 1935 and 1987 Constitutions).

(3) Limitations on Acquisition

A partnership, even if entirely of Filipino capital may
not:
(a) acquire, lease, or hold public agricultural lands in excess
of 1,024 hectares.
(b) lease public lands adapted to grazing in excess of 2,000
hectares.

Art. 1775. Associations and societies, whose articles

are kept secret among the members, and wherein any one
of the members may contract in his own name with third
persons, shall have no juridical personality, and shall be
governed by the provisions relating to co-ownership.

COMMENT:
(1) If Articles Are Kept Secret
(a) The association here is certainly not a partnership and
therefore not a legal person, because “anyone of the mem-
bers may contract in his own name with third persons”
and not in the name of the firm.
(b) Although not a juridical entity, it may be sued by third
persons under the “common name” it uses; otherwise,
said innocent third parties may be prejudiced. (Rule 3,
Sec. 15, Rules of Court).
(c) However, it cannot sue as such, because it has no legal
personality and, therefore, cannot ordinarily be a party to
a civil action. (Rule 3, Sec. 1, Rules of Court). Moreover,

609
Art. 1776 CIVIL CODE OF THE PHILIPPINES

the fact that it has no legal personality as a partnership

cannot be invoked by the “partners” for the purpose of
evading compliance with obligations contracted by them,
because they who caused the nullity of a contract are
prohibited from availing of its benefits. (11 Manresa
289-290).
(d) Therefore, insofar as innocent third parties are concerned,
the partners can be considered as members of a part-
nership; but as between themselves, or insofar as third
persons are prejudiced, only the rules on co-ownership
must apply. (See Art. 1775). The same rule applies in
the case of a partnership by estoppel. (See Art. 1825,
Civil Code).

(2) Effect of Certain Transactions

Thus, contracts entered into by a “partner” in his own
name may be sued upon still by him in his individual capacity,
notwithstanding the absence of a partnership. (See Prautch
v. Jones, 8 Phil. 1). It has also been held that when two or
more individuals having a common interest in a business
bring a court action, it should be presumed that they pros-
ecute the same in their individual capacity as co-owners, and
not in behalf of a partnership which does not exist in legal
contemplation. (Smith, et al. v. Lopez, et al., 5 Phil. 78).

Art. 1776. As to its object, a partnership is either uni-

versal or particular.
As regards the liability of the partners, a partnership
may be general or limited.

COMMENT:
(1) Classification of Partnerships
(a) According to manner of creation:
1) orally constituted
2) constituted in a private instrument
3) constituted in a public instrument

610
CIVIL CODE OF THE PHILIPPINES Art. 1776

4) registered in the Office of the Securities and Ex-

change Commission
(b) According to object:
1) universal
a) with all present property
b) with all profits (the individual properties here
continue to be owned by the partners, but the
usufruct thereof passes to the firm)
2) particular — here the object are determinate things,
their use or fruits; a specific undertaking, or the
exercise of a profession or occupation (Art. 1783,
Civil Code).
(c) According to liability:
1) limited partnership — that where at least one part-
ner is a general partner, and the rest are limited
partners. (NOTE: A general partner is liable beyond
his contribution; a limited partner is liable only to
the extent of his contribution.)
2) general partnership — that where all the partners
are general partners.
(d) According to legality:
1) lawful or legal
2) illegal or unlawful
(e) According to duration:
1) for a specific period or till the purpose is accom-
plished
2) partnership at will
a) here, no period, express or implied, is given
and so its duration depends on the will of the
partners;
b) if the period has expired, but the partnership
continued, without liquidation, by the partners
who habitually acted as such during the term.
(Art. 1785, Civil Code).

611
Art. 1776 CIVIL CODE OF THE PHILIPPINES

(f) According to representation to others:

1) ordinary partnership
2) partnership by estoppel
(2) Classification Into General and Limited
(a) A general partnership is one where all the partners
are general partners (that is, they are liable even with
respect to their individual properties, after the assets
of the partnership have been exhausted).
(b) A limited partnership is one where at least one partner
is a general partner and the others are limited partners.
(A limited partner is one whose liability is limited only
up to the extent of his contribution.)
(NOTE: A partnership where all the partners are
“limited partners” cannot exist as a limited partnership;
it will even be refused registration. If at all it continues,
it will be a general partnership, and all the partners will
be general partners.)

(3) Example of Partnership De Facto

If upon the death of the wife, the husband continues to
manage the formerly conjugal properties now owned by him and
the common children, and said children allow their father to so
manage the property, without even causing their rights to the
property to be recorded in the Office of the Register of Deeds
or in the Assessor’s Office, a partnership de facto has been cre-
ated. It is therefore to be presumed that all the acts performed
by the father, as managing partner, were for the benefit of all
the partners. (Andres de Jesus, et al. v. Nicanor Padilla and
Roman de Jesus, C.A., L-12191-R, Apr. 19, 1955).

(4) Example of Partnership by Estoppel

When two or more persons attempt to create a partner-
ship but fail to comply with the legal formalities essential for
juridical personality, the law considers them as partners, and
the association is a partnership insofar as it is favorable to
third persons, by reason of the equitable principle of estoppel.

612
CIVIL CODE OF THE PHILIPPINES Art. 1777

(MacDonald, et al. v. Nat. City Bank of New York, 99 Phil.

156).

(5) Formalities Needed for the Creation of a Partnership

(a) Personal property
1) less than P3,000 (total) — may be oral
2) P3,000 or more — must be in a public instrument
and registered in the Securities and Exchange Com-
mission. But even if this is not complied with, the
partnership is still valid and possesses a distinct
personality. (Arts. 1772, 1768, Civil Code). Evidently,
the requirement is merely for administrative and
licensing purposes.
(b) Real property — Regardless of the value contributed, a
public instrument is needed, with an attached inventory;
otherwise the partnership is VOID and has NO juridical
personality even as between the parties. (Art. 1773, Civil
Code). Moreover, to be effective against third parties,
the partnership must also be registered in the Registry
of Property of the province where the real property con-
tributed is found. After all, there is an alienation here
of a real right on real property.
(c) Limited partnership — must be registered AS SUCH in
the Office of the Securities and Exchange Commission;
otherwise, it is not valid as a limited partnership. (NOTE:
However, even without such registration, it may still be
considered a general partnership, and as such, possesses
juridical personality). (See Arts. 1843, 1844, Civil Code).

Art. 1777. A universal partnership may refer to all the

present property or to all the profits.

COMMENT:
Kinds of Universal Partnerships
(a) Partnership of all present property
(b) Partnership of all profits

613
Arts. 1778-1780 CIVIL CODE OF THE PHILIPPINES

Art. 1778. A partnership of all present property is that

in which the partners contribute all the property which
actually belongs to them to a common fund, with the inten-
tion of dividing the same among themselves, as well as all
the profits which they may acquire therewith.

COMMENT:
Definition of Universal Partnership of All Present Prop-
erty
The contribution here consists of:
(a) All the properties actually belonging to the partners
(b) The profits acquired with said properties.

Art. 1779. In a universal partnership of all present prop-

erty, the property which belonged to each of the partners
at the time of the constitution of the partnership, becomes
the common property of all the partners, as well as all the
profits which they may acquire therewith.
A stipulation for the common enjoyment of any other
profits may also be made; but the property which the part-
ners may acquire subsequently by inheritance, legacy, or
donation cannot be included in such stipulation, except the
fruits thereof.

COMMENT:
Transfer of Ownership From the Partners to the Uni-
versal Partnership
See Comments under the next Article.

Art. 1780. A universal partnership of profits comprises

all that the partners may acquire by their industry or work
during the existence of the partnership.
Movable or immovable property which each of the
partners may possess at the time of the celebration of the
contract shall continue to pertain exclusively to each, only
the usufruct passing to the partnership.

614
CIVIL CODE OF THE PHILIPPINES Art. 1780

COMMENT:
(1) Universal Partnership of Profits
The Article speaks of the universal partnership of profits.
(NOTE: This Article and the three preceding ones speak
of the two kinds of universal partnership.)

(2) Distinctions

ALL PROFITS ALL PRESENT

PROPERTY

(a) Only the USUFRUCT (a) All the property actu-

of the properties of the ally belonging to the part-
partners becomes COM- ners are CONTRIBUTED
MON PROPERTY (owned — and said properties
by them and the partner- become COMMON PROP-
ship); NAKED OWNER- ERTY (owned by all the
SHIP is retained by each partners and by the part-
of the partners. (See also nership).
Jackson v. Blum, 1 Phil.
4).
(b) ALL PROFITS acquired (b) As a rule, aside from the
by the INDUSTRY or contributed properties,
WORK of the part- only the PROFITS of said
ners become COMMON contributed COMMON
PROPERTY (regardless PROPERTY (not other
of whether or not said profits).
profits were obtained
(NOTE: Profits from
through the usufruct con-
other sources may become
tributed).
COMMON, but only if
there is a stipulation to
such effect.)
Properties subsequent-
ly acquired by inherit-
ance, legacy, or donation,
cannot be included in the
stipulation, BUT the fruits
thereof can be included in
the stipulation.)

615
Art. 1780 CIVIL CODE OF THE PHILIPPINES

(3) Future Property

Reasons why future (by inheritance, legacy, donation)
property cannot be included in the stipulation regarding the
universal partnership of all present property:
(a) First, as a rule, contracts regarding successional rights
cannot be made.
(b) Secondly, a partnership demands that the contributed
things be determinate, known, and certain.
(c) Thirdly, a universal partnership of all present proper-
ties really implies a donation, and it is well-known that
generally, future property cannot be donated. (See 11
Manresa, pp. 304-314 and Art. 751, Civil Code).

(4) Some Hypothetical Problems on ALL PRESENT PROP-

ERTY
(a) A and B entered into a universal partnership of all
present property. No stipulation was made regarding
other properties. Subsequently, A received a parcel of
land by inheritance from his father; and another parcel
of land from the San Beda College as remuneration for
A’s work as professor therein. Question: Are the two
parcels of land and their fruits to be enjoyed by the
partnership?
ANS.: No, because there was no stipulation regard-
ing future properties or their fruits.
(b) Same as (a) except that in the contract, it was stipulated
that all properties subsequently acquired would belong
to the partnership.
ANS.: The land acquired as salary as well as its
fruits will belong to the firm; but the land acquired later
by inheritance will NOT belong to the partnership since
this cannot be stipulated upon. (Art. 1780). The fruits of
the inherited land will go to the firm because said fruits
may be considered as properties subsequently acquired,
and there is no prohibition to stipulate on fruits, even
if the fruits be those of properties acquired later on by
inheritance, legacy, or donation.

616
CIVIL CODE OF THE PHILIPPINES Art. 1780

(5) Some Hypothetical Problems on Profits

(a) In a universal partnership of profits, A contributed the
use of his car. At the end of the partnership, should the
car be returned to him?
ANS.: Yes, because the naked ownership had al-
ways been with him, and upon the end of the usufruct,
full ownership reverts to him. Remember that only its
use had been previously contributed. (See 11 Manresa
303).
(b) A and B entered into a universal partnership of profits.
Subsequently, A won 1st prize in the sweepstakes. Will
the money belong to the partnership?
ANS.: No, because it was not acquired by “industry
or work.” (Art. 1780, par. 1, Civil Code).
(c) A and B entered into a universal partnership of profits.
Subsequently A became a teacher at the Poveda Learn-
ing Centre. Will A’s salary belong to the partnership?
ANS.: Yes, even though no stipulation was made
on this point because after all the salary was acquired
by A’s “industry or work during the existence of the
partnership.” (Art. 1780, par. 1). Such “profit” belongs
therefore to the firm as a matter of RIGHT. Of course,
had there been a stipulation that such salary would
be excluded, the stipulation would be VALID. (See 11
Manresa 308).
(d) A and B entered into a universal partnership of profits.
Later, A purchased a parcel of land. Will the fruits of
said land belong to the partnership?
ANS.: As a rule, NO, because the usufruct (use and
fruits) granted to the firm under Art. 1780, par. 2 refers
only to that of the property possessed by the partner at
the time of the celebration of the contract. It follows that
fruits of after-acquired property do not belong to the
firm as a matter of right. However, it would be valid to
stipulate that the usufruct of after-acquired properties
would belong to the partnership.

617
Arts. 1781-1782 CIVIL CODE OF THE PHILIPPINES

Art. 1781. Articles of universal partnership, entered

into without specification of its nature, only constitute a
universal partnership of profits.

COMMENT:
Presumption in Favor of Partnership of Profits
(a) The Article applies only when a universal partnership
has been entered into.
(b) Reason for the Article. Less obligation is imposed in
the universal partnership of profits because their real
and personal properties are retained by them in naked
ownership.
(c) If however a universal partnership of all present proper-
ties is desired, REFORMATION is the proper remedy.
(See Arts. 1359, et seq., Civil Code).

Art. 1782. Persons who are prohibited from giving

each other any donation or advantage cannot enter into
universal partnership.

COMMENT:
(1) Persons Who Together Cannot Form a Universal Part-
nership
Examples of people prohibited:
(a) Husband and wife — as a rule. (Art. 133, Civil
Code).
(b) Those guilty of adultery or concubinage. (Art. 739,
Civil Code).
(c) Those guilty of the same criminal offense, if the
partnership was entered into in consideration of
the same. (Art. 739, Civil Code).

Commissioner of Internal Revenue v.

William J. Suter & the Court of Tax Appeals
L-25532, Feb. 28, 1969
FACTS: A limited partnership named “William
J. Suter ‘Morcoin’ Co., Ltd.” was formed on 30 Sept.

618
CIVIL CODE OF THE PHILIPPINES Art. 1783

1947 by William J. Suter as general partner (one

liable even beyond his contribution), and Julia Spirig
and Gustav Carlson, as limited partners (those liable
only to the extent of their contribution). In 1948,
Suter and Spirig got married, and sometime later,
Carlson sold his share in the partnership to Suter
and his wife. Issue: Did the marriage dissolve or
put an end to the partnership?
HELD: No, the marriage did not dissolve the
partnership. While spouses cannot enter into a uni-
versal partnership, they can enter into a particular
partnership or be members thereof. The partnership
was not, therefore, ended.

(2) Reason for the Article

A universal partnership is virtually a donation to each
other of the partner’s properties (or at least, their usufruct).
Therefore, if persons are prohibited to donate to each other,
they should not be allowed to do indirectly what the law
forbids directly. (See 11 Manresa 317).

(3) Effect of Violation

The partnership violating Art. 1782 is null and void, and
its nullity may be raised anytime. No legal personality was
ever acquired. (11 Manresa 317).

Art. 1783. A particular partnership has for its object

determinate things, their use or fruits, or specific undertak-
ing, or the exercise of a profession or vocation.

COMMENT:
(1) ‘Particular Partnership’ Defined
The Article defines a “particular” partnership.

(2) Examples
To construct a building; to buy and sell real estate; to
practice the law profession. Here in a sense, it is as if all

619
Art. 1783 CIVIL CODE OF THE PHILIPPINES

the members are industrial partners. (Compania Maritima v.

Muñoz, 9 Mil. 326).
(NOTE: A husband and his wife may enter into a par-
ticular partnership.)

(3) Doctrine
If two individuals form a particular partnership for a deal
in realty, it does not necessarily follow that all deals are for
the benefit of the partnership. In the absence of agreement,
each particular deal results in a particular partnership. If
one of them, on his own account, and using his own funds,
should make transactions in the same business, it is his own
undertaking. (Lyons v. Rosenstock, 56 Phil. 632).

620
CIVIL CODE OF THE PHILIPPINES

Chapter 2

OBLIGATIONS OF THE PARTNERS

Section 1
OBLIGATIONS OF THE PARTNERS
AMONG THEMSELVES

Different Relationships
When two persons, A and B, form a partnership, differ-
ent relations may arise:
(a) Relations between A and B;
(b) Relations between A and B on the one hand, and the
partnership on the other hand;
(c) Relations between A and B on the one hand, and third
persons on the other hand;
(d) Relations between the partnership and the third per-
sons.
Some Obligations of a Partner
(a) To give his contribution. (Arts. 1786, 1788, Civil Code).
(b) Not to convert firm money or property for his own use.
(Art. 1788, Civil Code).
(c) Not to engage in unfair competition with his own firm.
(Art. 1808, Civil Code).
(d) To account for and hold as trustee, unauthorized personal
profits. (Art. 1807, Civil Code).
(e) Pay for damages caused by his fault. (Art. 1794, Civil
Code).
(f) Duty to credit to the firm, payment made by a debtor
who owes him and the firm. (Art. 1792, Civil Code).

621
Art. 1784 CIVIL CODE OF THE PHILIPPINES

(g) To share with the other partners the share of the part-
nership credit which he has received from an insolvent
firm debtor. (Art. 1743, Civil Code).
Some Rights of a Partner
(a) property rights. (Art. 1810, Civil Code).
1) rights in specific partnership property (example
—rights in a car contributed to the firm).
2) interest in the partnership (share in the profits and
surplus). (Art. 1812, Civil Code).
3) right to participate in the management. (Art. 1810,
Civil Code).
[NOTE: This right is not given to the limited
partner. (Art. 1848, Civil Code).]
(b) right to associate with another person in his share. (Art.
1804, Civil Code).
(c) right to inspect and copy partnership books. (Art. 1805,
Civil Code).
(d) right to demand a formal account. (Art. 1809, Civil
Code).
(e) right to ask for the dissolution of the firm at the proper
time. (Arts. 1830-1831, Civil Code).

Art. 1784. A partnership begins from the moment of the

execution of the contract, unless it is otherwise stipulated.

COMMENT:
(1) When a Partnership Begins
(a) Generally, from the moment of the execution of the con-
tract.
(b) Exception — When there is a contrary stipulation.

(2) Intent to Create a Future Partnership

The Article presupposes that there can be a future part-
nership which at the moment has no juridical existence yet.

622
CIVIL CODE OF THE PHILIPPINES Art. 1785

The agreement for a future partnership does not of itself

result in a partnership. The intent must later on be actualized
by the formation of the intended partnership. (See Limuco v.
Calinao, C.A., L-10099-R, Sept. 30, 1953).

(3) Rule if Contributions Have Not Yet Been Actually

Made
Generally, even if contributions have not yet been made,
the firm already exists, for partnership is a consensual contract
(of course all the requisite formalities for such consent must
be present).

Art. 1785. When a partnership for a fixed term or par-

ticular undertaking is continued after the termination of
such term or particular undertaking without any express
agreement, the rights and duties of the partners remain the
same as they were at such termination, so far as is consist-
ent with a partnership at will.
A continuation of the business by the partners or such of
them as habitually acted therein during the term, without any
settlement or liquidation of the partnership affairs, is prima
facie evidence of a continuation of the partnership.

COMMENT:
(1) Duration of a Partnership
A partnership is unlimited as to its duration in the sense
that no time limit is fixed by law. The duration may be agreed
upon — expressly (as when there is a definite period) or im-
pliedly (as when a particular enterprise is undertaken — it
being understood that the firm ends as soon as its purpose
has been achieved).

(2) Partnership “At Will”

There are two kinds of a partnership “at will.”
(a) 1st kind — when there is no term, express or implied
(b) 2nd kind — when it is continued by the habitual man-
agers — although the period has ended, or the purpose

623
Art. 1786 CIVIL CODE OF THE PHILIPPINES

has been accomplished. (NOTE: This is “prima facie”

evidence of the firm’s continuation.)
[NOTE: It is called “at will” because its continued
existence really depends upon the will of the partners, or
even on the will of any of them. (40 Am. Jur., Sec. 19,
139).]

Art. 1786. Every partner is a debtor of the partnership

for whatever he may have promised to contribute thereto.
He shall also be bound for warranty in case of evic-
tion with regard to specific and determinate things which
he may have contributed to the partnership, in the same
cases and in the same manner as the vendor is bound with
respect to the vendee. He shall also be liable for the fruits
thereof from the time they should have been delivered,
without the need of any demand.

COMMENT:
(1) Three Important Duties of Every Partner
The Article speaks of three things:
(a) the duty to contribute what had been promised;
(b) the duty to deliver the fruits of what should have been
delivered; and
(c) the duty to warrant.

(2) The Duty to Contribute

(a) The contribution must be made ordinarily at the time the
partnership is entered into, unless a different period is
stipulated. In either case, no demand is needed to put the
partner in default, because in a partnership the obliga-
tion to contribute is one where time is of the essence (for
without the contribution, the partnership is useless).
(b) The partner must exercise due diligence in preserving
the property to be contributed, before he actually con-
tributes the same; otherwise, he can be held liable for

624
CIVIL CODE OF THE PHILIPPINES Art. 1786

losses and deterioration. (See 11 Manresa 344; see also

Art. 1794, Civil Code).

Moran, Jr. v. Court of Appeals

L-59956 Oct. 31, 1984
(1) A partner who promises to contribute to the
partnership becomes a promissory debtor of the latter.
(2) If the partnership venture is a failure, a part-
ner is not entitled to his promised commission, if said
promise does not state the basis of the commission.

(3) The Duty to Deliver the Fruits

(a) If property has been promised, the fruits thereof should
also be given. The fruits referred to are those arising
from the time they should have been delivered, without
need of any demand. If the partner is in bad faith, he
is liable not only for the fruits actually produced, but
also for those that could have been produced. (See 11
Manresa 344).
(b) If money has been promised, “interest and damages from
the time he should have complied with his obligation”
should be given. (Art. 1788). Here again, no demand is
needed to put the partner in default.
Query: Who owns the property before it is deliv-
ered?
ANS.: It is submitted that both in the case of money
or property, it is the partner who still owns the same
before delivery, for it is delivery, actual or constructive,
that transfers ownership.

(4) The Duty to Warrant

(a) The warranty in case of eviction refers to “specific and
determinate things” already contributed. (See Art. 1786,
Civil Code).
(b) There is “eviction” whenever by a final judgment based
on a right prior to the sale or an act imputable to the
partner, the partnership is deprived of the whole or a
part of the thing purchased. The parties may however

625
Art. 1787 CIVIL CODE OF THE PHILIPPINES

suppress, increase, or diminish this legal obligation. (See

Art. 1548, Civil Code). The partner who made the con-
tribution should be summoned in the suit for eviction, at
the instance of the partnership. (Art. 1558, Civil Code).

(5) Problem
If a partner fails to contribute within the stipulated
time what was promised, may the partnership contract be
rescinded?
ANS.: As a general rule, NO. The reason is, rescission is
not the proper remedy; the remedy should be to collect what
is owing, as well as damages. The general rule in obligations
cannot apply in the case of partnership. (Sancho v. Lizarraga,
55 Phil. 601). However, if the defaulting partner is already
dead, rescission may prosper. (Pabalan v. Velez, 22 Phil. 29).

Art. 1787. When the capital or a part thereof which

a partner is bound to contribute consists of goods, their
appraisal must be made in the manner prescribed in the
contract of partnership, and in the absence of stipulation,
it shall be made by experts chosen by the partners, and ac-
cording to current prices, the subsequent changes thereof
being for the account of the partnership.

COMMENT:
(1) When Contribution Consists of Goods
Appraisal of value is needed to determine how much has
been contributed.

(2) How Appraisal Is Made

(a) Firstly, as prescribed by the contract.
(b) Secondly, in default of the first, by EXPERTS chosen by
the partners, and at CURRENT prices.

(3) Necessity of the Inventory-Appraisal

Proof is needed to determine how much goods or money
had been contributed. An inventory is therefore useful. (See
Tablason v. Bollozos, C.A., 51 O.G. 1966).

626
CIVIL CODE OF THE PHILIPPINES Art. 1788

(4) Risk of Loss

After goods have been contributed, the partnership bears
the risks of subsequent changes in their value. (Art. 1787).

Art. 1788. A partner who has undertaken to contribute

a sum of money and fails to do so becomes a debtor for
the interest and damages from the time he should have
complied with his obligation.
The same rule applies to any amount he may have taken
from the partnership coffers, and his liability stroll begin
from the time he converted the amount to his own use.

COMMENT:
(1) Rules of Failure to Contribute and for Conversion
Cases covered by the Article:
(a) when money promised is not given on time;
(b) when partnership money is converted to the personal
use of the partner.

(2) Coverage of Liability

Liability covers ALSO interest and damages:
(a) Interest at the agreed rate; if none, at the legal rate of
6% per annum.
(b) Damages that may be suffered by the partnership.

(3) Why No Demand Is Needed to Put Partner in Default

(a) In the case of the contribution, because time is of the
essence, a partnership is formed precisely to make use of
the contributions, and this use should start from its for-
mation, unless a different period has been set; otherwise
the firm is necessarily deprived of the benefits thereof.
Thus, the injury is constant. (11 Manresa 332-335).
(b) In the case of conversion, because the firm is deprived
of the benefits of the money, from the very moment of
conversion.

627
Art. 1789 CIVIL CODE OF THE PHILIPPINES

[NOTE: Even if no actual injury results, the liability

exists, because the article is absolute. (See 11 Manresa
335-336).]

(4) Some Cases

(a) Martinez v. Ong Pong Co, 14 Phil. 726
A managing partner who fails to account for the
money received by him must return to the other partners
their shares plus legal interest in the absence of any
proof of actual loss.
(b) Colbert v. Bachrach, 12 Phil. 84
A partner who fails to collect “chits” entrusted to
him for collection must pay for the value of the chits
which he cannot return to the firm, insofar as his part-
ner’s shares are concerned. This is true whether or not
he was actually able to collect, unless he can adequately
explain the loss of the “chits.”
(c) Teague v. Martin, 53 Phil. 504
A partner who uses for his own purposes partner-
ship funds must ACCOUNT for the same.
(d) U.S. v. Clarin, 17 Phil. 84
Mere failure of the managing partner to return to
the others their share of the capital does not necessarily
constitute estafa.
(NOTE: After all, there may really have been a
business loss. Moreover, what should be brought is a
civil case.)

Art. 1789. An industrial partner cannot engage in busi-

ness for himself, unless the partnership expressly permits
him to do so, and if he should do so, the capitalist partners
may either exclude him from the firm or avail themselves
of the benefits which he may have obtained in violation of
this provision, with a right to damages in either case.

628
CIVIL CODE OF THE PHILIPPINES Art. 1789

COMMENT:
(1) Classification of Partners
(a) From the viewpoint of
CONTRIBUTION ............ } Capitalist
Industrial
(b) From the viewpoint of
LIABILITY ..................... } General
Limited
(c) From the viewpoint of
MANAGEMENT ............. } Managing
Silent
Liquidating
Ostensible
(d) Miscellaneous .................
} Secret
Dormant
Nominal

(2) Definitions and Some Characteristics

(a) Capitalist partner — one who furnishes capital. (He is
not exempted from losses; he can engage in other busi-
ness provided there is NO COMPETITION between the
partner and his business.) (See Art. 1808, Civil Code).
(b) Industrial partner — one who furnishes industry or labor.
[He is exempted from losses as between the partner; he
cannot engage in any other business without the express
consent of the other partners; otherwise:
1) he can be EXCLUDED from the firm (PLUS DAM-
AGES);
2) OR the benefits he obtains from the other businesses
can be availed of by the other partners (PLUS
DAMAGES). (Art. 1789, Civil Code).]
[NOTE: The rule remains true whether or not
there is COMPETITION. Reason: All his industry
is supposed to be given only to the partnership.
(Limuco v. Calinao, C.A., L-10099-R, Sept. 30,
1953).]
(c) Capitalist-industrial partner — one who contributes both
capital and industry.

629
Art. 1789 CIVIL CODE OF THE PHILIPPINES

(d) General partner — one who is liable beyond the extent

of his contribution.
(e) Limited partner — one who is liable only to the extent
of his contribution.
[NOTE: An industrial partner can only be a general
partner, never a limited partner. (See Art. 1845, Civil
Code).]
(f) Managing partner — one who manages actively the firm’s
affairs.
(g) Silent partner — one who does not participate in the man-
agement (though he shares in the profits or losses).
(h) Liquidating partner — one who liquidates or winds up
the affairs of the firm after it has been dissolved.
(i) Ostensible partner — one whose connection with the
firm is public and open (that is, not hidden). (Usually
his name is included in the firm name.)
(j) Secret partner — one whose connection with the firm is
concealed or kept a secret.
(k) Dormant partner — one who is both a secret (hidden)
and silent (not managing) partner.
(l) Nominal partner — one who is not really a partner but
who may become liable as such insofar as third persons
are concerned. (Example: a partner by estoppel.)

(3) Distinctions Between a ‘Capitalist’ and an ‘Industrial

Partner’
(a) As to contribution:
1) the capitalist partner contributes money or prop-
erty
2) the industrial partner contributes his industry
(mental or physical)
(b) As to prohibition to engage in other business:
1) the capitalist partner cannot generally engage in
the same or similar enterprise as that of his firm

630
CIVIL CODE OF THE PHILIPPINES Art. 1790

(the test is the possibility of unfair competition).

(Art. 1808, Civil Code).
2) the industrial partner cannot engage in any business
for himself (Reason: all his industry is supposed to be
contributed to the firm). (Art. 1789, Civil Code).
(c) As to profits:
1) the capitalist partner shares in the profits according
to the agreement thereon; if none, pro rata to his
contribution. (Art. 1797, Civil Code).
2) the industrial partner receives a just and equitable
share. (Art. 1797, Civil Code).
(d) As to losses:
1) capitalist
a) first, the stipulation as to losses
b) if none, the agreement as to profits
c) if none, pro rata to contribution
2) the industrial partner is exempted as to losses (as
between the partners). But is liable to strangers,
without prejudice to reimbursement from the capi-
talist partners. (Art. 1816, Civil Code).

Art. 1790. Unless there is a stipulation to the contrary

the partners shall contribute equal shares to the capital of
the partnership.

COMMENT:
(1) Amount of Contribution
(a) It is permissible to contribute unequal shares, if there
is a stipulation to this effect.
(b) In the absence of proof, the shares are presumed equal.

(2) To Whom Applicable

The rule applies to capitalist partners apparently; how-
ever, the share of the industrial partner is undoubtedly also

631
Arts. 1791-1792 CIVIL CODE OF THE PHILIPPINES

available, for his industry may be worth even more than the
entire capital contributed.

Art. 1791. If there is no agreement to the contrary, in

case of an imminent loss of the business of the partnership,
any partner who refuses to contribute an additional share
to the capital, except an industrial partner, to save the
venture, shall be obliged to sell his interest to the other
partners.

COMMENT:
(1) When a Capitalist Partner Is Obliged to Sell His Inter-
est to the Other Partners
(a) If there is imminent loss of the business of the partner-
ship;
(b) and he refuses (deliberately and not because of poverty,
otherwise this would be unjust) to contribute an addi-
tional share to the capital;
(c) and provided further that there is no agreement to the
contrary.

(2) Reason
Because of his apparent lack of interest, and granting
that he sincerely believes that efforts to save the firm would
be futile, the capitalist partner referred to should get out of
the firm.

(3) Rule for the Industrial Partners

Note that the industrial partner is exempted. Reason:
He is already giving his entire industry.

Art. 1792. If a partner authorized to manage collects a

demandable sum, which was owed to him in his own name,
from a person who owed the partnership another sum also
demandable, the sum thus collected shall be applied to the
two credits in proportion to their amounts, even though he

632
CIVIL CODE OF THE PHILIPPINES Art. 1792

may have given a receipt for his own credit only, but should
he have given it for the account of the partnership credit,
the amount shall be fully applied to the latter.
The provisions of this article are understood to be
without prejudice to the right granted to the debtor by
Article 1252, but only if the personal credit of the partner
should be more onerous to him.

COMMENT:
(1) Rule if Managing Partner Collects a Credit
For this Article to apply the following requisites must
concur:
(a) The existence of at least 2 debts (one where the firm is the
creditor; the other, where the partner is the creditor).
(b) Both sums are demandable.
(c) The collecting partner is a managing partner.

(2) Example
P, a managing partner, is X’s creditor to the amount of
P1 million, already demandable. X also owes the partnership
P1 million, also demandable. P collects P1 million.
(a) If P gives a receipt for the firm, it is the firm’s credit
that has been collected.
(b) If P gives a receipt for his own credit only, P500,000 will
be given to him; the other P500,000, to the firm. (Note
the use of the word “proportion.”)
[Reason for the law: To prevent furtherance of the
partner’s personal interest to the detriment of the firm.
(See 11 Manresa 361).]
Exception: X may decide that he is paying only
P’s credit in accordance with his right of “application
of payment.” (Art. 1262, Civil Code). This is all right;
BUT only if the personal credit of P is more onerous to
X (Art. 1792, Civil Code).

633
Art. 1793 CIVIL CODE OF THE PHILIPPINES

(3) When Article Does Not Apply

Art. 1792 does not apply if the partner collecting is not
a managing partner. Here there is no basis for the suspicion
that the partner is in BAD FAITH. (11 Manresa 351).

Art. 1793. A partner who has received, in whole or

in part, his share of a partnership credit, when the other
partners have not collected theirs, shall be obliged, if the
debtor should thereafter become insolvent, to bring to the
partnership capital what he received even though he may
have given receipt for his share only.

COMMENT:

(1) Art. 1792 Compared With Art. 1793 (Where a Partner

Receives His Share of a Partnership Credit)

Art. 1792 Art. 1793

(a) two debts (a) one debt only (firm cred-

it)
(b) applies only to managing (b) applies to any partner
partner

(2) Example
X owes a firm P1 million. P, a partner, was given his
share of P500,000, there being only two partners. Later X
becomes insolvent. Must P share the P500,000 with the other
partner?
ANS.: Yes, even if P had given a receipt for his share
only. Reason for the law: Equity demands proportionate share
in the benefits and losses. (See 11 Manresa 353).
Note that Art. 1793 applies whether the partner has
received HIS SHARE wholly or in part. (See Art. 1793).

634
CIVIL CODE OF THE PHILIPPINES Art. 1794

(3) Query
Does Art. 1793 apply even if the collecting was done
AFTER the dissolution of the partnership?
ANS.: No more, because:
(a) strictly speaking, when the firm is dissolved, there is no
more partnership credit or capital. (A mere co-ownership
exists. Note that the law uses “partnership capital.”)
(b) no more trust relations really still exist.
(c) equity demands the rewarding of one’s diligence in col-
lecting. (Manresa and Ricchi).

Art. 1794. Every partner is responsible to the partnership

for damages suffered by it through his fault, and he cannot
compensate them with the profits and benefits which he may
have earned for the partnership by his industry. However,
the courts may equitably lessen his responsibility if through
the partner’s extraordinary efforts in other activities of the
partnership, unusual profits have been realized.

COMMENT:
(1) Why General Damages Cannot Be Offset by Benefits
(a) Firstly, the partner has the DUTY to secure benefits for
the partnership; on the other hand, he has the DUTY
also not to be at fault.
(b) Secondly, since both are duties, compensation should not
take place, the partner being the debtor in both instances.
(See 11 Manresa 377). Compensation requires 2 persons
who are reciprocally debtors and creditors of each other.

(2) Mitigation of Liability

Note however that equity may mitigate liability if there
be “extraordinary efforts” resulting in “unusual profits.”

(3) Need for Liquidation

Before a partner sues another for alleged fraudulent
management and resultant damages, a liquidation must first

635
Art. 1795 CIVIL CODE OF THE PHILIPPINES

be effected to know the extent of the damage. (Soncuya v. De

Luna, 67 Phil. 646).

(4) Effect of Death of the Negligent Partner

If a negligent partner is already dead, suit for recovery
may be had against his estate. (See Po Yeng Cheo v. Lim Ka
Yam, 44 Phil. 172).

Art. 1795. The risk of specffic and determinate things,

which are not fungible, contributed to the partnership so
that only their use and fruits may be for the common ben-
efit, shall be borne by the partner who owns them.
If the things contributed are fungible, or cannot be kept
without deteriorating, or if they were contributed to be sold,
the risk shall be borne by the partnership. In the absence
of stipulation, the risk of things brought and appraised in
the inventory, shall also be borne by the partnership, and
in such case the claim shall be limited to the value of which
they were appraised.

COMMENT:
Risk of Loss
(a) Specific and determinate things (NOT fungible) — whose
usufruct is enjoyed by a firm — like a car — partner who
owns it bears loss for ownership was never transferred
to the firm.
(b) Fungible or Deteriorable — Firm bears loss for evidently,
ownership was being transferred; otherwise, use is im-
possible.
(c) Things Contributed to be Sold — Firm bears loss for
evidently, firm was intended to be the owner; otherwise,
a sale could not be made.
(d) Contributed under Appraisal — Firm bears loss because
this has the effect of an implied sale. (See 11 Manresa
360-361).

636
CIVIL CODE OF THE PHILIPPINES Art. 1796

Art. 1796. The partnership shall be responsible to every

partner for the amounts he may have disbursed on behalf
of the partnership and for the corresponding interest, from
the time the expenses are made, it shall also answer to each
partner for the obligations he may have contracted in good
faith in the interest of the partnership business, and for
risks in consequence of its management.

COMMENT:
Responsibility of Firm
(a) To refund amounts disbursed on behalf of firm plus in-
terest (legal) from the time expenses were made (and not
from demand, since after all, a partner is an agent, and
the rule on agency applies to him). (11 Manresa 365).
[NOTE: Refund must be made even in case of fail-
ure of the enterprise entered into, provided the partner
is not at fault. Reason: Being a mere agent, the partner
should not assume personal liability. (See Arts. 1897 and
1912). Moreover, conversion by the partner results in
liability from the moment of conversion. (See Art. 1788,
par. 2).]
[NOTE: The “amounts disbursed” referred to in the
Article does not refer to the original capital. (Martinez
v. Ong Pong Co, 14 Phil. 726).]
[NOTE: A partner who advances funds from his own
pocket for taxes on partnership land, must be reimbursed
the same from partnership assets. If the firm is insolvent,
the other partners must reimburse the paying partner
except for the latter’s proportionate share in the taxes.
(See Pabalan v. Velez, 22 Phil. 29).]
(b) To answer to each partner for obligations, he may have
entered into in good faith in the interest of the partner-
ship, as well as for RISKS in consequence of its manage-
ment. (Reason: The partner is an AGENT.)
Example: Debts incurred, by the manager for the
firm’s interest, impliedly acquiesced in by the others,
must be shouldered by the firm. (Agustin v. Inocencio,
9 Phil. 134).

637
Art. 1797 CIVIL CODE OF THE PHILIPPINES

Art. 1797. The losses and profits shall be distributed in

conformity with the agreement. If only the share of each
partner in the profits has been agreed upon, the share of
each in the losses shall be in the same proportion.
In the absence of stipulation, the share of each partner
in the profits and losses shall be in proportion to what he
may have contributed, but the industrial partner shall not
be liable for the losses. As for the profits, the industrial
partner shall receive such share as may be just and equi-
table under the circumstances. If besides his services he
has contributed capital, he shall also receive a share in the
profits in proportion to his capital.

COMMENT:
(1) How Profits Are Distributed
(a) according to agreement (but not inequitously to defeat).
(Art. 1799).
(b) if none, according to amount of contribution. (See 11
Manresa 377).

(2) How Losses are Distributed

(a) according to agreement — as to losses (but not inequi-
tously)
(b) if none, according to agreement as to profits
(c) if none, according to amount of contribution. (See 11
Manresa 377).

(3) Industrial Partner’s Profits

A just and equitable share (under the old law, a share
equivalent to that of the capitalist partner with the least
capital).
[NOTE: If he also contributed capital, see (1).]

(4) Industrial Partner’s Losses

While he may be held liable by third persons, still he
can recover whatever he is made to give them, from the other

638
CIVIL CODE OF THE PHILIPPINES Arts. 1798-1799

partners, for he is exempted from LOSSES, with or without

stipulation to this effect.

(5) Non-Applicability to Strangers

Art. 1797 applies only to the partners, not when liability
in favor of strangers are concerned, particularly with reference
to the industrial partner. (Cia Maritima v. Muñoz, 9 Phil.
326).

Art. 1798. If the partners have agreed to intrust to a

third person the designation of the share of each one in
the profits and losses, such designation may be impugned
only when it is manifestly inequitable. In no case may a
partner who has begun to execute the decision of the third
person, or who has not impugned the same within a period
of three months from the time he had knowledge thereof,
complain of such decision.
The designation of losses and profits cannot be intrusted
to one of the partners.

COMMENT:
Designation by Third Person of Shares in Profits and
Losses
(a) The Article speaks of a “third person,” not a partner.
Reason: To avoid partiality. (11 Manresa 375).
(b) When designation by 3rd party may be impugned — “when
it is MANIFESTLY INEQUITABLE.”
(c) When designation by third party cannot be impugned
even if manifestly inequitable:
1) if the aggrieved partner has already begun to execute
the decision;
2) or if he has not impugned the same within a period
of three months from the time he had knowledge
thereof (not from the time of making).

Art. 1799. A stipulation which excludes one or more

partners from any share in the profits or losses is void.

639
Art. 1799 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Stipulation Excluding a Partner from Profits or Losses
(a) The general rule is that a stipulation excluding one or more
partners from any share in the profits or losses is void.
Reason: The partnership is for COMMON BENEFIT.
(b) One exception is in the case of the industrial partner
whom the law itself excludes from losses. (Art. 1797, par.
2). If the law itself does this, a stipulation exempting
the industrial partner from losses is naturally valid.
(Of course, it is permissible to stipulate that even the
industrial partner shall be liable for losses.)

(2) Reason Why Industrial Partner Is Generally Exempted

from Losses
While capitalist partners can withdraw their capital, the
industrial partner cannot withdraw any labor or industry he
had already exerted. Moreover, in a certain sense, he already
has shared in the losses in that, if the partnership shows no
profit, this means that he has labored in vain. (See 11 Man-
resa 377).

(3) Problem
A, B, and C were partners, the first one being an indus-
trial partner. During the first year of operation, the firm made
a profit of P3 million. During the second year, a loss of P1.5
million was sustained. Thus, the net profit for the two years of
operation was only P1.5 million. In the articles of partnership
it was stipulated that A, the industrial partner would get 1/3
of the profits, but would not participate in the losses.
(a) Is the stipulation valid? Why?
(b) How much will A get: 1/3 of P3 million or 1/3 of P1.5
million? Why?
ANS.:
1) The stipulation is valid, for even the law itself ex-
empts the industrial partner from losses. His share
in the profits is presumably fair.

640
CIVIL CODE OF THE PHILIPPINES Art. 1800

2) A will get only 1/3 of P1.5 million, the net profit

and not 1/3 of P3 million. While it is true that he
does not share in the losses, this only means that
he will not share in the net losses. It is understood
that he share in the losses insofar as these can be
accommodated in the profits. It is but fair to com-
pute all the various transactions in determining
the net profits or losses. (See Criado v. Gutierrez
Hermanos, 37 Phil. 883).

Art. 1800. The partner who has been appointed man-

ager in the articles of partnership may execute all acts of
administration despite the opposition of his partners, un-
less he should act in bad faith; and his power is irrevoca-
ble without just or lawful cause. The vote of the partners
representing the controlling interest shall be necessary for
such revocation of power.
A power granted after the partnership has been con-
stituted may be revoked at any time.

COMMENT:
(1) Appointment of Manager
Art. 1800 speaks of two modes of appointment:
(a) appointment as manager in the articles of partnership;
(b) appointment as manager made in an instrument other
than the articles of partnership or made orally.

(2) Appointment in Articles of Partnership

(a) Power is irrevocable without just or lawful cause.
THEREFORE:
1) to remove him for JUST cause, the controlling
partners (controlling financial interest) should vote
to OUST HIM. (See Art. 1800, par. 1)
2) to remove him WITHOUT CAUSE, or FOR AN
UNJUST CAUSE, there must be UNANIMITY
(including his own vote).

641
Art. 1800 CIVIL CODE OF THE PHILIPPINES

Reason: This represents a change in the will of

the parties: a change in the terms of the contract;
a novation, so to speak, requiring unanimity. (See
11 Manresa 382).
(b) Extent of power:
1) if he acts in GOOD faith, he may do all acts of
ADMINISTRATION (not ownership) despite the
opposition of his partners.
2) if in BAD faith, he cannot (however, he is presumed
to be acting in good faith; moreover, if he really is
in bad faith the controlling interest should remove
him.)

(3) Appointment Other Than in the Articles of Partner-

ship
(a) Power to act may be revoked at any time, with or without
just cause.
[Reason: Such appointment is a mere delegation of
power, revocable at any time. (11 Manresa 381).]
[NOTE: Of course, removal should also be done by
the controlling interest].
(NOTE: Moreover, the controlling partners should
not abuse this right, otherwise damages are recoverable
from them under Arts. 19 and 20.)
(b) Extent of power: As long as he remains manager, he can
perform all acts of ADMINISTRATION, but of course, if
the others oppose and he persists, he can be removed.

(4) Scope of Powers of a Manager

Unless his powers are specifically restricted, he has
the powers of a general agent, as well as all the incidental
powers needed to carry out the objectives of the partnership,
such as, for example, the power to issue official receipts, in
the transaction of business; otherwise, this would not be in
keeping with present day business dealings. (Ng Ya v. Sugbu
Commercial Co., C.A., 50 O.G. 4913). Indeed, when the object
of a partnership has been determined, the manager has all

642
CIVIL CODE OF THE PHILIPPINES Art. 1801

the powers necessary for the attainment of such objective.

(Smith, Bell & Co. v. Aznar & Co., 40 O.G. 1882). Moreover,
as manager, he has, even without the approval of the other
partners, the power to dismiss an employee, particularly when
a justifiable cause exists. (Matela v. Chua-Sintek, et al., C.A.,
L-12165, Apr. 6, 1955).
(NOTE: In the Matela case, Matela, a pharmacy clerk in
a drug store operated by a partnership, was suspected of having
misappropriated P300 worth of anti-tetanus serum; whereupon,
while being investigated by the police, he hurled abusive and
unsavory language against the manager, in the presence of
customers of the firm. The manager then dismissed him, which
dismissal the Court of Appeals held to be highly justified.)

Art. 1801. If two or more partners have been intrusted

with the management of the partnership without specifi-
cation of their respective duties, or without a stipulation
that one of them shall not act without the consent of all
the others, each one may separately execute all acts of
administration, but if any of them should oppose the acts
of the others, the decision of the majority shall prevail. In
case of a tie, the matter shall be decided by the partners
owning the controlling interest.

COMMENT:
(1) Rule When There Are Two or More Managers
Art. 1801 applies when:
(a) two or more partners are managers;
(b) there is NO specification of respective duties;
(c) there is no stipulation requiring unanimity.
THEREFORE: Art. 1801 does not apply if unanimity
is required; or when there is a designation of respective
duties.

(2) Specific Rules

(a) Each may separately execute all acts of administration
(unlimited powers to administer).

643
Art. 1802 CIVIL CODE OF THE PHILIPPINES

(b) Except if any of the managers should oppose. (Here the

decision of the MAJORITY of the managers shall pre-
vail.)
(Suppose there is a tie, the partners owning the
CONTROLLING INTEREST prevail — provided they
are also managers.)
[NOTE: The rights to oppose is not given to non-
managers because in appointing their other partners as
managers, they have stripped themselves of all participa-
tion in the administration. (See 11 Manresa 385).]

(3) When Opposition May Be Made

When must the other managers make the opposition?
ANS.: Before the acts produce legal effects insofar as
third persons are concerned. Reason — For them to delay or
for them to protest after third parties are affected would be
unfair to said third parties. Moreover, the acts of the firm
would be unstable. (11 Manresa 387).

Art. 1802. In case it should have been stipulated that

none of the managing partners shall act without the consent
of the others, the concurrence of all shall be necessary for
the validity of the acts, and the absence or disability of any
one of them cannot be alleged, unless there is imminent
danger of grave or irreparable injury to the partnership.

COMMENT:
(1) When Unanimity Is Required
(a) This Article applies when there must be unanimity in
the actuations of the managers.
(b) Suppose one of the managers is absent or incapacitated,
is unanimity still required?
ANS.: Yes, for absence or incapacity is no excuse.
EXCEPTION — when there is imminent danger of grave
or irreparable injury to the partnership. (Art. 1802).

644
CIVIL CODE OF THE PHILIPPINES Art. 1802

(2) Duty of Third Persons

The rule that third persons are not required to inquire as
to whether or not a partner with whom he transacts has the
consent of all the managers, for the presumption is that he
acts with due authority and can bind the partnership (Litton
v. Hill and Ceron, et al., 67 Phil. 509, citing Mills v. Niggle,
112 Pac. 617 and Le Roy v. Johnson, 7 US Law ed.) applies
only when they innocently deal with a partner apparently
carrying on in the usual way the partnership business (See
Art. 1818) because under Art. 1802, it is imperative that if
unanimity is required it is essential that there be unanimity;
otherwise, the act shall not be valid, that is, the partnership is
not bound. (Art. 1802, first clause). It would be wise therefore
if the third person could inquire whether or not unanimity is
required, and if so, if such unanimity is present. This is for
his own protection. Thus, it has been held that a sale by a
partner of partnership assets without the consent of the other
managers is not valid. (See Santos v. Villanueva, et al., C.A.,
50 O.G. 175).

Smith, Bell and Co. v. Aznar

(CA) 40 O.G. 1882

FACTS: Tobes, an industrial partner, was authorized to

“manage, operate, and direct the affairs, business, and activi-
ties of the partnership” and “to make, sign, seal, execute, and
deliver contracts — upon terms and conditions acceptable to
him duly approved in writing by the capitalist partner.” The
firm was engaged in the business of buying and selling mer-
chandise of all kinds. One day, Tobes purchased “on credit”
certain goods regularly purchased by the Company, but without
first getting the authority of the capitalist partner.
ISSUE: Is the partnership bound?
HELD: Yes, since the transaction, even if “on credit” was
a routine one. Moreover, authority to purchase carries with it
the implied authority to purchase on credit. The requirement
of written authority refers obviously to formal and unusual
contracts in writing.

645
Art. 1803 CIVIL CODE OF THE PHILIPPINES

Art. 1803. When the manner of management has not

been agreed upon, the following rules shall be observed:
(1) All the partners shall be considered agents and what-
ever any one of them may do alone shall bind the partner-
ship, without prejudice to the provisions of Article 1801.
(2) None of the partners may, without the consent of
the others, make any important alteration in the immov-
able property of the partnership, even if it may be useful to
the partnership. But if the refusal of consent by the other
partners is manifestly prejudicial to the interest of the
partnership, the court’s intervention may be sought.

COMMENT:
(1) Rules to Be Observed When Manner of Management
Has Not Been Agreed Upon
(a) Generally, each partner is an agent.
(b) Although each is an agent, still if the acts of one are
opposed by the rest, the majority should prevail (Art.
1801) for the presumed intent is for all the partners to
manage, as in Art. 1801.
(c) When a partner acts as agent, it is understood that he
acts in behalf of the firm; therefore when he acts in his
own name, he does not bind the partnership generally.
(Criado v. Gutierrez Hermanos, 37 Phil. 838). Generally,
a sale made by a partner of partnership property is not
binding on the firm if not authorized. (Santos v. Vil-
lanueva, et al., CA, L-8876-R, Sept. 7, 1953). However,
said transaction may be ratified as when the proceeds
thereof are spent for the benefit of the firm. (Ventura v.
Smith, et al., C.A., L-122-R, July 14, 1947).
(d) On the other hand, paragraph 1 or the authority to bind
the firm does not apply if somebody else had been given
authority to manage in the articles of organization or
thru some other means. (Red Men v. Veteran Army, 7
Phil. 685). Of course, proof on this point that somebody
else was authorized must be given; otherwise, the gen-
eral rule — “all are agents” — prevails. (Bachrach v. La
Protectora, 37 Phil. 441).

646
CIVIL CODE OF THE PHILIPPINES Art. 1803

(e) Alterations require unanimity. (Art. 1803, No. 2).

(2) Cases

Red Men v. Veteran Army

7 Phil. 685

FACTS: The Veteran Army, composed of veterans in

the Spanish-American War, had a constitution where it
empowered a “department of 16 members” to manage its
affairs. The constitution also provided that “six members of
the department constituted a quorum to do business.” One
day, one of the members of the department leased for the use
of the organization a certain building. But the organization
refused to pay later the unpaid rents on the ground that it
never authorized the signing member to enter into such a
contract of lease.
HELD: The Veteran Army, not having been formed for
profit, is not a partnership, but even if it be one, it cannot
be held liable for the unauthorized contract entered into in
its name. For while a partner is an agent, and can bind the
firm, still this power is allowed only when the articles of
partnership make no provision for the management of the
partnership business. In this case, it is evident that the power
to manage was given to the “department” as a whole and not
to any person or officer.

Criado v. Gutierrez Hermanos

37 Phil. 883

FACTS: A and B were partners. A was indebted to X.

On A’s death, B voluntarily assumed A’s debts, so that X
would not sue A’s estate anymore. But B did not pay later
on. Therefore, X sued the partnership. Is the firm liable?
HELD: No, the firm is not liable for B’s act was an
independent, private act unconnected with the mercantile
operations of the partnership. Moreover, the partnership never
voluntarily assumed the obligation. Therefore only B, not the
partnership, should be held responsible.

647
Art. 1804 CIVIL CODE OF THE PHILIPPINES

Sy-Boco v. Yap Teng

7 Phil. 12

FACTS: Yap and Yapsuan were partners in a store.

Yap contracted with Sy-Boco to furnish native cloth for the
store. Yap then introduced Sy-Boco to Yapsuan, the business
manager of the partnership. Yap told Sy-Boco that Yapsuan,
as manager, had authority to receive the cloth for him (Yap)
and that the value of the cloth should be CHARGED to YAP’S
ACCOUNT. Yap failed to pay on the ground that the goods
were delivered to the firm and that therefore the firm itself,
or the 2 partners jointly, must be held liable, and not him
alone.
HELD: Yap alone should be held liable. Firstly, he con-
tracted in his own name. Secondly, he himself had instructed
Sy-Boco to charge the value to him (Yap) personally. It follows
that the firm should not be held liable.

(3) Rule on Alterations

(a) Par. 2 deals with “important alterations” in “immovable
property of the partnership.” Why is the reference only
to immovables?
ANS.: First, because of their comparative greater
importance than personalty. Second, because, in a proper
case, they should be returned to the partners in the same
condition as when they were delivered to the partnership.
(11 Manresa 393).
(b) “Alteration” here contemplates useful expenses, not nec-
essary ones.
(c) Consent of the others may be express or implied (as
when the partners had knowledge of the alteration and
no opposition was made by them). (11 Manresa 392).

Art. 1804. Every partner may associate another person

with him in his share, but the associate shall not be admit-
ted in the partnership without the consent of all the other
partners, even if the partner having an associate should
be a manager.

648
CIVIL CODE OF THE PHILIPPINES Art. 1805

COMMENT:
Associate of Partner
(a) For a partner to have an associate in his share, consent
of the other partners is not required.
(b) For the associate to become a partner, ALL must consent
(whether the partner having the associate is a manager
or not).
Reasons:
1) mutual trust is the basis of partnership;
2) change in membership is a modification or novation
of the contract. (See 11 Manresa 395).

Art. 1805. The partnership books shall be kept, subject to

any agreement between the partners, at the principal place
of business of the partnership, and every partner shall at
any reasonable hour have access to and may inspect and
copy any of them.

COMMENT:
(1) Partnership Books
(a) The right in this Article is granted to enable the partner
to obtain true and full information of the partnership
affairs (Art. 1806), for after all, he is a co-owner of the
properties, including the books. (Art. 1811).
(b) However, the Article presupposes a “going partnership,”
not one pending dissolution, for here the right depends
on the court’s discretion (Geist v. Burnstine, 1940; 20
N.Y.S. 2d, 417); nor to one already dissolved, for here,
although the books belong to all the partners (in the
absence of a contrary agreement), still no single partner
is duty-bound to continue the place of business for the
benefit of the others. (Sanderson v. Cooke, 1931, 256
N.Y.S. 73). Neither is a purchaser of the firm’s goodwill
duty-bound to keep the books for the inspection of the
former partners. (Sanderson v. Cooke, supra).

649
Art. 1806 CIVIL CODE OF THE PHILIPPINES

(c) Art. 1806 says areasonable hour.” What is this? Our

Supreme Court has held that the reasonable hour should
be on business days throughout the year, and not merely
during some capricious or arbitrary period selected by
the managers. (See Pardo v. Hercules Lumber Co. and
Ferrer, 47 Phil. 964).

(2) Value of Partnership Books of Account as Evidence

They constitute an admission of the facts stated therein,
an admission that can be introduced as evidence against the
keeper or maker thereof. And this is true even if the books
are kept strictly in accordance with the provision of the law.
The only way out is to prove that the entries had been placed
therein as a result of fraud or mistake, which of course must
be proved. (Garrido v. Asencio, 10 Phil. 691).

Garrido v. Asencio
10 Phil. 691

FACTS: Garrido and Asencio were partners in the firm

“Asencio y Cia,” which was later on dissolved by mutual
agreement. Garrido later sued Asencio, who was in charge
of the books and funds, for the amount of capital which he
(Garrido) has invested. Asencio’s defense was that the part-
nership had lost, and therefore nothing was due Garrido. As
proof, Asencio presented the books which admittedly were
kept and made jointly by him and Garrido. Garrido charged
however that the books should not be admitted in evidence
because they were not kept strictly in accordance with legal
provisions. Issue: Are the books admissible in evidence?
HELD: Yes, for after all the entries had been jointly made,
and therefore their correctness must be taken to be admitted by
Garrido (and Asencio) except so far as it is made to appear that
they are erroneous as a result of fraud or mistake. Garrido has
failed to prove that he has been misled by fraud or mistake.

Art. 1806. Partners shall render on demand true and

full information of all things affecting the partnership to
any partner or the legal representative of any deceased
partner or of any partner under legal disability.

650
CIVIL CODE OF THE PHILIPPINES Art. 1806

COMMENT:

(1) Duty of Partners to Give Information

Reason for the law — There must be no concealment
between partners in all matters affecting the firm’s interest.
This is required by good faith. Thus, this duty to give on
demand “true and full information.”
[NOTE: Even without the demand, honesty demands
the giving of vital information, the refraining from all kinds
of concealment. (See Poss v. Gottlieb, 1922, 18 Misc. 318).

Poss v. Gottlieb
1922, 18 Misc. 318
FACTS: A and B were real estate partners. A heard of
a possible purchaser of a certain parcel of land owned by the
firm. But A did not inform B. Instead, A persuaded B to sell
to him (A) B’s share at a nominal amount, after which A sold
the whole parcel at a big profit. B sued A for damages for
alleged deceit A’s defense was that he after all had not been
asked by B about a possible purchaser.
HELD: A is liable, for he should not have concealed.
“Good faith not only requires that a partner should not make
any false concealment, but he should abstain from all conceal-
ment.”

(2) Errors in the Books

If partnership books contain errors, but said errors have
not been alleged, the books must be considered entirely correct
insofar as the keeper of said books of account is concerned.
(Ternate v. Aniversario, 8 Phil. 292).

Ternate v. Aniversario
8 Phil. 292
FACTS: Ternate was the managing partner in a firm
engaged in coastwise shipping. He was also the keeper of the
books. As manager he was entitled to 2% of the net income;
the rest was to be distributed to all the partners in propor-
tion to their respective contributions. Later Ternate rendered

651
Art. 1807 CIVIL CODE OF THE PHILIPPINES

a statement of accounts, giving each partner his share of the

profits. Still later he sued for his 2% from each of the part-
ners, without however explaining why he had not deducted
his 2% beforehand. Issue: Can he recover the 2%?
HELD: No, because he may be said to be in estoppel,
having made and signed the accounts himself without explain-
ing the omission of the 2%. Presumably, this 2% had already
been obtained by him.

(3) Who Can Demand Information

Note that under Art. 1806, the following are entitled to
true and full information:
(a) any partner
(b) legal representative of a dead partner
(c) legal representative of any partner under legal disability
[NOTE: The duty to give information is distinct
from the duty to account under Art. 1807.]

Art. 1807. Every partner must account to the partner-

ship for any benefit, and hold as trustee for it any profits
derived by him without the consent of the other partners
from any transaction connected with the formation, conduct,
or liquidation of the partnership or from any use by him
of its property.

COMMENT:

(1) Duty to Account

(a) Reason for the law: The fiduciary relations between the
partners are relationships of trust and confidence which
must not be abused (Pang Lim & Galvez v. Lo Seng, 42
Phil. 282) or used to personal advantage. (Einsweiler v.
Einsweiler, 1945, 390 Ill. 286).
(b) The trust relations exist only during the life of the part-
nership, not before, nor after. Hence, fiduciary relations
do not exist between the persons still negotiating for the

652
CIVIL CODE OF THE PHILIPPINES Art. 1807

formation of partnership. (Walker v. Patterson, 1926, 166

Minn. 215). The trust relations end with the death of
the partnership (Bayer v. Bayer, 1926, 214 N.Y.S. 322)
unless the foundation for the breach of trust took place
even during the existence of the firm. (See Hanlon v.
Haussermann and Beam, 40 Phil. 796).

(2) Some Problems

(a) A partner with partnership funds, and unknown to the
others, purchased a house in his own name. Who owns
the house?
ANS.: The partnership owns the house. The buying
partner should only be considered a trustee. (See Art.
1807).
(b) A partner in the real estate business, without the knowl-
edge of the other partners, bought a parcel of land in his
daughter’s name and subsequently sold the same at a
profit. Should the other partners share in the profits?
ANS.: Yes, for the transaction can be considered
an affair of the partnership. (Watson v. Kellogg, 1933,
19 P-2d. 253).
(c) A, B and C are partners. A, as a result of a transaction
connected with the conduct of the partnership, has in
his hands, so that it may be traced, a specific sum of
money or other property. A is insolvent. Is the claim of
the partnership against A a claim against him as an
ordinary creditor, or is it a claim to the specific property
or money in his hands?
ANS.: The words “and hold as trustee for the part-
nership any profits” indicate clearly that the partnership
can claim as their own (hence, specific property) any
property or money that can be traced. (Commissioner’s
Note, 7 ULA, Sec. 21, pp. 29-30).
(NOTE: Art. 1807 was taken from Sec. 21 of the
Uniform Partnership Act of the United States which was
drafted, of course, by a Commission.)

653
Art. 1807 CIVIL CODE OF THE PHILIPPINES

(3) Some Cases

Buenaventura v. David
37 Phil. 435
FACTS: David and Buenaventura were partners in the real
estate business, David being the capitalist and Buenaventura,
the industrial partner. David with his own funds purchased
the land in Tarlac known as the “Hacienda de Guitan.” Legal
title was issued in David’s name and from that moment David
exercised all acts of ownership over it, with Buenaventura’s
assistance. Later David offered a half-interest on the land to
Buenaventura for approximately P2,000, but Buenaventura
refused the offer, and did not make the advance. Later, both
partners broke up the partnership. More than 7 years later,
Buenaventura sued for the transfer to his name of the title to
half of the property on the ground that David should be consid-
ered merely the trustee. Will the action prosper?
HELD: The action will not prosper for clearly under the
facts, David was the sole owner of the land. Had there really
been a trust, the action would be successful and title could
be transferred (Uy Aloc v. Cho Jan Ling, 19 Phil. 202), yet
here no such trust existed. Perhaps, had the money for the
half-interest been advanced, the answer would have been dif-
ferent. But the truth is, no such advance was made. Finally,
Buenaventura is guilty of “laches” — long delay in the bringing
of the action — such undue delay being strongly persuasive
of a lack of merit in the claim. “Time inevitably tends to
obliterate occurrences from the memory of witnesses, and
where the recollection appears to be entirely clear, the true
cause to the solution of a case may be hopelessly lost. These
considerations constitute one of the pillars of the doctrine
long familiar in equity jurisprudence to the effect that laches
or unreasonable delay on the part of a plaintiff in seeking
to enforce a right is not only persuasive of a want of merit,
but may, according to the circumstances, be destructive of the
right itself. Vigilantibus non dormientibus equitas subvenit.”

Tuason and San Pedro v. Gavino Zamora and Sons

2 Phil. 305
FACTS: Don Mariano Tuason, a partner in the firm of
“Tuason and San Pedro,” engaged in building construction, by

654
CIVIL CODE OF THE PHILIPPINES Art. 1807

himself entered into a contract for the construction of a house,

although in reality the contract was for and in behalf of the
partnership, and as a matter of fact, partnership funds were
used. When the partnership sued the defendant, the latter
questioned the firm’s right to bring the action for payment.
HELD: The partnership had the right, for after all the
contract was really entered in its behalf, and with the use
of the firm’s funds. And payment to the firm will really be
payment to Tuason himself, for the firm can be said to be
the true creditor. The defendant need not fear therefore the
lack of authority of the firm to receive payment.

Pang Lim and Galvez v. Lo Seng

42 Phil. 282

FACTS: Pang Lim and Lo Seng were partners in the

distillery business. The firm was renting for its use a certain
parcel of land, upon which the firm made certain improve-
ments. In the lease contracts, it was agreed that the owner
of the land would become the owner also of all the improve-
ments made by the firm at the end of 15 years. Before the
end of the lease, Pang Lim withdrew as partner and sold
his interests to Lo Seng. He also bought the land from its
owner. He now wants to terminate the lease on the ground
that a purchaser of the leased estate is generally allowed to
end the lease. When Lo Seng refused to vacate, Pang Lim
brought this action for unlawful detainer.
HELD: The suit will not prosper because of Pang Lim’s
evident bad faith. He obviously desired the termination of
the lease, in order to avail himself of the benefits of the
improvements which would go to the owner of the land, as
per stipulation in the lease contract. Moreover, when he sold
his rights as a partner, this included the right to the lease.
For him to now disregard the lease, from which sale he had
profited, would be most unfair, considering that he seeks to
destroy an interest derived from himself, and for which he
has already received full value. Finally, one partner cannot,
to the detriment of another, apply exclusively to his own
benefit the results of the knowledge and information gained
in the character of partner.

655
Art. 1808 CIVIL CODE OF THE PHILIPPINES

Hanlon v. Haussermann and Beam

40 Phil. 796

FACTS: Haussermann and Beam, officers of the Benguet

Consolidated Mining Company, entered into an agreement
with Sellner and Hanlon whereby in consideration of P50,000
to be raised by the latter two (to rehabilitate certain essen-
tial machineries) within a six-month period, the two would
receive certain shares in the company. Because the P50,000
was not raised within the proper period, Haussermann and
Beam had to look for other sources of capital. Fortunately they
were able to do so, and the shares in the company rose to
10 times their original value. Sellner and Hanlon now desire
to participate in said profits on the ground that the four of
them had jointly agreed to improve the company, and it is
but fair that they should also share in the profits.
HELD: Sellner and Hanlon are wrong. In the first place,
they were not partners. In the second place, granting that
they were originally joint ventures, still the fiduciary relations
between them ceased when Sellner and Hanlon were unable
to raise the needed P50,000. It is true that the defendants
had obliged themselves to seek financial assistance from the
plaintiff, but only for the period of six months, not indefinitely
afterwards. Moreover, “after the termination of an agency,
partnership, or joint venture, each of the parties is free to act
in his own interest, provided he has done nothing during the
continuance of the relation to lay a foundation for an undue
advantage to himself.”

Teague v. Martin, et al.

53 Phil. 504

If a partner without authority of the partnership uses

firm funds for the purchase of certain articles registered in
his name, he will have, in the suit for dissolution, to account
for said funds. If the firm has on the other hand made use
of the articles for its own benefit, it will likewise be obliged
to account for the reasonable value of its use.

Art. 1808. The capitalist partners cannot engage for

their own account in any operation which is of the kind of

656
CIVIL CODE OF THE PHILIPPINES Art. 1808

business in which the partnership is engaged, unless there

is a stipulation to the contrary.
Any capitalist partner violating this prohibition shall
bring to the common funds any profits accruing to him from
his transactions, and shall personally bear all the losses.

COMMENT:
(1) Business Prohibition on Capitalist Partners
Note that while the industrial partner is prohibited from
engaging “in business for himself” (any business), the capitalist
partner is prohibited from engaging for his own account in
any operation “which is of the kind of business in which the
partnership is engaged” (same or similar business that may
result in competition). (See 2 Blanco 426). The competition
may become unfair in view of the knowledge by the capitalist
partner of the firm’s business secrets. (2 Blanco 426).

2) Instances When There Is No Prohibition

(a) When it is expressly stipulated that the capitalist partner
can so engage himself. (Art. 1808, par. 1).
(b) When the other partners expressly allow him to do so.
(c) When the other partners impliedly allow him to do so.
(Example: When ALL of them are likewise violating
the article.)
(d) When the company ceases to be engaged in business
(hence during the period of liquidation and winding
up, the article no longer applies, even if the “engaging”
partner is himself the “liquidating partner”). (2 Vivante
107-108). The reason is clear: there can possibly be no
unfair competition.
(e) When the general-capitalist partner becomes merely a
limited partner in a competitive enterprise for after all,
a limited partner does not manage.

(3) Effect of Violation

(a) the violator shall bring to the partnership all the profits
illegally obtained

657
Art. 1809 CIVIL CODE OF THE PHILIPPINES

(b) but he shall personally bear all the losses.

[NOTE: Suppose he gains a total of P10 million
and losses for a total of P2 million, how much must he
bring to the firm?
ANS.: Strictly construed, he must bring P1 million, and
suffer the P2 million loss all by himself; however this would
be unduly harsh, and the proper interpretation, it is submit-
ted, is for him to give only P8 million. In other words, losses
can be deducted from profits. It is only net losses which he
must shoulder.]
(c) Although not mentioned in the law expressly, it is be-
lieved that the violator can be ousted from the firm on
the ground of loss of trust and confidence, particularly if
the violation is repeated after due warning. This would
of course result in the dissolution of the firm.

Art. 1809. Any partner shall have the right to a formal

account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership
business or possession of its property by his co-partners;
(2) If the right exists under the terms of any agree-
ment;
(3) As provided by Article 1807;
(4) Whenever other circumstances render it just and
reasonable.

COMMENT:

(1) Right to Demand a Formal Account

(a) Generally, no formal accounting is demandable till after
dissolution. Reason: After all there is access to the books.
(Art. 1805).
(b) However, in the instances enumerated in Art. 1809, it
is evident that the formal accounting can properly and
justifiably be asked for thus:

658
CIVIL CODE OF THE PHILIPPINES Art. 1809

1) in No. 1 — he may have access to the books

2) in No. 2 — there is no express stipulation

Leung v. IAC and Yiu

GR 70926, Jan. 31, 1989

The right to demand an accounting exists as

long as the partnership exists. Prescription begins
to run only upon the dissolution of the partnership
when the final accounting is done.
3) in No. 3 — it is unfair if other partners can take
undue advantage of partnership funds or partner-
ship transactions. (See Art. 1807).
4) in No. 4 — as when one partner has been travelling
for a long period of time on a business involving
the firm.
[NOTE: In no other case can a formal account-
ing be demanded. (Commissioner’s Note, 7 ULA,
Sec. 22, pp. 30-31).]

(2) Estoppel
An accounting made cannot be questioned anymore if it
was accepted without objection for this would now be a case
of estoppel (Spitz v. Abrans, 1941, 128 Conn. 121), unless of
course fraud and error are alleged and proved. (See Ornum
v. Lasala, 74 Phil. 242).

(3) Stipulation About Continuing Share

If a partnership is entered into by 2 physicians, with
the stipulation that should one of them join the Army, the
remaining partner continuing to practice would give the former
25% of the net profits — such stipulation is valid, and proper
accounting should be made. Of course, if the practicing doc-
tor does not want to continue practicing anymore, this is all
right. (See Liden v. Hoshal, 1943, 307 Mich. 568).

659
Arts. 1810-1811 CIVIL CODE OF THE PHILIPPINES

Section 2
PROPERTY RIGHTS OF A PARTNER

Art. 1810. The property rights of a partner are:

(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management.

COMMENT:
Property Rights of a Partner
(a) Example of “specific partnership property”:
A and B each contributed a car for the partnership.
The two cars are specific partnership property.
(b) Example of “interest in the partnership” — the partner’s
share of the profits and losses (without mentioning any
particular or specific property).
(c) Note that the right to participate in the management is
a very valuable property right.

Art. 1811. A partner is co-owner with his partners of

specific partnership property.
The incidents of this co-ownership are such that:
(1) A partner, subject to the provisions of this Title and
to any agreement between the partners, has an equal right
with his partners to possess specific partnership property
for partnership purposes; but he has no right to possess
such property for any other purpose without the consent
of his partners;
(2) A partner’s right in specific partnership property
is not assignable except in connection with the assignment
of rights of all the partners in the same property;
(3) A partner’s right in specific partnership property
is not subject to attachment or execution, except on a claim

660
CIVIL CODE OF THE PHILIPPINES Art. 1811

against the partnership. When partnership property is at-

tached for a partnership debt the partners, or any of them,
or the representatives of a deceased partner cannot claim
any right under the homestead or exemption laws;
(4) A partner’s right in specific partnership property
is not subject to legal support under Article 291.

COMMENT:
(1) Co-Ownership in Specific Partnership Property
The law says “a partner is co-owner with his partners
of specific partnership property.” What does this mean?
ANS.: Simply that they are co-owners (tenants in common
with proportional, sometimes equal) right thereto. However,
the rules on co-ownership do not necessarily apply; the rules
on “co-ownership in partnership” are applicable. Said rules are
detailed in the subsequent paragraphs. (See Commissioner’s
Note, 7 ULA, Sec. 25, pp. 32-33).

(2) Rights of a Partner in Specific Partnership Property

(Example: a car contributed by one of the partners to
the partnership)
(a) In general, he has an equal right with his partners to
possess the car but only for partnership purposes (not for
other purposes, except if the others expressly or impliedly
give their consent).
(b) He cannot assign his right in the car (except if all the
other partners assign their rights in the same prop-
erty).
[NOTE: If this rule is violated, the assignment is
VOID (See Cayton v. Hardy, 27 Mo. 536), where the
other partners were able to recover what had been sold
or assigned). The same rule applies if the right is mort-
gaged. (Walcox v. Jackson, 7 Colo. 521). The assignee or
purchaser does NOT become a co-owner of the specific
partnership property with the other partners. (See Free-
man v. Abramson, 30 Misc. 101, 61 N.Y.S. 839).]

661
Art. 1811 CIVIL CODE OF THE PHILIPPINES

(NOTE: Reason for rule of non-assignability: It is

hard to determine how much it exactly is until after
liquidation.)
(c) His right in the car is not subject to the attachment or
execution (except on a claim against the partnership).
(NOTE: If there is a partnership debt, the specific
property can be attached. Here, the partners or any of
them or the representatives of a deceased partner cannot
claim any right under the homestead or exemption laws.
This is because in a sense, the property is not considered
their individual or separate property.)
[NOTE: Reason why in general, the right of the
partner in the car cannot be attached by his separate
or individual creditor: If he cannot make a voluntary
assignment, neither should his separate creditors be al-
lowed an involuntary assignment because “the beneficial
rights of the separate creditors of a partner in specific
partnership property should be no greater than the ben-
eficial rights of their debtor.” (See Case v. Beauregard,
99 U.S. 119 and Nixon v. Nash, 80 Am. Dec. 390).]
(d) His right in the car is NOT subject to legal support
under Art. 291 (said Article enumerates the people who
are obliged to support each other).

(3) Some Cases

Kimbal v. Hamilton F. Ins. Co.

(1861), 8 Bos. (N.Y.) 495
FACTS: A and B were partners. Without A’s consent B
assigned all the specific partnership properties to X. Do A
and B have insurable interest in said properties?
HELD: Yes, for the assignment is void and is clearly
against the law.

McGrath v. Cowen
(1898), 57 Ohio St. 385
FACTS: A and B were partners. A mortgaged his right
in a certain specific partnership property. Later the firm

662
CIVIL CODE OF THE PHILIPPINES Arts. 1812-1813

creditor wanted to get said property. Who should prevail, the

firm creditor or the mortgagee?
HELD: The firm creditors, for the mortgage in specific
partnership property is void, B not having also assigned his
right. This is so, even if the mortgagee’s right therein be en-
tirely destroyed (without prejudice of course to his recovery
from A).

Sherwood v. Jackson
8 P. (2d) 943

FACTS: A and B were partners. Because A suffered

certain damages from B, A sued B. A won. A then obtained
an order of execution to levy on B’s interest in certain specific
partnership properties. Execution was made, and A bought B’s
interest in said specific properties. Issue: Was the execution
lawful?
HELD: The execution is not valid, for B’s right in specific
partnership property is NOT subject to attachment or execu-
tion. The only exception (that is, a claim against the property)
is not present in this case.

Art. 1812. A partner’s interest in the partnership is his

share of the profits and surplus.

COMMENT:
A Partner’s Interest in the Partnership
While in general, a partner’s interest in specific partner-
ship property cannot be assigned, cannot be attached, and is
not subject to legal support, a partner’s interest in the part-
nership (his share in the profits and surplus) can in general
be assigned, be attached, be subject to legal support. (See Arts.
1813 and 1814).

Art. 1813. A conveyance by a partner of his whole inter-

est in the partnership does not of itself dissolve the part-
nership, or, as against the other partners in the absence of
agreement, entitle the assignee, during the continuance of
the partnership, to interfere in the management or adminis-

663
Art. 1813 CIVIL CODE OF THE PHILIPPINES

tration of the partnership business or affairs, or to require

any information or account of partnership transactions,
or to inspect the partnership books; but it merely entitles
the assignee to receive in accordance with his contract
the profits to which the assigning partner would otherwise
be entitled. However, in case of fraud in the management
of the partnership, the assignee may avail himself of the
usual remedies.
In case of a dissolution of the partnership, the assignee
is entitled to receive his assignor’s interest and may require
an account from the date only of the last account agreed
to by all the partners.

COMMENT:

(1) Effects of Conveyance By Partner of His Interest in

the Partnership
(a) If a partner CONVEYS (assigns, sells, donates) his
WHOLE interest in the partnership (his share in the
profits and surplus), either of two things may happen:
1) the partnership may still remain; or
2) the partneship may be dissolved.
(NOTE: However, such mere conveyance does
NOT of itself dissolve the firm, therefore in general
the partnership remains.)
(b) The assignee (conveyee) does not necessarily become a
partner. The assignor is still the partner, with a right
to demand accounting and settlement. (See Herman v.
Pepper, 1933, 311 Pa. 104).
(c) The assignee cannot even interfere in the management or
administration of the partnership business or affairs.
(d) The assignee cannot also demand:
1) information;
2) accounting;
3) inspection of the partnership books.

664
CIVIL CODE OF THE PHILIPPINES Art. 1813

(2) Rights of the Assignee

(a) To get whatever profits the assignor-partner would have
obtained.
Question: Is he to be considered an outside creditor
who would be entitled to collect before the partners get
their own profits?
ANS.: No, for he merely shares in the profits, the
same as the assignor-partner whose share he (the as-
signee) will now get. Hence, outside creditors would have
to be preferred. (See Machuca v. Chuidian, Buenaventura
and Co., 2 Phil. 210).
(b) To avail himself of the usual remedies in case of fraud
in the management.
(c) To ask for annulment of the contract of assignment if
he was induced to enter into it thru any of the vices of
consent (fraud, error, intimidation, force, undue influ-
ence) or if he himself was incapacitated to give consent
(minor, insane).
(d) To demand an accounting — (but only if indeed the
partnership is dissolved, but even then, the account can
cover the period only from the date of the last account-
ing which has been agreed to by all the partners). (Art.
1813, 2nd paragraph).

(3) Rule in Case of Mortgages

Does Art. 1813 cover also a case when the partner merely
mortgages his interest in the profits?
ANS.: Yes, but here said interest is not alienated; it is
merely given as security, and therefore the rules on securities
for loans, etc. can properly apply. (See Herman v. Pepper, 311
Pa. 104).

White v. Long
1927, 289 Pa. 526
FACTS: A, B, C, and D were partners. A assigned his
interest in the partnership to his son S. S now wanted to join
in the management of the enterprise. B, C, and D refused. Is
the partnership necessarily dissolved?

665
Art. 1814 CIVIL CODE OF THE PHILIPPINES

HELD: No, the mere assignment did not dissolve the firm.
This is so even if B, C and D did not allow S to participate
in the firm’s business conduct. After all, S did not become
a partner. He was a mere assignee (entitled to collect only
whatever profits his father A could have collected).

Art. 1814. Without prejudice to the preferred rights

of partnership creditors under Article 1827, on due appli-
cation to a competent court by any judgment creditor of
a partner, the court which entered the judgment, or any
other court, may charge the interest of the debtor partner
with payment of the unsatisfied amount of such judgment
debt with interest thereon, and may then or later appoint a
receiver of his share of the profits, and of any other money
due or to fall due to him in respect of the partnership, and
make all other orders, directions, accounts and inquiries
which the debtor partner might have made, or which the
circumstances of the case may require.
The interest charged may be redeemed at any time
before foreclosure, or in case of a sale being directed by
the court, may be purchased without thereby causing a
dissolution:
(1) With separate property, by any one or more of the
partners; or
(2) With partnership property, by any one or more of
the partners with the consent of all the partners whose
interests are not so charged or sold.
Nothing in this Title shall be held to deprive a partner
of his right, if any, under the exemption laws, as regards
his interest in the partnership.

COMMENT:
(1) Charging the Interest of a Partner
Example:
A, B and C are partners. A personally owes X a sum of
money. X sues A, and obtains a final judgment in this favor.
But A has no money. What can X do?

666
CIVIL CODE OF THE PHILIPPINES Art. 1814

ANS.: X may go to the same court (or any other court

possessed of jurisdiction) and ask that A’s interest in the
partnership be “charged” (attached, or levied upon) for the
payment to him (X) of whatever has not yet been paid him
with interest thereon.
[NOTE: While a partner’s interest in the partnership
(his share in the profits or surplus) may be charged or levied
upon, his interest in a specific firm property cannot as a rule
be attached.]

(2) Preferential Rights of Partnership Creditors

The law says “without prejudice to the preferred rights
of partnership creditors under Art. 1827.” What does this
mean?
ANS.: This simply means that partnership creditors
are entitled to priority over partnership assets (including the
partner’s interest in the profits), that is, the separate creditors
will get only after the firm creditors have been satisfied.
Art. 1827 reads: “The creditors of the partnership shall
be preferred to those of each partners as regards the part-
nership property. Without prejudice to this right, the private
creditors of such partner may ask the attachment and public
sale of the share of the latter in the partnership assets.”
[NOTE:
(a) Partnership creditors have preference in partnership as-
sets.
(b) Separate or individual creditors have preference in sepa-
rate or individual properties (not those included in the
firm).]

(3) Receivership
(a) When the charging order is applied for and granted, the
court MAY (discretionary) at the same time or later ap-
point a receiver of the partner’s share in the PROFITS
or other MONEY due him. (Art. 1814).
(b) The receiver appointed is entitled to any RELIEF neces-
sary to conserve the partnership assets for partnership

667
Art. 1814 CIVIL CODE OF THE PHILIPPINES

purposes. Thus, he may nullify all efforts to assign specific

partnership property. (See Windom Nat. Bank v. Klein,
1934, Minn. 447).
(c) Suppose the other partners owe the firm some money,
may the receiver be authorized to demand that such
amount be collected?
HELD: Yes, for such credit forms part of the partnership
assets. (Upton v. Upton, 1934, 268 Mich. 26).

(4) Redemption of the Interest Charged

(a) “Redemption” here merely means the extinguishment of
the charge or attachment on the partner’s interest in
the profits.
(b) How is this “redemption” made?
ANS.:
1) The “charge” may be “redeemed” or bought at any-
time BEFORE foreclosure.
2) AFTER foreclosure, it may still be “bought,” with
separate property (by any one or more of the part-
ners); or with partnership property (with consent of
all the other partners).
(NOTE: The consent of the delinquent partner
is not needed.)

(5) Exemption Laws

Regarding a partner’s interest in the partnership, may
the partner still avail himself of the exemption laws?
ANS.: Yes, because in a sense, this is his private prop-
erty.
[NOTE: He cannot however avail himself of the exemption
laws insofar as his interest in specific partnership property
is concerned. (Art. 1811, No. 3).]

668
CIVIL CODE OF THE PHILIPPINES Art. 1815

Section 3
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS

Art. 1815. Every partnership shall operate under a firm

name, which may or may not include the name of one or
more of the partners.
Those who, not being members of the partnership, in-
clude their names in the firm name shall be subject to the
liability of a partner.

COMMENT:
(1) Firm Name
(a) This is the name of the juridical entity.
(b) Under Art. 126 of the Code of Commerce, the name of at
least one of the general partners in the general partner-
ship should appear with the words “and company” (in
case not all the partners were included).
The rule has now been changed. Thus, under the
Civil Code, the firm name may or may not include the
name of one or more of the partners.
(c) Suppose the firm name is changed in good faith but the
members remain the same, will the partnership under the
new name retain all the rights it had under the old name?
ANS.: Yes. (See Sharruf case).

Sharruf and Co. v. Baloise Fire Insurance Co.

64 Phil. 258

FACTS: Sharruf and Eskenazi, partners under the

name “Sharruf and Co.,” insured for P40,000 their goods.
Later, the name was changed to “Sharruf and Eskenazi.”
The insured goods were subsequently burned, but the
insurance company refused to pay on the ground that
its name, having been changed, the partnership now had
no juridical personality to sue, nor did it have insurable
interest in the goods.

669
Art. 1816 CIVIL CODE OF THE PHILIPPINES

HELD: The change of name is not important, not

having been done to defraud the insurance company.
Moreover, the members remain the same. Therefore, the
firm can collect the insurance indemnity.

(2) Liability of Strangers Who Include Their Names

Strangers (those not members of the partnership) who
include their names in the firm are liable as partners because
of estoppel (Art. 1815, par. 2) but do not have the rights of
partners for after all, they had not entered into any partner-
ship contract. The purpose of the law is to protect customers
from being misled as to whom they are dealing with. (See
Sagal v. Fylar, 89 Conn. 293).
[NOTE: If a person misrepresents himself as a partner,
and as a consequence thereof, a stranger is misled, the de-
ceiver is liable as a partner (without the rights of a partner)
and this is true, even if he did not include his name in the
firm name.]
[NOTE: Under Art. 1846, if a limited partner includes
his name in the firm name, he has obligations, but not the
rights of, a general partner.]
[NOTE: The mere fact that a partnership has assumed
a fictitious or assumed name, other than its real one, does
not affect the validity of contracts otherwise validly entered
into. (38 Am. Jur., Name, Sec. 15, p. 15).]

Art. 1816. All partners, including industrial ones, shall

be liable pro rata with all their property and after all the
partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the account
of the partnership, under its signature and by a person au-
thorized to act for the partnership. However, any partner
may enter into a separate obligation to perform a partner-
ship contract.

COMMENT:
(1) Liability Distinguished from Losses
While an industrial partner is exempted by law from
losses (as between the partners), he is not exempted from li-

670
CIVIL CODE OF THE PHILIPPINES Art. 1816

ability (insofar as third persons are concerned). This means

that the third person can sue the firm and the partners,
including the industrial partner. Of course, the partners will
be personally liable (jointly or pro rata) only after the assets
of the partnership have been exhausted. Even the industrial
partner would have to pay, but of course he can recover later
on what he has paid, from the capitalist partners, unless there
is contrary agreement. (De los Reyes v. Lukban & Borja, 35
Phil. 757; Compania Maritima v. Muñoz, et al., 9 Phil. 326).

(2) Example
A, B and C, capitalist partners, each contributed P100,000;
and D, the industrial partner contributed his services. Sup-
pose X, a customer, is the creditor of the firm to the amount
of P900,000, what should X do?
ANS.: X must sue the firm and all the partners, includ-
ing D. After getting the P3 million (capital assets of the firm)
he can still recover P6 million from the 4 partners jointly or
pro rata (not solidarily). Hence, he can recover P1.5 million
from D. D can later on recover P1.5 million from A, B, and
C at the rate of P500,000 each, for after all, he is exempted
by the law from losses, as distinguished from liabilities.
(NOTE: Under the law the liability of the partners is
subsidiary and joint, not principal and solidary.)

(3) Liability of a Partner Who Has Withdrawn

A partner who withdraws is not liable for liabilities
contracted after he has withdrawn, for then he is no longer
a partner. If his interest has not yet been paid him, his right
to the same is that of a mere creditor. (See Robles v. Pardo
y Robles Hermanos, 59 Phil. 482).

(4) Unequal Contribution of Capitalist Partners

Suppose capitalist partners had contributed unequally
to the capital, will their liability to strangers be equal or
proportionate to their contributions?
ANS.: Proportionate for the law says “pro rata” (propor-
tionate). (See Art. 1815).

671
Art. 1816 CIVIL CODE OF THE PHILIPPINES

(5) BAR
X, Y, and Z organized and registered a commercial
regular general co-partnership with a capital of P10 mil-
lion, X contributing 50% of the capital, Y 30% and Z 20%.
A certain creditor who has a claim of P2 million against the
co-partnership desired to file suit to collect his claim.
(a) Who should be made party defendant or defendants in
the creditor’s suit?
(b) Whose assets are liable for the satisfaction of the credi-
tor’s judgment? Explain the extent of liability of the
defendant or defendants.
Answer:
(a) The defendants should be the firm itself and the three
partners. (Art. 1816). (NOTE — Since there are no more
commercial partnerships today, the new Civil Code provi-
sions should be applied).
(b) First, the assets of the firm (P10 million) must be ex-
hausted, then X, Y and Z will be liable pro rata in the
proportion of 50-30-20 for the remaining P10 million.
(Art. 1860). Hence, X will pay from his individual as-
sets P5 million; P3 million; and Z, P2 million. As among
themselves the losses will be divided, in the absence of
agreement on losses or profits, in accordance with their
contribution of 50%, 30%, and 20%. (Art. 1797).

Island Sales, Inc. v. United Pioneers

General Construction Co., et al.
L-22493, Jul. 31, 1975
FACTS: The plaintiff sued a partnership composed
of five (5) general partners for payment of a promissory
note. Later, the plaintiff filed a motion to dismiss the case
against one of the partners. The motion was granted. If the
defendants lose the case, how much will each of the four
remaining defendants pay — 1/5 or 1/4 of the debt?
HELD: Each of the four will pay 1/5 of the debt.
Under Art. 1816 of the Civil Code, the partners are li-
able “pro rata,” meaning “joint” (as distinguished from
solidary). Originally, each of the five (5) partners was

672
CIVIL CODE OF THE PHILIPPINES Art. 1817

liable for 1/5. The discharge from the complaint of one of

them did not mean that said discharged defendant is no
longer a partner. So each of the remaining four should
pay 1/5. They must not be made liable for the share
of the fifth partner. When plaintiff moved to dismiss
the complaint against said fifth partner, it was merely
condoning or remitting his individual liability to the
plaintiff. Said condonation or remission will not benefit
the other “joint” debtors or partners.

(6) Effect of Stipulation Exempting Liability to Third Per-

sons
Suppose it is stipulated that all the industrial partners
and some of the capitalist partners would be exempted from
liability insofar as third persons are concerned, would the
stipulation be valid?
ANS.: The stipulation would be null and void. (See Com-
pania Maritima v. Muñoz, et al., 9 Phil. 326).

(7) Comment of the Code Commission

“The basic rule (formulated in Art. 1698 of the old Code
for civil partnerships) on the personal but subsidiary liability
of the partners pro rata for the obligations of the partnership
has been retained. The Commission considers the solidary
liability laid down in the Code of Commerce (for commercial
partnerships) as inadvisable, such liability being the cause for
the reluctance and fear with which the formation of business
partnerships has been regarded by all.”

(8) Partner Acting in His Own Name

Note that under Art. 1816, any partner may however
“enter into a separate obligation to perform a partnership
contract.” (Here, he does not act in behalf of the partner-
ship; he acts in his own name, although for the benefit of
the partnership.)

Art. 1817. Any stipulation against the liability laid down

in the preceding article shall be void, except as among the
partners.

673
Art. 1817 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Stipulation Eliminating Liability
Query: As among the partners, is it permissible to stipu-
late that a capitalist partner be exempted from liability?
ANS.: The answeris YES, under Art. 1817. And yet under
Art. 1799, a stipulation which excludes one or more partners
(capitalist) from any share in the profits or losses is VOID. How
can these two articles be reconciled? It would seem that the
only way to harmonize the two articles (insofar as capitalist
partners are concerned) is this: it is permissible to stipulate
among them that a capitalist partner will be exempted from
liability in excess of the original capital contributed; but will
not be exempted insofar as his capital is concerned.
Example:
A, B, and C, capitalist partners, each contributed P1 mil-
lion. The firm’s indebtedness amounts to P9 million. It was
stipulated that A would be exempted from liability. Assuming
that the capital of P3 million is still in the firm, what would
be the rights of the firms creditors?
ANS.: To get the P3 million and to get still P2 million
each from the 3 partners (a total of P9 million). A will thus
be liable to the third persons for P2 million. How much, if
any, can A recover from B and C? It is submitted that he
can recover P2 million from B and C (P1 million each) for as
to liability as among them, he is exempted (Art. 1817) but he
cannot recover his original capital of P1 million. (Art. 1799).

(2) ‘Liability’ and ‘Losses’ Distinguished

Note that while in general “liability” refers to responsibil-
ity towards third persons, and “losses” refers to responsibility
as among the partners (Compania Maritima v. Muñoz, et al.,
9 Phil. 326), still Art. 1817, a new codal provision, can refer
to “liability” as “among the partners.”

(3) BAR
In the articles of a general co-ownership, one of the
partners is expressly exempted from personal liability for the
losses of the partnership. Is this agreement valid? Explain.

674
CIVIL CODE OF THE PHILIPPINES Art. 1818

Answer:

(a) If the exempted partner is an industrial one — the agree-

ment is valid as among themselves, but not insofar as
creditors are concerned.
(b) If the exempted partner is a capitalist one — the agree-
ment is void as against creditors of the firm. As among
themselves, it is valid — regarding contributions in
excess of the capital (Art. 1817); but void, regarding the
original contribution. (Art. 1799).

Art. 1818. Every partner is an agent of the partnership

for the purpose of its business, and the act of every partner,
including the execution in the partnership name of any in-
strument, for apparently carrying on in the usual way the
business of the partnership of which he is a member binds
the partnership, unless the partner so acting has in fact no
authority to act for the partnership in the particular matter,
and the person with whom he is dealing has knowledge of
the fact that he has no such authority.
An act of a partner which is not apparently for the
carrying on of business of the partnership in the usual
way does not bind the partnership unless authorized by
the other partners.
Except when authorized by the other partners or un-
less they have abandoned the business, one or more but
less than all the partners have no authority to:
(1) Assign the partnership property in trust for credi-
tors or on the assignee’s promise to pay the debts of the
partnership;
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it impossible
to carry on the ordinary business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership
claim or liability;

675
Art. 1818 CIVIL CODE OF THE PHILIPPINES

(6) Submit a partnership claim or liability to arbitra-

tion;
7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction
on authority shall bind the partnership to persons having
knowledge of the restriction.

COMMENT:
(1) When A Partner Can Bind or Cannot Bind the Firm
This Article speaks of:
(a) the fact that the partner is an agent;
(b) the instances when he can bind the partnership;
(c) the instances when he cannot bind the partnership (in
which case, should he enter into the contract, he alone,
and not the firm nor the partner would be liable).

(2) Agency of a Partner

It has been truthfully said that a partnership is a con-
tract of “mutual agency,” each partner acting as a principal
on his own behalf, and as an agent for his co-partners or the
firm. (Commercial Casualty Ins. Co. v. North, 1943, 320 Ill.
App. 221, 60 N.E. 2d 434).

(3) When Can a Partner Bind the Partnership

A partner binds the partnership when the following
requisites are present:
(a) when he is expressly authorized or impliedly author-
ized;
(b) when he acts in behalf and in the name of the partner-
ship.
Instances of implied authorization:
1) when the other partners do not object, although
they have knowledge of the act;

676
CIVIL CODE OF THE PHILIPPINES Art. 1818

2) when the act is for “apparently carrying on in the

usual way the business of the partnership.” (This
is binding on the firm even if the partner was not
really authorized, provided that the third party is
in GOOD FAITH.)

Example:
A and B are partners in buying and selling auto-
mobiles. A, by the partner’s agreement, was authorized
to BUY automobiles on a CASH basis, never on the
INSTALLMENT plan. One day A bought on CREDIT or
on the INSTALLMENT PLAN a car from X, a client. X
did not know of A’s lack of authority. A’s purchase was
made on behalf and in the name of the partnership. Is
the partnership bound?
ANS.: Yes, the partnership is bound because
although A was not really authorized, still for “appar-
ently carrying on in the usual way the business of the
partnership” A is implicitly authorized and X was in
good faith. Had X known of A’s actual lack of authority,
the answer would be different, that is, the partnership
would not be bound. (See Smith, Bell & Co. v. Azaar &
CA, 40 O.G. 1882, citing 20 RCL, pp. 894-895: “Where
a business of a partnership is to buy and sell, a partner
who purchases on credit in the name of the firm is act-
ing within his implied powers, since it is usual to buy
and sell on credit.)
[NOTE: For apparently carrying on the business in
the usual way, is a partner legally authorized to enter
into FORMAL contracts that would bind the firm?]
ANS.: Yes. The words “including the execution
in the partnership name of any instrument” avoid any
possible doubt as to whether a partner has authority,
in the ordinary course of business, to enter into formal
contracts for his partnership, or to convey partnership
property when the conveyance is the result of a sale in
the ordinary course of partnership business. (Commis-
sioner’s Note, 7 ULA, Sec. 9, pp. 17-18). Indeed, it is
as if he had full power of attorney from all co-partners.
(Rouse v. Pollard, 1941, 129 N.J. Eq. 47, 18 A.2d. 5).]

677
Art. 1818 CIVIL CODE OF THE PHILIPPINES

[NOTE: How can we determine whether or not the

transaction is within the scope of the partnership busi-
ness?
ANS.: The “scope of business may be gauged by the
usual manner in which it is carried out in the locality;
but scope may be broadened by actual conduct of busi-
ness, as carried out with knowledge, actual or presumed,
of the partner (partners, or partnership) sought to be
charged.” (Rouse v. Pollard, supra). If a partnership is
engaged in “buying and selling real estate” the act of
a general partner in selling “three parcels of land” is
within her powers as a general partner. (Goquiolay v.
Sycip, L-11840, Dec. 10, 1963).]
[NOTE: If a contract is entered into in the name
of the partner, he who alleges that it was really in be-
half of the partnership, has the burden of proof. (Bank
of America Nat. Trust & Savings Assn. v. Kumle, 1948
— Cal. App. 100 p. 2d. 875).]

(4) When Will the Act of the Partner Not Bind the Partner-
ship
(a) When, although for “apparently carrying on in the usual
way the business of the partnership,” still the partner
has in fact NO AUTHORITY, and the 3rd party knows
that the partner has no authority. (This is to penalize
customer or client in bad faith.)
(b) When the act is NOT for “apparently carrying on in the
usual way” of the partnership and the partner has NO
AUTHORITY.
(NOTE: Here, whether or not the 3rd party knows
of the LACK of AUTHORITY is NOT IMPORTANT. As
long as there was really no authority, the firm is not
bound.)
[NOTE: The 7 kinds of acts enumerated in Art.
1818 are instances of acts which are NOT for “appar-
ently carrying on in the usual way the business of the
partnership.” In those seven instances, the authority
must be UNANIMOUS (from ALL the partners) except
if the business has been abandoned.]

678
CIVIL CODE OF THE PHILIPPINES Art. 1818

Examples:
(a) A, B, and C are partners. A assigned the as-
sets of the firm to X on the condition that X would pay
the debts of the firm. The assignment had the approval
of B, but C had objected. Is the assignment valid?
ANS.: The assignment is not valid. And this is true
whether or not X knew of A’s actual lack of authority.
For the act is considered “unusual.” (See Art. 1818, 3rd
paragraph, No. 1; see also Hapmorth v. Grieuson, 1939,
N.Y.S. 2d 700; and In Re Messenger, D.C. Pa. 1940,
32 Supp. 400 — which involved a truck owned by the
partnership.)
(b) A, B, and C are partners. X owes the firm P10
million. A, who is X’s friend, remitted or renounced, in
behalf of the firm, the claim. X did not know of A’s lack
of authority. May the firm still collect from X?
ANS.: Yes, for the act was not authorized, and is
“unusual.” (See Art. 1818, 3rd par., No. 7).

(5) Reasons Why the 7 Acts of Ownership are “Unusual”

(a) “assign the partnership property” — the firm will virtu-
ally be dissolved
(b) “dispose of the goodwill” — goodwill is valuable property
(c) “do any other act which would make it impossible to
carry on” — this is evidently prejudicial
(d) “confess a judgment” — if done before a case is filed,
this is null and void; if done later, the firm would be
jeopardized
(e) “compromise” — this is an act of ownership and may be
said to be equivalent to alienation (which may not be
justified)
(f) “arbitration” — this is also an act of ownership which
may not be justified
(g) “renounce a claim” — why should a partner renounce
a claim that does not belong to him but to the partner-
ship?

679
Art. 1819 CIVIL CODE OF THE PHILIPPINES

De la Rosa v. Ortega Go-Cotay

48 Phil. 605

FACTS: Go and Vicente were partners for the

purchase and sale of merchandise. Vicente died, and his
place in the firm was taken over by his son Enrique. Go
later died and De la Rosa was appointed administrator
of his estate. De la Rosa asked Enrique to liquidate the
firm, and petitioned the court for the appointment of a
receiver. A receiver was duly appointed, but to prevent
the receiver from assuming his office, Enrique filed a
bond for P10,000. Whereupon, Enrique continued the
business of the firm without court authorization. Later,
Enrique liquidated the assets but claimed that as a result
of his transaction after he had filed the bond, the firm
had lost, and the losses offset the profits that had been
made during the previous years. Issue: Must Enrique still
give Go’s share in the previous profits to Go’s estate?
HELD: Yes. It is true that Enrique had authority to
manage and conduct the business before the death of Go,
but when Enrique filed the bond, he in effect ceased to
be a partner, and instead, became a receiver whose duty
is merely to preserve and not to continue the business,
unless judicial authorization had been obtained. Being
unauthorized, Enrique is the only one to bear the losses
of his own transactions and, therefore, he must still give
to the estate of Go the share of Go in the profits of the
previous years.

Art. 1819. Where title to real property is in the partner-

ship name, any partner may convey title to such property
by a conveyance executed in the partnership name; but the
partnership may recover such property unless the partner’s
act binds the partnership under the provisions of the first
paragraph of Article 1818, or unless such property has been
conveyed by the grantee or a person claiming through such
grantee to a holder for value without knowledge that the part-
ner, in making the conveyance, has exceeded his authority.
Where title to real property is in the name of the part-
nership, a conveyance executed by a partner, in his own

680
CIVIL CODE OF THE PHILIPPINES Art. 1819

name, passes the equitable interest of the partnership, pro-

vided the act is one within the authority of the partner under
the provisions of the first paragraph of Article 1818.
Where title to real property is in the name of one or
more but not all the partners, and the record does not dis-
close the right of the partnership, the partners in whose
name the title stands may convey title to such property, but
the partnership may recover such property if the partner’s
act does not bind the partnership under the provisions of
the first paragraph of Article 1818, unless the purchaser or
his assignee, is a holder for value, without knowledge.
Where the title to real property is in the name of one
or more or all partners, or in a third person in trust for
the partnership, a conveyance executed by a partner in the
partnership name, or in his own name, passes the equitable
interest of the partnership, provided the act is one within
the authority of the partner under the provisions of the
first paragraph of Article 1818.
Where the title to real property is in the names of all
the partners a conveyance executed by all the partners
passes all their rights in such property.

COMMENT:
(1) Conveyance of Real Property
(a) This is a particular elaboration of Art. 1818, but is ap-
plicable to real property alone.
(b) The Article was adopted to do away with the existing
uncertainty surrounding the subject of the conveyance
of real property belonging to the partnership. (Commis-
sioner’s Note, 7 ULA, Sec. 10, p. 19).
(c) It will be noticed that in some instances, what is conveyed
is TITLE, and in other instances, what is conveyed is
merely the “EQUITABLE INTEREST.” What does this
phrase mean?
ANS.: An equitable interest or title is one not only
recognized by law, but also by the principles of equity.
(See 30 C.J.S. 401). Evidently, as used in Art. 1819, it

681
Art. 1819 CIVIL CODE OF THE PHILIPPINES

refers to “all interest which the partnership had, except

TITLE,” that is, the beneficial interests like use, fruits,
but not the naked ownership.
(d) Art. 1819 speaks of “to convey” or a “conveyance.” Doubt-
less this includes a sale, or a donation. Does it include
a mortgage?
ANS.: While under the rules of agency, a special
power to sell does not include the power to mortgage, and
vice uersa (Art. 1879), still Art. 1819 has been interpreted
in the U.S. to include under the term “conveyance” the
right to mortgage. (See Bosler v. Sealfrom, 1923, 92 Pa.
Super. Ct. 254).
(e) Notice that real property may be registered or owned in
the name of:
1) the partnership;
2) all the partners;
3) one, some, or not all the partners;
4) one, some, or not all the partners in TRUST for
the partnership;
5) third person in TRUST for the partnership.
Notice also the act of conveyancing may be in the
name of the registered owner or in the name of the
partners all together, or in the name of one, some but
not all of the partners, or in the name of the partnership
(the registration being apparently disregarded).

(2) Example of Par. No. 1

A, B, C, and D are partners of the firm “Edimus.” A
parcel of land registered under the name “Edimus” was sold
by A on behalf and in the name of the firm “Edimus,” but
without express authority. The purchaser is X. Does X become
the ownership.
ANS.: Ordinarily YES, but the firm may get back the
land unless:
(a) the firm is engaged in the buying and selling of land
(consequently, the act of A is “usual”);

682
CIVIL CODE OF THE PHILIPPINES Art. 1819

(b) X had in turn sold the same land to Y for value and Y did
not know of A’s actual lack of authority. (This is the case
even when the selling of the land was not for apparently
carrying on the business in the usual ways.) Thus, in the
case presented, the firm cannot get back the land. Reason:
Because the property has in turn been “conveyed by the
grantee (X) to a holder for value (Y) without knowledge
that the partner, in making the conveyance, has exceeded
his authority.” (Art. 1819, 1st par.)

(3) Example of Par. No. 2

A, B, C, and D are partners of the firm “Edimus” engaged
in the buying and selling of land. A parcel of land registered
in the name “Edimus” was sold by A in his own name. Does
the buyer become the owner of the land? If not, what right
does the buyer have?
ANS.: The buyer does not become the owner of the land.
However, he gets the “equitable interest” of the firm insofar
as the land is concerned, because after all the selling of land
was in the “usual” course of business. Of course, the buyer
may later on ask for the reformation of the contract, so that
now, the seller’s name would appear to be that of Edimus,
provided of course that the other partners would not object.
(They would object, of course, if indeed A did not have actual
authority to sell, unless the buyer did not know of such lack
of authority.) If the contract be thus reformed, it is clear that
the buyer has also been given TITLE.
(NOTE: If the partnership had not been engaged in
the purchase and sale of land, the buyer would not even be
entitled to the “equitable interest.”)

(4) Example of Par. No. 3

A, B, C and D were partners in the real estate firm of
“Edimus.” Although a certain parcel of land really belonged
to the firm, it was registered in the name of A and B. A and
B sold, in their own name, the land to X. May the firm get
back the land?
ANS.: Since the firm is engaged in the real estate busi-
ness, the act of selling the land was for carrying on in the

683
Art. 1819 CIVIL CODE OF THE PHILIPPINES

usual way the firm’s business. So, the firm cannot get back
the land, for title thereto has been conveyed to X.
Question: Suppose in the preceding problem A and B
had not been expressly disauthorized by the firm to sell land,
would your answers remain the same?
ANS.: It depends:
(a) If X had been in good faith, that is, he had no knowledge
of the lack of authority, the answer would be the same.
(1st par., Art. 1818).
(b) If X had been in BAD FAITH, the firm can get back the
land unless X in turn had sold the property to Y who is
in GOOD faith. (Here the assignee Y of the purchaser
X is a “holder for value without knowledge.”)

(5) Example of Par. No. 4

A, B, C, and D were partners in the real estate firm of
“Edimus.” A certain parcel of land was in the name of “A, in
trust for the firm Edimus.”
(a) If A sells the land to X in the name of Edimus, will X
become the owner?
ANS.: No. What X gets will only be the equitable
interest of the firm.
(b) If A sells the land to X in his (A’s) own name, will X
become the owner?
ANS.: No. What X gets will also be only the equi-
table interest of the firm.
Reason: It is clear in both instances that under the
registry records A is only the trustee.

(6) Example of Par. No. 5

A, B, C and D were partners in the real estate firm of
“Edimus.” A certain parcel of land was registered, not in the
name of the firm, but in the name of A, B, C and D. If A, B,
C, and D will sell the land to X, will X become the owner,
or will he have only the equitable interest?

684
CIVIL CODE OF THE PHILIPPINES Art. 1820

ANS.: X will get the title. Consequently, he becomes the

owner, for the law says that “where the title to real property
is in the names of all the partners, a conveyance executed by
all the partners passes all their rights in such property.” (Art.
1819, par. 5). The phrase “all their rights” includes “owner-
ship” because under Art. 1811 — “A partner is co-owner with
his partners of specific partnership property.”

Art. 1820. An admission or representation made by any

partner concerning partnership affairs within the scope
of his authority in accordance with this Title is evidence
against the partnership.

COMMENT:
(1) Admission or Representation Made By a Partner
Generally, an admission by a partner is an admission
against the partnership under the conditions given:
(a) the admission must concern partnership affairs
(b) within the scope of his authority

(2) Restrictions on the Rule

(a) Admissions made BEFORE dissolution are binding only
when the partner has authority to act on the particular
matter.
(b) Admissions made AFTER dissolution are binding only
if the admissions were necessary to WIND UP the busi-
ness.
Reason: If the admission is not the “act of the part-
nership (thru the partner), it should NOT be evidence
against it.” The words “within the scope of his authority”
produce this result. (See Commissioner’s Note, 7 ULA,
Sec. 11, p. 20).
[NOTE: Needless to say, an admission by a former
partner, made AFTER he has retired from the partnership,
is NOT evidence against the firm. (Ormachea Tin Congco v.
Trillana, 13 Phil. 194).]

685
Art. 1821 CIVIL CODE OF THE PHILIPPINES

Ormachea Tin Congco v. Trillana

13 Phil. 194

FACTS: Trillana owed a distillery partnership the sum

of P5,000, but when sued for the debt, he put up the defense
of payment. As proof thereof, he introduced as evidence a
declaration made by the former managing partner to the effect
that Trillana owed the partnership nothing. The declaration
was made however AFTER the declarant had ceased to be a
partner. Issue: Is the declaration evidence against the part-
nership?
HELD: No, it cannot be used against the firm because
it was made by a person no longer a partner at the time of
declaration. Trillana’s debt therefore still exists.

(3) Previous Admission

When is a previous admission (not present court testi-
mony) of a partner admissible in evidence against the part-
nership?
ANS.: When it was made WITHIN the scope of the part-
nership, and DURING its existence, provided of course that
the existence of the partnership is first proved by evidence
OTHER than such act or declaration. (Sec. 26, Rule 130,
Revised Rules of Court).

Art. 1821. Notice to any partner of any matter relating to

partnership affairs, and the knowledge of the partner acting
in the particular matter, acquired while a partner or then
present to his mind, and the knowledge of any other partner
who reasonably could and should have communicated it to
the acting partner, operate as notice to or knowledge of the
partnership, except in the case of a fraud on the partnership,
committed by or with the consent of that partner.

COMMENT:

(1) Effect of Notice to a Partner

(a) In general, notice to a partner is notice to the partner-
ship, that is, a partnership cannot claim ignorance if a

686
CIVIL CODE OF THE PHILIPPINES Art. 1821

partner knew. BUT this rule has restrictions and quali-

fications.
(b) Notice to a partner, given while ALREADY a partner, is
a notice to the partnership, provided it relates to part-
nership affairs.

(2) Effect of Knowledge Although No Notice Was Given

It may be that no notice has been given, but knowledge
has been somehow acquired. (Thus, while nobody made any
notification, still the partner perhaps because of analysis or
deduction came to know of something.) Is this knowledge of a
partner also to be considered knowledge of the partnership?
ANS.: Knowledge of the partner is also knowledge of the
firm provided:
(a) The knowledge was acquired by a partner who is acting
in the particular matter involved.

(NOTE: The knowledge may have been acquired

while already a partner, or even PRIOR TO THAT TIME,
provided he still remembers the same, that is, “present
to his mind.”)
(b) Or the knowledge may have been acquired by a partner
NOT acting in the particular matter involved. But here
it is essential that “the partner having ‘knowledge’ had
reason to believe that the fact related to a matter which
had some possibility of being the subject of the partner-
ship business, and then only if he was so situated that
he could communicate it to the partner acting in the
particular matter before such partner gives binding effect
to his act. The words “who reasonably could and should
have communicated it to the acting partner accomplish
this result.” (Commissioner’s Note, 7 ULA, Sec. 12, pp.
20-21).
(NOTE: Here, the knowledge must have been ob-
tained while ALREADY a partner, because the phrase
“then present to his mind” applies only to the partner
ACTING in the particular matter involved.)

687
Art. 1822 CIVIL CODE OF THE PHILIPPINES

(3) Problem
P acquired some knowledge about S’s credit before P became
a partner. Later P became a partner, and one day S had a trans-
action with the firm. P never conveyed the information he knew
to the firm although he could have done so. Another partner R
was the person who dealt with S’s transaction. Nobody else in
the firm knew what P already knew. Question: Is P’s knowledge
also the knowledge of the partnership?
ANS.: No, because P was not the partner acting in the
particular matter involved. He had acquired the knowledge
BEFORE he became a partner, not afterwards. The words
“present to his mind” (remembered) do not apply, for they ap-
ply only to the person ACTING in the particular matter. Thus,
the Commissioners have said: “Where the knowledge or notice
has been received by the partner before he became a partner,
and his partners are ignorant of this, and he is not the partner
acting in the particular matter, there is no doubt that there
has been neither knowledge of nor notice to the partnership.”
(Commissioner’s Note, 7 ULA, Sec. 12, pp. 20-21).

(4) Service of Pleading on a Partner in a Law Firm

It has been held that service of pleadings on the part-
ner in a law firm is also service on the whole firm and the
other partners. (As a matter of fact, service on the firm, as
evidenced by the signature of the receiving clerk of the firm
who received in behalf of the firm, is indeed service on the law
partners, and this is true whether or not the clerk forgot to
inform the partners.) It has also been held that service on a
partner is effectual not only to bind the party served but also
to reach the assets of the partnership (Rodel v. Seib, 1932,
159 Atl. 182) which may be affected by a final judgment. (See
Peterson v. W. Davis & Sons, 1943, 216 Minn. 60).

Art. 1822. Where, by any wrongful act or omission of

any partner acting in the ordinary course of the business
of the partnership or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner
in the partnership, or any penalty is incurred, the partner-
ship is liable therefor to the same extent as the partner so
acting or omitting to act.

688
CIVIL CODE OF THE PHILIPPINES Art. 1822

COMMENT:
(1) Wrongful Act or Omission of a Partner
Example:
A, B, and C were partners. While acting within the scope
of the firm’s business, A committed a tort against X, a third
person. Is the firm liable?
ANS.: Yes. (Art. 1822). Moreover A, B, and C, as well as
the firm itself, are liable in solidum. (Art. 1824). Note that
even the innocent partners are civilly personally liable (Baxter
v. Wunder, 1927, 89 Pa. Super. Ct. 585), without prejudice
of course to their right to recover from the guilty partner.
(See Art. 1217). (See also Fairman v. Darney, 1919, 73 Pa.
Super. Ct. 238, where the court held that a wrongful refusal
to return a customer’s machine rendered ALL the partners
personally liable.)

(2) Injury to an Employee

The law speaks of an injury to “any person, not being a
partner.” Does Art. 1822 apply to an injury to an employee,
not a partner, of the firm?
ANS.: It would seem that the answer is YES, for a mere
employee is not necessarily a partner. (See Parish v. Pulley,
101 S.E. 236). And yet in a Utah case, the court decided oth-
erwise (Palle v. State Industrial Commission, 1932, 79 Utah
47) apparently because the injury should have been caused
a person not connected in any way with the firm.

(3) When the Firm and the Other Partners are NOT Liable
(a) If the wrongful act or omission was not done within
the scope of the partnership business and for its benefit
(Schlos v. Silverman, 172 Md. 632) or with the authority
of the co-partners. (Art. 1822).
(b) If the act or omission was NOT wrongful. (See Art. 1822
which uses the term “wrongful”.)
(c) If the act or omission, although wrongful, did not make
the partner concerned liable himself. (See Caplan v.
Caplan, 268 N.Y. 455).

689
Arts. 1823-1824 CIVIL CODE OF THE PHILIPPINES

(d) If the wrongful act or omission was committed after the

firm had been dissolved (stopped its business) and same
was not in connection with the process of winding up.
(Halton v. American Pastry Products Corp., 274 Mass.
268).

Art. 1823. The partnership is bound to make good the

loss:
(1) Where one partner acting within the scope of his
apparent authority receives money or property of a third
person and misapplies it; and
(2) Where the partnership in the course of its business
receives money or property of a third person and the money
or property so received is misapplied by any partner while
it is in the custody of the partnership.

COMMENT:
Liability of Partnership for Misappropriation
The difference between par. 1 and par. 2 is that in the
former the misappropriation is made by the receiving partner,
while in the latter, the culprit may be any partner. The effect
however is the same in both cases, as can be seen from Art.
1824.

Art. 1824. All partners are liable solidarily with the

partnership for everything chargeable to the partnership
under Articles 1822 and 1823.

COMMENT:
(1) Solidary Liability of the Partners With the Partner-
ship
(a) While in torts and crimes, the liability of the partners is
solidary, in contractual obligations, it is generally merely
joint. (Art. 1816). While Art. 1816 speaks of pro rata li-
ability of the partners, and while the Code Commission
says that pro rata in this article means “in proportion
to their contribution” (Memorandum of The Code Com-

690
CIVIL CODE OF THE PHILIPPINES Art. 1825

mission, Lawyer’s Journal, Oct. 1955, p. 518), still the

Supreme Court has ruled that “pro rata” here means
joint, such that if 5 partners are liable, each would be
responsible for 1/5 of the debt (regardless of amount of
contribution) and if one of the five would be excused (as
when the plaintiff after suing the five partners dismisses
the claim against one of them, each of the remaining four
would be responsible for 1/5. Thus “pro rata” is used in
the sense of “joint” to distinguish the same from solidary
liability. (See Island Sales v. Pioneers Gen. Construction
Co., 22493, Jul. 31, 1975). (However, in compensation
cases under the Workmen’s Compensation Act, the li-
ability of the business partners should be solidary. If
the responsibility of the partners were to be merely
joint and not solidary, and one of them happens to be
insolvent, the amount awarded to the dependents of the
deceased employee would be only partially satisfied. This
is evidently contrary to the intent and purpose of the
law to give full protection to the employee. (Liwanag v.
Workmen’s Comp. Com., L-12164, May 22, 1959).
(b) Note that torts and crimes result from individual acts
of the partners; while contractual liabilities arise from
partnership obligations.
(c) Note that it is not only the partners that are liable in
solidum; it is also the partnership.

(2) Example
A and B are partners. A misappropriates a sum of
money belonging to a customer X but which was already in
the custody of the partnership. Whom can X hold liable?
ANS.: X can hold liable either the firm or A or B, and
the liability is for the whole amount because it is solidary.
However, if B is made to pay the full amount, he can recover
the whole amount, plus the interest from A later on instead
of only A’s share, for the simple reason that it is only A who
is guilty.

Art. 1825. When a person, by words spoken or written

or by conduct, represents himself, or consents to another
representing him to anyone, as a partner in an existing part-

691
Art. 1825 CIVIL CODE OF THE PHILIPPINES

nership or with one or more persons not actual partners, he

is liable to any such persons to whom such representation
has been made, who has, on the faith of such representa-
tion, given credit to the actual or apparent partnership,
and if he has made such representation or consented to its
being made in a public manner he is liable to such person,
whether the representation has or has not been made or
communicated to such person so giving credit by or with
the knowledge of the apparent partner making the repre-
sentation or consenting to its being made:
(1) When a partnership liability results, he is liable as
though he were an actual member of the partnership;
(2) When no partnership liability results, he is liable
pro rata with the other persons, if any, so consenting to the
contract or representation as to incur liability, otherwise
separately.
When a person has been thus represented to be a
partner in an existing partnership, or with one or more
persons not actual partners, he is an agent of the persons
consenting to such representation to bind them to the
same extent and in the same manner as though he were
a partner in fact, with respect to persons who rely upon
the representation. When all the members of the existing
partnership consent to the representation, a partnership
act or obligation results; but in all other cases it is the
joint act or obligation of the person acting and the person
consenting to the representation.

COMMENT:

(1) Partner and Partnership By Estoppel

This Article refers to a “partner by estoppel” and to a
“partnership by estoppel.”

(2) How the Problem May Arise

A person may:
(a) represent himself as a partner of an existing partnership,
with or without the consent of the partnership.

692
CIVIL CODE OF THE PHILIPPINES Art. 1825

(NOTE: If a third person is misled and acts because

of such misrepresentation, the deceiver is a partner by
estoppel. If the partnership consented to the misrepre-
sentation, a partnership liability results. We have here
a case of “partnership by estoppel” with the original
members and the deceiver as partners. If the firm had
not consented, no partnership liability results, but the
deceiver is considered still as a “partner by estoppel,” with
all the obligations but not the rights of a partner.)
(b) represent himself as a partner of a non-existent partner-
ship. (Here, clearly no partnership liability results, but
the deceiver and all persons who may have aided him
in the misrepresentation are still liable.)
(NOTE: The liability in such a case would be joint
or pro rata.)

(3) When Estoppel Does Not Apply

When although there is misrepresentation, the third
party is not deceived, the doctrine of estoppel does not apply.
Note that the law says “liable to any such persons to whom
such representation has been made, who has, on the faith of
such representation, given credit as to the actual or apparent
partnership.” (Art. 1825). (See In re Ganaposki D.C. Pa., 1939,
27 F. Supp. 41).

(4) Examples of a “Partner by Estoppel”

(a) To obtain better credit facilities for a partnership of
which he was not a member, X represented himself as
having a half-interest therein. If the misrepresentation
is believed and acted upon by innocent strangers, X
should be considered as a partner by estoppel. (Mever
v. Newmann, 1922, 222 Ill. App. 191).
(b) X, a rich man, wanted to give better financial credit to
a partnership, so he signed the partnership agreement
as partner when in fact, he was not really one. People
who rely on the misrepresentation can consider him a
partner by estoppel. (Hobbs v. Virginia Nat. Bank, 1926,
147 V. 892).

693
Art. 1825 CIVIL CODE OF THE PHILIPPINES

(NOTE: The estoppel may really be termed an

estoppel by contract, which is really a form of estoppel
by deed, in view of the document signed.)
(c) A partnership which for want of the proper legal formali-
ties is not given legal personality, may be considered, at
least insofar as their contractual obligations to strangers
are concerned, as a “partnership by estoppel.” Persons
dealing with it are estopped from denying its partnership
existence. (See MacDonald v. Nat. City Bank of N.Y., L-
7991, May 21, 1956, 53 O.G. 1783, where a “partnership”
not given legal personality was not allowed to impugn a
chattel mortgage on three automobiles, a contract which
it had voluntarily entered into.) According to the Court,
for the purpose of its de facto existence it has such at-
tributes of a partnership as domicile. (MacDonald v. Nat.
City Bank of N.Y., supra).

(5) Burden of Proof

The creditor, or whoever alleges the existence of a part-
ner or partnership by estoppel has the burden of proving the
existence of the misrepresentation and the innocent reliance on
it. (See Orofino Rochdale Co. v. Fred A. Shore Lumber Co.,
1927, 43 Idaho 425).

(6) Problem
A is engaged in business all by himself. With a view
to obtaining a better financial standing in the community,
A pretended to friends and clients that B was his partner.
The misrepresentation was with B’s consent. Who would be
preferred later on as to the assets of the business-creditors
who trusted only A or creditors who relied on the alleged
partnership of A and B?
ANS.: While partnership creditors are preferred over
separate creditors (See Art. 1827), still in this particular case,
there was no real partnership, and therefore neither partner-
ship assets nor partnership creditors properly exist. Therefore,
also no preference is given to creditors who relied on the
existence of the fictitious firm. Inasmuch as NO partnership

694
CIVIL CODE OF THE PHILIPPINES Art. 1826

liability results, it follows that deceived creditors may only

hold both A and B as jointly liable. (See Commissioner’s Note,
7 ULA, Sec. 16, pp. 24-25).

Art. 1826. A person admitted as a partner into an ex-

isting partnership is liable for all the obligations of the
partnership arising before his admission as though he had
been a partner when such obligations were incurred, except
that this liability shall be satisfied only out of partnership
property, unless there is a stipulation to the contrary.

COMMENT:
(1) Entry of a New Partner Into an Existing Partnership
Example:
A, B, and C are partners. D is admitted as a new part-
ner. Will D be liable for partnership obligations contracted
PRIOR to his admission to the partnership?
ANS.: Yes, but his liability will extend only to his share
in the partnership property, not to his own individual proper-
ties. (Art. 1826).
(NOTE: Had he been an original partner, he would be
liable both insofar as his share in the firm is concerned, and
his own individual property.)
(NOTE: It is understood that the newly admitted part-
ner would be liable as an ordinary original partner for all
partnership obligations incurred AFTER his admission to the
firm.)

(2) Creation of a New Partnership in View of the Entry

Does the admission of a new partner dissolve the old
firm and create a new one?
ANS.: Yes, and it is precisely because of this principle
that Art. 1826 has been enacted. The reason is simple: since
the old firm is dissolved, the original creditors would not be
the creditors of the new firm, but only of the original partners;
hence, they may lose their preference. To avoid this injustice,

695
Art. 1826 CIVIL CODE OF THE PHILIPPINES

under the new Civil Code (together with the new creditors of
the new firm), they are also considered creditors of the NEW
firm. (See also Art. 1840, which among other things provide
that generally “creditors of the dissolved partnership are also
creditors of the person or partnership continuing the business.”)
Thus, it is essential that the partnership assets of the new
firm (with the capital of the new partner) be available even
to the old creditors. (See Commissioner’s Note, 7 ULA, Sec.
17, pp. 26-27).
[NOTE: It is wrong to state that “the theory that a new
firm is created by the admission of a new partner, has been
abandoned.” It is wrong because indeed a new firm is created;
but the old creditors of the firm retain their preference as
partnership creditors. (See Commissioner’s Note to Sec. 41,
ULA).]
“Art. 1826 should be read together with Art. 1840. Both
are based on the principle that there has been one continuous
business. The fact that A has been admitted to the business,
or C ceased to be connected with it, should not be allowed
to cause endless confusion as to the claims of the creditors
on the property employed in the business. All creditors of
the business, irrespective of the times when they became
creditors, and the exact combinations of persons then owning
the business, should have equal rights in such property. The
recognition of this principle solves one of the most perplex-
ing problems of the partnership law.” (Commissioner’s Note,
7 ULA, Sec. 17, pp. 26-27).

(3) Liability of New Partner for Previous Obligations

Is not the rule of holding the new partner liable (with
his share of the firm’s assets) for PREVIOUS obligations of
the firm unduly harsh on said new partner?
ANS.: No, it is not unduly harsh. After all “the incoming
partner partakes of the benefit of the partnership property,
and an established business. He has every means of obtaining
full knowledge and protecting himself, because he may insist
on the liquidation or settlement of existing partnership debts.
On the other hand, the creditors have no means of protect-

696
CIVIL CODE OF THE PHILIPPINES Art. 1827

ing themselves.” (Commissioner’s Note, 7 ULA, Sec. 17, pp.

26-27).

Art. 1827. The creditors of the partnership shall be

preferred to those of each partner as regards the partner-
ship property. Without prejudice to this right, the private
creditors of each partner may ask the attachment and public
sale of the share of the latter in the partnership assets.

COMMENT:
(1) Reason for the Preference of Partnership Creditors
After all, the partnership is a juridical person with
whom the creditors have contracted. Moreover, the assets of
the partnership must first be exhausted.

(2) Reason Why Individual Creditors May Still Attach the

Partner’s Share
After all, the remainder (after paying partnership obliga-
tions) really belongs to the partners.
(NOTE: The purchaser at the public sale does not neces-
sarily become a partner.)

(3) Sale by a Partner of His Share to a Third Party

If a partner sells his share to a third party, but the firm
itself still remains solvent, creditors of the partnership can-
not assail the validity of the sale by alleging that it is made
in fraud of them, since they have not really been prejudiced.
(See Walch v. Lim & Chay Seng, 58 Phil. 13).

697
Art. 1531 CIVIL CODE OF THE PHILIPPINES

Chapter 3

DISSOLUTION AND WINDING UP

Art. 1828. The dissolution of a partnership is the change

in the relation of the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from
the winding up of the business.

COMMENT:
Dissolution Defined
See Comments under the next Article.

Art. 1829. On dissolution the partnership is not termi-

nated, but continues until the winding up of partnership
affairs is completed.

COMMENT:
(1) ‘Dissolution’ Defined
Dissolution is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying
on of the business. (Art. 1828). It is that point of time when
the partners cease to carry on the business together. (Com.
Note, 7 ULA, Sec. 29, p. 43).

(2) ‘Winding Up’ Defined

Winding up is the process of settling business affairs
after dissolution.
(NOTE: Examples of winding up: the paying of previous
obligations; the collecting of assets previously demandable;
even the contracting for new business if needed to wind up,
such as the contracting with a demolition company for the
demolition of the garage used in a “used car” partnership.)

698
CIVIL CODE OF THE PHILIPPINES Art. 1830

Recentes v. Court of First Instance

GR 40504, Jul. 29, 1983

In an action for accounting and for payment of money

allegedly due a partner, a receiver must be appointed to wind
up the dissolved partnership.

(3) ‘Termination’ Defined

Termination is the point in time after all the partnership
affairs have been wound up. (Com. Note, 7 ULA, Sec. 29, p.
43).

(4) Effect on Obligations

(a) Just because a partnership is dissolved, this does not
necessarily mean that a partner can evade previous ob-
ligations entered into by the partnership. (Testate Estate
of Mota v. Serra, 47 Phil. 464).
(b) Of course, generally, dissolution saves the former partners
from new obligations to which they have not expressly
or impliedly consented, unless the same be essential for
winding up. (See Art. 1843, par. 1; see also Testate Estate
of Mota v. Serra, 47 Phil. 464).

Art. 1830. Dissolution is caused:

(1) Without violation of the agreement between the
partners:
(a) By the termination of the definite term or
particular undertaking specified in the agreement;
(b) By the express will of any partner, who must
act in good faith, when no definite term or particular
undertaking is specified;
(c) By the express will of all the partners who
have not assigned their interests or suffered them to
be charged for their separate debts, either before or
after the termination of any specified term or particular
undertaking;

699
Art. 1830 CIVIL CODE OF THE PHILIPPINES

(d) By the expulsion of any partner from the

business bona fide in accordance with such a power
conferred by the agreement between the partners;
(2) In contravention of the agreement between the
partners, where the circumstances do not permit a dis-
solution under any other provision of this article, by the
express will of any partner at any time;
(3) By any event which makes it unlawful for the busi-
ness of the partnership to be carried on or for the members
to carry it on in partnership;
(4) When a specific thing, which a partner had prom-
ised to contribute to the partnership, perishes before the
delivery; in any case by the loss of the thing, when the
partner who contributed it having reserved the ownership
thereof, has only transferred to the partnership the use or
enjoyment of the same; but the partnership shall not be
dissolved by the loss of the thing when it occurs after the
partnership has acquired the ownership thereof;
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partner-
ship;
(7) By the civil interdiction of any partner;
(8) By decree of court under the following article.

COMMENT:
(1) Causes of Dissolution
(a) Arts. 1830 and 1831 give the causes for dissolution.
(b) Note that in Art. 1830, eight causes are given, the first
one of which is subdivided into four instances.

(2) No Violation of Agreement

In No. 1 cause (in Art. 1830), the partnership agreement
has NOT been violated —
(a) termination of the definite term or specific undertaking

700
CIVIL CODE OF THE PHILIPPINES Art. 1830

Here the contract is the law between the parties,

if the firm however still continues after said period, it
becomes a partnership at WILL.
(b) express will of a partner who must act in good faith when
there is NO definite term and NO specified undertaking
If he insists on leaving in bad faith, the firm is
dissolved, but he may be responsible for damages.
(c) express will of all partners (except those who have AS-
SIGNED or whose interests have been CHARGED)
[NOTE: If one partner says he will not have any-
thing more to do with the firm, and the other does not
object, there is dissolution by implied mutual consent. (Le
Gualt v. Lewis Zimmerman, 205 Pac. 157). Also, when
one buys out the interest of ALL the others. (French v.
Mulholland, 187 N.W. 254).]
(d) expulsion in good faith of a member
(NOTE: If one is expelled, the number of partners
is decreased; hence, the dissolution.)
(NOTE: If a partner is expelled in bad faith, there
can also be eventual dissolution for here, there would be
apparent lack of confidence, without prejudice of course
to liability for damages.)

(3) Cause No. 2 — Vilolation of Agreement

Even if there is a specified term, one partner may cause
its dissolution by expressly withdrawing even before the ex-
piration of the period, with or without justifiable cause. Of
course, if the cause is not justified, or no cause was given,
the withdrawing partner is liable for damages, but in no
case can he be compelled to remain in the firm. With his
withdrawal, the number of members is decreased, hence, the
dissolution.

Reason for allowing withdrawal:

Partnership is based on mutual confidence. Thus, it has
been held in one case that even if a firm still has three years to
run, still a letter received by it from one partner withdrawing

701
Art. 1830 CIVIL CODE OF THE PHILIPPINES

from the firm, served to dissolve the firm, without prejudice

to resulting damages. (See Crossman v. Gibney, 1916, 164
Wis. 396, 160 N.W. 172; see also Lichauco, et al. v. Soriano,
26 Phil. 593).

(4) Cause No. 3 — Unlawfulness of the Business

If the business later on becomes unlawful, it follows that
the firm will not be allowed to carry on. On the other hand
if the business or object had been unlawful from the very
beginning, the firm never had any juridical personality.

(5) Cause No. 4 — LOSS

(a) If a specific thing promised as contribution is lost BE-
FORE delivery.
Reason: The firm is dissolved because the partner
has NOT given his contribution.
(NOTE: If lost after delivery, the firm bears the
loss, and the partner remains, since after all, he had
given his contribution.)
(NOTE: The rules just given do not apply to generic
things, for genus does not perish.)
(b) If only the use of a specific thing is contributed, and it
is LOST BEFORE or AFTER delivery to the firm.
Reason: Here, the naked owner reserved the owner-
ship, its loss is borne by him, so it is as if he had not
contributed anything.

(6) Cause No. 5 — DEATH of ANY Partner

The death of any partner, whether known or unknown to
the others causes a decrease in the number of partners, hence
there is automatic dissolution (but not automatic termination
for the affairs must still be wound up). Be it noted that a
deceased partner is no longer associated in the active busi-
ness of the partnership; in a sense however, this dissolution
may be partial or total: partial, when the surviving partners

702
CIVIL CODE OF THE PHILIPPINES Art. 1830

continue the business among themselves; and total, when the

survivors, instead of continuing the enterprise, proceed to the
liquidation of partnership’s assets.
[NOTE: The status of the firm would be that of a “part-
nership in liquidation.” (See Bearneza v. Dequilla, 43 Phil.
237).]
(NOTE: The dissolution is without prejudice to Art.
1833.)

Goquiolay v. Sycip
L-11840, Dec. 10, 1963
FACTS: The articles of a general partnership expressly
stipulated that “in the event of the death of any of the
partners at any time before the expiration of said term, the
co-partnership shall not be dissolved, but will have to be con-
tinued, and the deceased partner shall be represented by his
heirs or assigns in said co-partnership.” One of the partners
subsequently died, and this was before the expiration of the
partnership life. The deceased partner was then replaced by
his widow. Issue: Does the widow or substitute become also
a general partner or only a limited partner?
HELD: She became a mere general partner. The articles
did not provide that the heirs of the deceased would be merely
limited partners; on the contrary, they expressly stipulated
that in case of death of either partner, “the co-partnership...
will have to be continued” with the heirs or assigns. It cer-
tainly could not be continued if it were to be converted from
a general partnership into a limited partnership since the dif-
ference between the two kinds of associations is fundamental,
and specially because the conversion into a limited associa-
tion would leave the heirs of the deceased partner without a
share in the management. Hence, the contractual stipulation
actually contemplated that the heirs would become general
partners rather than limited ones.

Bearneza v. Dequilla
43 Phil. 237
FACTS: Bearneza and Dequilla were partners for the
exploitation of a fish pond Bearneza died in 1912. In 1919,

703
Art. 1830 CIVIL CODE OF THE PHILIPPINES

Bearneza’s legal heir demanded from Dequilla the deceased’s

share in the profits between the time of his death and 1919.
Issue: Should said profits be given?
HELD: No, because they were profits made after the
firm had been dissolved by Bearneza’s death. The plaintiff
is entitled only to the profits obtained already at the time of
death, for after death, what existed was merely a “partner-
ship in liquidation.”
(NOTE: Of course profits already accruing before death
but collected or realized only afterwards should be included,
for the basis therefor had already been laid.)
[NOTE: Who liquidates?
ANS.: Although it has been held that when the death of
one of the partners dissolves the partnership, the liquidation
of its affairs is by law entrusted to the surviving partners, or
to liquidators appointed by them, and NOT to the executors of
the deceased partner (Wahl v. Donaldson Sim & Co., 5 Phil.
900), still under the new Civil Code it is provided that “any
partner, his legal representative, or his assignee, upon cause
shown may obtain winding up by the court.” (Art. 1836).]

(7) Cause No. 6 — Insolvency of any Partner or of the

Partnership
(a) The insolvency need not be judicially declared; it is
enough that the assets be less than the liabilities.
(NOTE: It is submitted that no judicial decree is
needed to dissolve the partnership here, for otherwise,
this cause would have been inserted under No. 8, “by
decree of the court.”)
[NOTE: Contrast the rule just given with the case
of an insane partner. While insanity for the purpose
here may be either declared judicially or not (as when
evidence has been given to show that the partner is “of
unsound mind,” still there must be a judicial decree for
dissolution). (See Art. 1831, No. 1).]
(b) Reason why insolvency is a ground for dissolution: The

704
CIVIL CODE OF THE PHILIPPINES Art. 1830

business of a firm requires solvency or ability to meet

the financial demands of creditors.

(8) Cause No. 7 — Civil Interdiction of any Partner

Civil interdiction (or civil death) results in incapacity to
enter into dispositions of property, inter vivos.

(9) Cause No. 8 — Decree of the Court under Art. 1831

(See Art. 1831)
(NOTE: The decree must be a final judgment rendered
by a court of competent jurisdiction.)

(10) Decrease of Causes of Dissolution

Can the partners in their contract decrease or limit the
causes of dissolution?
ANS.: No. (See Lichauco v. Lichauco, 33 Phil. 350,
where the Supreme Court held that a contractual provision
prohibiting dissolution except by authorization of two-thirds
of the members, cannot be sustained when the firm had lost
its capital, or had become bankrupt, or had utterly abandoned
the enterprise for which it had been organized.)

(11) Cases

Eugenia Lichauco, et al. v. Faustino Lichauco

33 Phil. 350

FACTS: Faustino Lichauco was the managing partner

of a firm for the carrying on of a rice-cleaning business. Be-
cause the enterprise was unprofitable, same was discontinued
and the rice machinery was dismantled. When sued for an
accounting he refused on the ground that under the terms of
the partnership contract, dissolution could be done only by a
vote of 2/3 of the members, and such vote had not yet taken
place. Issue: Is his contention correct?
HELD: His contention is wrong, for when the enterprise
was abandoned, and the machines sold, undoubtedly the firm

705
Art. 1831 CIVIL CODE OF THE PHILIPPINES

was dissolved by provision of the law; and therefore he has

the duty to liquidate and account to all and to each of his
associates.

Walter Jackson v. Paul Blum, et al.

1 Phil. 4

FACTS: A and B were partners in a partnership at will.

They dissolved the partnership, and A assigned his interest
to X. Because of a debt, the partnership assets were in the
possession of a fourth party, Y, as security. May X demand
accounting from Y?
HELD: Yes, even if X was not a partner of A and B
for after the partnership was dissolved, A and B became co-
owners and A could assign his interest or share. One of A’s
rights was to demand an accounting so that his share could
be determined. This right, he could transfer to X. So X can
demand the accounting.

Solomon v. Hollander
55 Mich. 256
FACTS: Kirkwood and Hollander were partners in the
jewelry business by virtue of a contract which stipulated
an existence for at least one year. A month after the firm
began, Kirkwood became dissatisfied and announced in the
newspapers the dissolution of the partnership, for he did not
want anymore to be a partner. Hollander, although he knew
this, nevertheless still ordered new goods in the partnership’s
name. Is Kirkwood still liable for these new transactions?
HELD: No more, since the firm was already dissolved,
and he had given no authority to his former partner. He is
entitled to his share of the assets as of the date of dissolu-
tion. However, damages may be deducted therefrom in view
of his wrongful dissolution of the firm. That he had the right
to withdraw even before the expiration of the term is clear,
because said right to dissolve “is a right inseparably incident
to every partnership.”

Art. 1831. On application by or for a partner the court

shall decree a dissolution whenever:

706
CIVIL CODE OF THE PHILIPPINES Art. 1831

(1) A partner has been declared insane in any judicial

proceeding or is shown to be of unsound mind;
(2) A partner becomes in any other way incapable of
performing his part of the partnership contract;
(3) A partner has been guilty of such conduct as tends
to affect prejudicially the carrying on of the business;
(4) A partner wilfully or persistently commits a breach
of the partnership agreement, or otherwise so conducts
himself in matters relating to the partnership business that
it is not reasonably practicable to carry on the business in
partnership with him;
(5) The business of the partnership can only be car-
ried on at a loss;
(6) Other circumstances render a dissolution equita-
ble.
On the application of the purchaser of a partner’s in-
terest under Article 1813 or 1814:
(1) After the termination of the specified term or par-
ticular undertaking;
(2) At any time if the partnership was a partnership
at will when the interest was assigned or when the charg-
ing order was issued.

COMMENT:

(1) Dissolution by Judicial Decree

This Article speaks of a dissolution by decree of the court.
In a suit for dissolution, proof as to the existence of the firm
must first be given. (Armstrong v. Richard, 192 N.Y. 502).

(2) Who Can Sue for Dissolution

ANS.:
(a) A partner for any of the 6 causes given in the first
paragraph.

707
Art. 1831 CIVIL CODE OF THE PHILIPPINES

(b) The purchaser of a partner’s interest in the partnership

under Art. 1813 or 1814, provided that the period has
expired or if the firm was a partnership at will when
the interest was assigned or charged.
(NOTE: If the period is not yet over, said purchaser
cannot sue for dissolution.)

(3) Insanity of a Partner

(a) Even if a partner has not yet been previously declared
insane by the court, dissolution may be asked, as long
as the insanity is duly proved in court.
(b) Reason for making insanity a cause: The partner will be
incapacitated to contract.

(4) Incapability to Perform Part

This may happen when the partner enters the government
service which would prohibit him from participating in the
firm; or when he will have to stay abroad for a long time.

(5) Prejudicial Conduct or Persistent Breach of the Agree-

ment
(a) When the managers fail to hold regular meetings as pro-
vided for in the agreement, fail to make reform or to hear
grievances, and fail to give proper financial reports, an
action for dissolution would prosper. (Gatdula v. Santos,
29 Phil. 1). The same rule holds if accounting is unjustifi-
ably refused. (Lavoine v. Casey, 251 Mas. 124).
(b) True exclusion from the management of one of the persons
authorized to manage, is indeed a ground for dissolution;
but not occasional friction among the managers or trivial
faults, particularly if the firm is financially prosperous.
(Potter, et al. v. Brown, et al., 328 Pa. 554, 118 ALR
1415).

Potter, et al. v. Brown, et al.

328 Pa. 554, 118 ALR 1415
FACTS: In 1934 an insurance partnership was
formed, giving almost unlimited powers to Mr. Brown,

708
CIVIL CODE OF THE PHILIPPINES Art. 1831

the partner owning the controlling interest. Mr. Brown,

as general manager, was also given the powers to fix, in-
crease, and reduce the salaries of the other partners who
helped in the business. However, the power to admit new
partners was given to the numerical majority (not finan-
cial majority). One day, Brown proposed the admission of
a new partner, Mr. Moore, but he was defeated by a vote
of 7 to 3 on the ground that Moore was not an insurance
man. Later, Brown called a special meeting for the board
of managers to reconsider their vote; but in said meeting
Brown’s proposal was again defeated. So, Brown retali-
ated by reducing the salaries of the others. He relented
however, and restored the salaries after a week. But from
that time on, the others refused to attend the meeting (the
seven partners who had voted against Brown’s proposal of
Moore). These seven later on sued for dissolution; and for
the right to continue the business. They admitted how-
ever that Brown was a wonderful executive, and that the
firm was making immense profits, and that finally Brown
had occasionally contributed additional capital whenever
the firm needed the same. They alleged however that the
measure of compulsion adopted by Brown to force the ac-
ceptance of Moore as a partner constituted misconduct on
the part of Brown.
HELD: The partnership will NOT be dissolved. After
all:
1) There was neither allegation nor proof of fraudulent
or dishonest practices.
2) The plaintiffs were not really denied their proper
share of participation in the management of the
business, such rights being stipulated in the partner-
ship agreement. Notice that almost exclusive control
was vested in one partner, and this stipulation can
strictly be enforced. (Peacock v. Cummings, 46 Pa.
434).
3) If the plaintiffs are aggrieved because they are un-
able to exercise the direction over partnership affairs
that they feel is their due, the reason is to be found
primarily in the partnership agreement rather than
because of any misconduct of Mr. Brown.

709
Art. 1832 CIVIL CODE OF THE PHILIPPINES

4) While the attempt to reduce salaries was really

made, still this did not constitute gross misconduct
as the restoration was done speedily; nor did the
firm suffer.
5) Differences and discord should be settled by the
partners themselves by the application of mutual
forbearance rather than suits for dissolution. Equity
is not a referee of partnership quarrels.
6) The business is a highly prosperous one.
7) The plaintiffs are not also faultless. It would ap-
pear that they are willing to pick up the gauntlet
of partnership conflict, and to seize upon incidents
constituting at their gravest import, mere technical
misconduct of a partner, for the purpose of acquir-
ing as their own a long established and valuable
business to the exclusion of the partner who is the
owner of the major interest therein.

(6) Appointment of Receiver

In a suit for dissolution, the court may appoint a receiver
at its discretion (Salonga v. Lipka, 224 Mich. 278) but a re-
ceiver is not needed when practically all the firm assets are
in the hands of a sheriff under a writ of replevin (Gianuso v.
Weiss, 191 N.Y.S. 118) or when the existence of a partnership
with the plaintiff is denied, particularly if the business of the
firm is being conducted successfully. (Armstrong v. Richard,
192 N.Y.S. 502).

(7) Time of Dissolution

It is understood that a firm whose dissolution is petitioned
for in court becomes a dissolved partnership at the time the
judicial decree becomes a final judgment. (See Scheckter v.
Rubin, 1944, 349 Pa. 102).

Art. 1832. Except so far as may be necessary to wind

up partnership affairs or to complete transactions begun
but not then finished, dissolution terminates all authority
of any partner to act for the partnership:

710
CIVIL CODE OF THE PHILIPPINES Art. 1832

(1) With respect to the partner;

(a) When the dissolution is not by the act, insol-
vency or death of a partner; or
(b) When the dissolution is by such act, insolvency
or death of a partner, in cases where Article 1833 so
requires;
(2) With respect to persons not partners, as declared
in Article 1834.

COMMENT:

(1) Effects of Dissolution

(a) When a partnership is dissolved, certain effects are
inevitable, insofar as the relations of the firm toward
third persons are concerned; and insofar as the partners
themselves are affected in their relations with one another.
Arts. 1832, 1833, and 1834 speak of said relationships.
(b) Art. 1832 merely states a general rule, that when the
firm is dissolved, a partner can no longer bind the part-
nership. The exceptions will be discussed later.

(2) Effect on Previous Contracts

When a firm is dissolved, does this mean that the con-
tracts and obligations previously entered into, whether the
firm is the creditor or the debtor, automatically cease?
ANS.: No, otherwise the result would be unfair. The
firm is still allowed to collect previously acquired credits; it is
also bound to pay off its debts. A dissolved partnership still
has personality for the winding up of its affairs. (See Testate
Estate of Mota, et al. v. Serra, 47 Phil. 464).

(3) Creditors Who Have Not Been Prejudiced

If the obligations and rights of a dissolved firm are trans-
ferred to another firm, should creditors still hold the former
liable even if said creditors have not been prejudiced?

711
Art. 1833 CIVIL CODE OF THE PHILIPPINES

ANS.: No more, as long as the new firm can indeed

take care of said creditors. It would be erroneous to let the
old firm still pay, if the new firm can really pay. (Aboitiz v.
Oquinena and Co. [Ltd.], 39 Phil. 926).

Art. 1833. Where the dissolution is caused by the act,

death or insolvency of a partner, each partner is liable to
his co-partners for his share of any liability created by any
partner acting for the partnership as if the partnership had
not been dissolved unless:
(1) The dissolution being by act of any partner, the
partner acting for the partnership had knowledge of the
dissolution; or
(2) The dissolution being by the death or insolvency
of a partner, the partner acting for the partnership had
knowledge or notice of the death or insolvency.

COMMENT:

(1) Two Kinds of Causes for Dissolution

Dissolution may be caused:
(a) On the one hand by:
A — act (like withdrawing of a partner)
I — insolvency
D — death
(b) On the other hand by other things, like TERMINATION
of the period.

(2) Dissolution Caused by A-I-D

Art. 1833 speaks of dissolution caused by A-I-D, and the
effects on the partners as among themselves, if a partnership
liability is incurred (that is, if the firm is STILL BOUND).
(NOTE: If the firm is not bound, see Art. 1834, where
only the partner acting is liable.)

712
CIVIL CODE OF THE PHILIPPINES Art. 1833

(3) Effect of A-I-D

In Art. 1833, all the partners are still bound to each other
generally, except in the 2 instances mentioned, namely:
(a) If the partner acting had KNOWLEDGE (as distinguished
from mere NOTICE, but without actual knowledge), if
dissolution is caused by an ACT (like withdrawing, re-
tiring). (Here, only the partner acting assumes liability,
in that even if the firm may be held by strangers, and
even if the partners will still be individually liable, still
the other partners can always recover from the partner
acting.)
(b) If the partner acting had KNOWLEDGE or NOTICE, if
dissolution was caused by death or insolvency. Here again,
while the firm may be liable, in proper cases, recovery
can be had by the other partners from the partner act-
ing.

(4) Examples
a) A, B, and C were partners. A resigned from the firm.
Therefore it was dissolved. B knew this, and yet he still
deliberately entered into new transactions with X, an
innocent customer. (The meaning of “innocent customer”
will be discussed in the next article.) The transactions
were not needed for winding up. Will the firm be still
liable?
ANS.: Yes. (See Art. 1834). If the firm assets are
not enough, X can still go after the individual assets of
A, B, and C. After all of them have paid X, can A and
C still recover from B, the partner who acted despite his
knowledge of the firm’s dissolution?
ANS.: Yes, because B should not have done what
he did.
(b) If in the preceding problem, X knew of the dissolution,
the firm cannot be held liable. Neither will A or C be
liable. Only B and X are concerned, and they will have
to settle with each other, depending on their reason why
they still entered into the contract.

713
Art. 1833 CIVIL CODE OF THE PHILIPPINES

(c) Note that for (a) to apply, B, must have knowledge, not
merely notice. If A had died or had become insolvent,
the principles in (a) will be followed whether B had
knowledge or mere notice. (According to the Commission,
“notice” should be sufficient if the fact to be notified is
an ordinary business fact as when a letter concerning
transactions is placed on the desk of B, but B never
opened the letter.) But dissolution caused by an act,
prior to the termination of the period agreed upon is
certainly not an ordinary fact. In this case, mere notice
not producing knowledge would not be sufficient. True
dissolution takes place automatically by virtue of such
act, but B, the partner acting should not be prejudiced.
(See Commissioner’s Note, 7 ULA, Sec. 84, pp. 48-50).
[NOTE: Death or insolvency, being more ordinary
than an “act, notice is enough. Hence, the law provides
“knowledge or notice.” However, it is still essential that
there be “knowledge or notice” of the fact of death or
insolvency to justify non-liability of the other partners
to the partner acting. Otherwise, it would be unfair to
let the partner acting assume the whole liability. Thus,
the Commission has said: “In the case of death, to hold
a partner acting for the partnership bona fide in igno-
rance of the death of one of his co-partners must assume
the entire liability, even though all other partners are
ignorant of the death of the partner, and even though
such deceased partner was entirely inactive, and may
have resided at any distance from the actual place of
business, is entirely unjust to the acting partner or
partners. What has been said of the death of a partner
applies also to the bankruptcy of a partner. If there are a
number of partners, and one of them becomes bankrupt,
and another having no knowledge or notice of this fact,
makes a contract in the ordinary course of the business,
there appears no reason why he should not be able to
call on his other partners not bankrupt or deceased, to
contribute towards any loss which his separate estate
may sustain on account of the contract.” (Commissioner’s
Note, 7 ULA, Sec. 84, pp. 48-50).]

714
CIVIL CODE OF THE PHILIPPINES Art. 1834

Art. 1834. After dissolution, a partner can bind the

partnership, except as provided in the third paragraph of
this article:
(1) By any act appropriate for winding up partnership
affairs or completing transactions unfinished at dissolu-
tion;
(2) By any transaction which would bind the partner-
ship if dissolution had not taken place, provided the other
party to the transaction:
(a) Had extended credit to the partnership prior
to dissolution and had no knowledge or notice of the
dissolution;
(b) Though he had not so extended credit, had
nevertheless known of the partnership prior to dissolu-
tion, and having no knowledge or notice of dissolution,
the fact of dissolution had not been advertised in a
newspaper of general circulation in the place (or in
each place if more than one) at which the partnership
business was regularly carried on.
The liability of a partner under the first paragraph, No.
2, shall be satisfied out of partnership assets alone when
such partner had been prior to dissolution:
(1) Unknown as a partner to the person with whom
the contract is made; and
(2) So far unknown and inactive in partnership affairs
that the business reputation of the partnership could not
be said to have been in any degree due to his connection
with it.
The partnership is in no case bound by any act of a
partner after dissolution:
(1) Where the partnership is dissolved because it is
unlawful to carry on the business, unless the act is appro-
priate for winding up partnership affairs; or
(2) Where the partner has become insolvent; or
(3) Where the partner has no authority to wind up
partnership affairs, except by a transaction with one who —

715
Art. 1834 CIVIL CODE OF THE PHILIPPINES

(a) Had extended credit to the partnership prior

to dissolution and had no knowledge or notice of his
want of authority; or
(b) Had not extended credit to the partnership
prior to dissolution, and, having no knowledge or
notice of his want of authority, the fact of his want
of authority has not been advertised in the manner
provided for advertising the fact of dissolution in the
first paragraph No. 2(b).
Nothing in this article shall affect the liabilify under
Article 1825 of any person who after dissolution represents
himself or consents to another representing him as a partner
in a partnership engaged in carrying on business.

COMMENT:
(1) When Firm Is Bound or Not Bound
This Article speaks of two possibilities:
(a) when the partnership is bound to strangers;
(b) when the partnership is not bound to strangers.

(2) When Partnership Is BOUND (a partnership liability

is created)
(a) business is for WINDING UP
Example: Selling of property of firm to pay off part-
nership debts; mortgaging firm assets for same purposes.
(See State Bank v. Bagley, 1932, 44 Wyo. 303)
(b) business is to complete unfinished transactions
(c) COMPLETELY NEW BUSINESS with third parties
considered innocent. [See (a) & (b) of No. (2) of the 1st
paragraph.]
[NOTE: The differences between (a) and (b), No.
2 of the 1st paragraph are these: In (a), the customer
had previously extended credit, that is, was a previous
creditor. In case of dissolution he deserves to ACTUALLY
KNOW. In (b), he was not a previous creditor. Here, if

716
CIVIL CODE OF THE PHILIPPINES Art. 1834

there was publication of the dissolution, it is presumed

he already knows, regardless of actual knowledge or non-
knowledge.]

Examples:
A, B, and C are partners. A dies. B knows this, but
still he later transacts new business with X, a business
not connected with winding up. This notice of dissolu-
tion was in the paper but X did not read the notice, and
when X transacted with B, X thought all the time that
the firm had not yet been dissolved.
(a) If X had been a previous creditor, is the firm liable?
ANS.: Yes [Art. 1834, 1st par. (2)(a)] BUT later on,
as among the partners, B alone will be liable, because
he knew of A’s death.
(b) If X had never extended credit before, is the firm li-
able?
ANS.: No, because after all there had been a pub-
lication of the dissolution and it is his fault that he did
not read the advertisement. He did not deserve special
attention for after all he had never been a previous
creditor of the firm.
(NOTE: Only B would be personally liable to X.)
(NOTE: Had there been no notice of dissolution
and X did not actually know of the dissolution, the firm
would have been liable.)
NOTE: Liability of the Unknown or Inactive Mem-
ber:
A, B, and C are partners. A withdraws. B knows
this, but he entered into a new contract with X, a pre-
vious creditor of the firm who had no actual knowledge
of the dissolution. C was not known by X to be ever a
partner of the firm, so it could not be because of C that
X had transacted the business.
Question: Is the firm liable?
ANS.: YES.

717
Art. 1834 CIVIL CODE OF THE PHILIPPINES

Question: If the partnership assets are insufficient,

can X go after the individual properties?
ANS.: Yes, except with reference to C, because the
law says that C’s liability “shall be satisfied out of the
partnership assets alone.”

(3) When Is the FIRM Not BOUND?

ANS.:
(a) in all cases not included in our answer in COMMENT
No. 2 of this article.
Example: new business with 3rd parties who are
in BAD FAITH, as already explained.
(b) where the firm was dissolved because it was UNLAWFUL
to carry on the business (as when its objects were later
declared by law to be outside the commerce of man)
EXCEPT — when the act is for WINDING UP
(c) where the partner that acted in the transaction has become
INSOLVENT
(d) where the partner is UNAUTHORIZED to wind up
EXCEPT — if the transaction is with a customer
in good faith (as already defined or explained).
It is understood that if after dissolution a stranger
will represent himself as a partner although he is not
one, he will be a partner by estoppel. (See Art. 1825 and
comments thereon).

(4) Some Decided Cases

JCH Service Station v. Patrikes

(1944) 181 Misc. 401

FACTS: After a firm was dissolved, a partner borrowed

money under the firm name from X. X knew that the firm
had already been dissolved. Is the firm liable?
HELD: No, because of X’s knowledge of the dissolu-
tion.

718
CIVIL CODE OF THE PHILIPPINES Art. 1835

McNeil Co. v. Hamlet

(1919) 213 Ill. App. 501

FACTS: A, B and C are partners under a certain firm

name. A retires. B and C continue the business. Is A liable
to previous customers who transact with the new firm if the
firm still uses the OLD firm name?
HELD: YES, unless A actually notifies said old customers
or unless said customers actually know of his retirement.

Froess v. Froess
289 Pa. St., 691, 137 A. 124

FACTS: Jacob and Philip, brothers, were partners in

the piano business. Philip died and Jacob continued the
under the same name, over the objection of Philip’s widow
who was continually asking for the liquidation. Regarding
the partnership assets, who should be preferred, the widow
regarding Philip’s share OR the creditors who still transacted
with Jacob AFTER knowing that Philip was dead?
HELD: The widow is preferred, because she had the
right to ascertain Philip’s interest after his death. The credi-
tor-customers cannot have preference for they knew of the
death of Philip, and still they transacted with the firm.

Art. 1835. The dissolution of the partnership does not

of itself discharge the existing liability of any partner.
A partner is discharged from any existing liability upon
dissolution of the partnership by an agreement to that effect
between himself, the partnership creditor and the person
or partnership continuing the business; and such agree-
ment may be inferred from the course of dealing between
the creditor having knowledge of the dissolution and the
person or partnership continuing the business.
The individual property of a deceased partner shall be
liable for all obligations of the partnership incurred while
he was a partner, but subject to the prior payment of his
separate debts.

719
Art. 1835 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Dissolution Ordinarily Does Not Discharge Existing
Liability of Partners
Just because the firm is dissolved does not automatically
mean that the existing liability of any partner is discharged.
Reason: Otherwise, creditors would be prejudiced, particu-
larly if a partner will just withdraw anytime from the firm.

(2) How a Partner’s Liability is Discharged

There must be an agreement. The following must
agree:
(a) the partner concerned;
(b) the other partners;
(c) the creditors.
[NOTE: If there be a novation of the old partner-
ship debts, and such novation is done after one of the
partners has retired, and without the consent of such
retired partner, said partner cannot be held liable by
creditors who made the novation with knowledge of the
firm’s dissolution. (General Tire and Rubber Co. v. Noble,
et al., 222 Mich. 545).

(3) Problem
A, B, and C are partners. A dies. Is A’s estate (separate
properties) liable for his share of the partnership obligations
incurred while he was still a partner?
ANS.: Yes, but of course his individual creditors (as dis-
tinguished from the firm creditors) are to be preferred. (3rd
par., Art. 1835).

(4) Effect of Death on Pending Action

An action for accounting against a managing partner
should be discontinued if he dies during the pendency of the
action. The suit must be conducted in the settlement proceed-
ings of the deceased’s estate, particularly if this is the desire
of his administrator. (Po Yeng Cheo v. Lim Ka Yam, 44 Phil.

720
CIVIL CODE OF THE PHILIPPINES Art. 1836

172). Thus, it is wrong to just continue the action for account-

ing and substitute the dead defendant with his heirs. (Lota
v. Tolentino, 90 Phil. 829).

Art. 1836. Unless otherwise agreed, the partners who

have not wrongfully dissolved the partnership or the legal
representative of the last surviving partner, not insolvent,
has the right to wind up the partnership affairs, provided,
however, that any partner, his legal representative or his
assignee, upon cause shown, may obtain winding up by
the court.

COMMENT:
(1) Extrajudicial and Judicial Winding-Up
(a) Extrajudicially —
1) by the partners who have not wrongfully dissolved the
partnership
2) or by the legal representative of the last surviving partner
(when all the partners are already dead), provided the
last survivor was not insolvent.
NOTE:
Where the managing partners of the partnership
has the necessary authority to liquidate its affairs under
its article of co-partnership, he may sell the partnership
properties even AFTER the life of the partnership has
already expired since he as manager, is empowered to
wind up the business affairs of the partnership. (Ng Cho
Cio, et al. v. Ng Diong and Hodges, L-14832, Jan. 28,
1961).
(b) Judicially —
Under the control and direction of the court, upon
proper cause that is shown to the court.
[NOTE: Here the person to wind up must be ap-
pointed by the court. And said appointee should not be
the legal representative of a deceased partner but should
be instead a surviving partner. (Po Yeng Cheo v. Lim
Ka Yam, 44 Phil. 172).]

721
Art. 1837 CIVIL CODE OF THE PHILIPPINES

[NOTE: The petition, however, for a judicial winding

up can be done by any partner, his legal representative,
or his assignee. (Art. 1836, 2nd part).]

(2) Rule if Survivor Is Not the Manager

If the surviving member of the firm is not the general
manager or administrator thereof, he is NOT required to
serve as liquidator thereof without compensation. If he liq-
uidates the affairs upon promise of a certain compensation
by the managing partners, he is naturally entitled to receive
compensation. (Criado v. Gutierrez Hermanos, 37 Phil. 883).

(3) Profits
Profits are supposed to accrue only during the existence
of the partnership before dissolution. Of course, profits that
will actually enter the firm after dissolution as a consequence
of transactions already made before dissolution are included
because they are considered as profits existing AT THE TIME
OF DISSOLUTION. Any other income earned after the time,
like interest or dividends on stock owned by the partners or
partnership at the time of dissolution should not be distributed
as profits (hence, the agreement here as to the distribution of
“profits” will not govern), but as merely additional income to
the capital (to be distributed under the rules on co-ownership,
that is, to be divided in proportion to the amount of capital
given).
[NOTE: Said “capital given” is computed as to the time
of dissolution, that is, after profits and losses have already
been computed (Wood v. Wood, 312 Pa. 374, 167 A 600).]
(NOTE: Indeed said income is not considered as “prof-
its” for after dissolution, the firm has ceased to continue the
business of the partners together.)

Art. 1837. When dissolution is caused in any way, except

in contravention of the partnership agreement, each partner,
as against his co-partners and all persons claiming through
them in respect of their interests in the partnership, unless
otherwise agreed, may have the partnership property applied

722
CIVIL CODE OF THE PHILIPPINES Art. 1837

to discharge its liabilities, and the surplus applied to pay

in cash the net amount owing to the respective partners.
But if dissolution is caused by expulsion of a partner, bona
fide under the partnership agreement and if the expelled
partner is discharged from all partnership liabilities, either
by payment or agreement under the second paragraph of
Article 1835, he shall receive in cash only the net amount
due him from the partnership.
When dissolution is caused in contravention of the
partnership agreement the rights of the partners shall be
as follows:
(1) Each partner who has not caused dissolution
wrongfully shall have:
(a) All the rights specified in the first paragraph
of this article, and
(b) The right, as against each partner who has
caused the dissolution wrongfully, to damages for
breach of the agreement.
(2) The partners who have not caused the dissolution
wrongfully, if they all desire to continue the business in
the same name either by themselves or jointly with others,
may do so, during the agreed term for the partnership and
for that purpose may possess the partnership property,
provided they secure the payment by bond approved by the
court, or pay to any partner who has caused the dissolution
wrongfully, the value of his interest in the partnership at
the dissolution, less any damages recoverable under the
second paragraph, No. 1(b) of this article, and in like man-
ner indemnify him against all present or future partnership
liabilities.
(3) A partner who has caused the dissolution wrong-
fully shall have:
(a) If the business is not continued under the pro-
visions of the second paragraph, No. 2, all the rights of
a partner under the first paragraph, subject to liability
for damages in the second paragraph, No. 1(b), of this
article.

723
Art. 1837 CIVIL CODE OF THE PHILIPPINES

(b) If the business is continued under the second

paragraph, No. 2, of this article, the right as against
his co-partners and all claiming through them in re-
spect of their interests in the partnership, to have
the value of his interest in the partnership, less any
damage caused to his co-partners by the dissolution,
ascertained and paid to him in cash, or the payment
secured by a bond approved by the court, and to be
released from all existing liabilities of the partnership;
but in ascertaining the value of the partner’s interest
the value of the goodwill of the business shall not be
considered.

COMMENT:
(1) Two Aspects of Causes of Dissolution
Dissolution may be caused:
(a) although the partnership contract is NOT VIOLATED
(Example: death, or arrival of term) (The rights of part-
ners are governed by the FIRST PARAGRAPH of this
article.)
(b) because the partnership contract is VIOLATED
Example: Deliberate withdrawal of a partner al-
though the period of the firm has not yet expired, thus
causing damage to the firm.
(NOTE: The rights of the partners here are governed
BUT the SECOND PARAGRAPH of this article.)

(2) Better Rights for Innocent Partners

Note that innocent partners have better rights than
guilty partners, and that the latter are required to indemnify
for the damages caused.

(3) Right of Innocent Partners to Continue

Note also that the innocent partners may continue the
business (but this time, there is really a NEW partnership).
They can even use the same firm name if they wish to;

724
CIVIL CODE OF THE PHILIPPINES Art. 1837

moreover, they can ask new members to join, BUT always,

the rights granted to the guilty partners are safeguarded by:
(a) a BOND approved by the court;
(b) a PAYMENT of his interest at the time of dissolution
MINUS damages. (Moreover, the guilty partner who is
excluded will be indemnified against all PRESENT or
FUTURE partnership liabilities. This is because he is
no longer a partner.)

(4) Right to Get Cash

In case of non-continuance of the business, the interest
of the partner should, if he desires, be given in CASH. (Firm
assets may be sold for this purpose.)
[NOTE: “The right given to each partner, where no
agreement to the contrary has been made to have his share
of the surplus paid to him in CASH makes certain an exist-
ing (under the old law) uncertainty. At present (under the
old law) it is not certain whether a partner may or may not
insist on a physical partition of the property remaining after
third persons have been paid. (Commissioner’s Note, 7 ULA,
Sec. 38, p. 57).]

(5) No Share in Goodwill for Guilty Partner

A guilty partner, in ascertaining the value of his inter-
est is NOT entitled to a proportionate share of the value of
the GOODWILL. (This is a necessary consequence of his bad
faith.)
[NOTE: The deprivation of his share in the goodwill is
not unconstitutional, and cannot be considered as unlawful
taking of property without due process of law. (See Zeibak v.
Nasser, 1938, 12 Cal. 2nd 1, 82P. 2d 374).]

(6) Partner Wrongfully Excluded

When a partner is excluded wrongfully, he should be con-
sidered as the innocent partner, and the others as the guilty
partners. It is now said that other partners “must account
not only for what is due to him at the date of the dissolution

725
Art. 1838 CIVIL CODE OF THE PHILIPPINES

but also for damages or for his share of the profits realized
from the appropriation of the partnership business and good
will. (Of course), it is otherwise if the excluded partner had
substantially broken the partnership agreement.” (Schnitzer
v. Josephthal, 1923, 122 Misc. 15, 202 N.Y.S. 77). Indeed, he
has a pecuniary interest in every existing contract that was
incomplete and in the trade name of the co-partnership and
assets at the time he was wrongfully expelled. (See Halfou-
baum v. Miss, 1936, 248 App. Div. 901, 290, N.Y.S. 708).

(7) Division of Losses

Although such things as “depreciation, obsolescence, or
diminished market value of capital assets” are not strictly
speaking to be considered losses because they merely constitute
a decrease in capital assets (and not the result of business
transactions), still they should, in fairness be considered as
losses, and the rules on losses must apply, provided that their
real market values at the time of liquidation are the values
considered. (See Greiss v. Platzer, 131 N.J. Eq. 160, 24 A. 2d
408).

Art. 1838. Where a partnership contract is rescinded

on the ground of the fraud or misrepresentation of one of
the parties thereto, the party entitled to rescind is, without
prejudice to any other right, entitled:
(1) To a lien on, or right of retention of, the surplus
of the partnership property after satisfying the partnership
liabilities to third persons for any sum of money paid by
him for the purchase of an interest in the partnership and
for any capital or advances contributed by him;
(2) To stand, after all liabilities to third persons have
been satisfied, in the place of the creditors of the partnership
for any payments made by him in respect of the partner-
ship liabilities; and
(3) To be indemnified by the person guilty of the
fraud or making the representation against all debts and
liabilities of the partnership.

726
CIVIL CODE OF THE PHILIPPINES Art. 1839

COMMENT:
(1) Rescission or annulment of Partnership Contract
(a) Although the law here uses the term “rescind,” the proper
technical term that should have been used is “annulled,”
in view of the “fraud or misrepresentation.”
(b) The “fraud or misrepresentation” here vitiates the consent
whereby the contract of partnership had been entered
into, hence, it is really “dolo causante.”

(2) Three Rights

The Article speaks of 3 rights (without prejudice to his
other rights under other legal provisions):
(a) right of LIEN or RETENTION
(b) right of SUBROGATION
(c) right of INDEMNIFICATION

Art. 1839. In settling accounts between the partners

after dissolution, the following rules shall be observed,
subject to any agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property;
(b) The contributions of the partners necessary
the payment of all the liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in
order of payment, as follows:
(a) Those owing to creditors other than part-
ners;
(b) Those owing to partners other than for capital
and profits;
(c) Those owing to partners in respect of capital;
(d) Those owing to partners in respect of profits.
(3) The assets shall be applied in the order of their
declaration in No. 1 of this article to the satisfaction of the
liabilities.

727
Art. 1839 CIVIL CODE OF THE PHILIPPINES

(4) The partners shall contribute, as provided by Article

1797, the amount necessary to satisfy the liabilities.
(5) An assignee for the benefit of creditors or any per-
son appointed by the court shall have the right to enforce
the contributions specified in the preceding number.
(6) Any partner or his legal representative shall have
the right to enforce the contributions specified in No. 4, to
the extent of the amount which he has paid in excess of
his share of the liability.
(7) The individual property of a deceased partner shall
be liable for the contributions specified in No. 4.
(8) When partnership property and the individual
properties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on
partnership property and separate creditors on individual
property, saving the rights of lien or secured creditors.
(9) Where a partner has become insolvent or his estate
is insolvent, the claims against his separate property shall
rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribu-
tion.

COMMENT:
(1) Rules for Settling Accounts
(a) Commissioner’s Comment on No. (1) subdivision (b) “the
contributions of the partners necessary for the payment
of all liabilities . . .”:
“The adoption of this clause will end the present
(under the old law) confusion as to whether the contribu-
tion of the partners toward the losses of the partnership
are partnership assets or not. The Commissioners believe
that the opinion that such contributions are assets is
supported by the better reasoning.” (Commissioner’s Note,
7 ULA, Sec. 40, p. 59).

728
CIVIL CODE OF THE PHILIPPINES Art. 1839

(b) Art. 1839 speaks of the methods of settling the accounts of

the partnership, that is to say — its LIQUIDATION.
[NOTE: Before liquidation is made, no action for
accounting of a partner’s share in the profit or for a re-
turn of his capital assets can properly be made, since it
is essential to first pay-off the creditors. Thus, a partner
who has retired must first ask for the liquidation before
he can recover his proportionate share of the partnership
assets. (Po Yeng Cheo v. Lim Ka Yam, supra.]
[NOTE: The managing partner of a firm is not a
debtor of the other partners for the capital embarked by
them in the business; thus, he can only be made liable
for the capital, when upon liquidation of the business,
there are found to be assets in his hands applicable
to the capital account. (Po Yeng Cheo v. Lim Ka Yam,
supra).]
(c) Art. 1839 can apply only if there is a contrary agreement.
Of course, such agreement cannot prejudice innocent
third parties.

(2) The Assets of the Partnership

(a) The partnership property (including goodwill).
(b) The contributions of the partners, which are made to
pay off the partnership liabilities.

(3) Order of Payment of Firm’s Liabilities

(a) First give to creditors (who are strangers), otherwise
they may be prejudiced.
(b) Then give to partners who are also creditors (they should
be placed in a subordinate position to outside creditors
for otherwise they may prefer their own interests).
[NOTE: Example of credits owing to partners which
are neither capital nor profits, are those for reimburse-
ment of business expenses. (See Geist v. Burnstine, 1940,
Misc. 19 N.Y. 2d 76).]
(c) Then give to the partners their capital.

729
Art. 1839 CIVIL CODE OF THE PHILIPPINES

(NOTE: Capital should be given ahead of profit for

it is only the surplus profit over capital that should be
considered as the gain or the profit of the firm.)
[NOTE: An industrial partner, who has not con-
tributed money or property at all is, in the absence of
stipulation, not entitled to participate in the capital.
He shares in the profits, however. (See Hunter v. Allen,
1944, 147 P. 2d 213).]
(d) Lastly, the profits must be distributed.
[NOTE: If, during the liquidation of a firm, the
profits for a certain period of time cannot be exactly
determined because no evidence or insufficient evidence
thereof is available, the court should determine the
profit for the period by finding the average profits during
the period BEFORE and AFTER the period of time in
question. (See De la Rosa v. Ortega Go-Cotay, 48 Phil.
605).]

(4) New Contributions

If the partnership assets are insufficient, the other
partners must contribute more money or property. Who can
enforce these contributions?
ANS.:
(a) In general, any assignee for the benefit of the creditor; or
any person appointed by the court (like a receiver). (Up-
ton v. Upton, 1934, 268 Mich 26). (Reason: Said enforced
contributions may be considered as partnership assets,
and should therefore be available to the creditors). (See
Upton v. Upton, supra).
(b) Any partner or his legal representative (to the extent of
the amount which he has paid in excess of the share of
the liability). (Art. 1839, No. 1[b]).

(5) Problem
A, B, and C are partners. A died. Is A’s estate still li-
able for the contributions needed to pay off the partnership
obligations?

730
CIVIL CODE OF THE PHILIPPINES Art. 1839

ANS.: Yes. (Generally, as long as the said obligations

had been incurred prior to his death.)

(6) Preference With Respect to the Assets

Suppose both the partnership property and the individual
properties of the partners are in the possession of the court
for distribution, who should be preferred?
ANS.: It depends:
(a) Regarding partnership property, partnership creditors
have preference.
(b) Regarding individual properties of the partners, the
individual creditors are preferred.

(7) Rule if Partner is Insolvent

If a partner is insolvent, how will his individual proper-
ties be distributed?
ANS.:
(a) First, give to the individual or separate creditors.
(b) Then, to the partnership creditors.
(c) Then, those owing to the other partners by way of con-
tribution.
(NOTE: Insolvency here of the partner or his estate
does not necessarily mean no more money or property; it
is enough that the assets are less than the liabilities.)
[NOTE: A person who alleges himself to be a partner
of a deceased individual has the right to intervene in
the settlement of the decedent’s estate, particularly in
the approval of the executor’s or administrator’s account
for after all it may be that he (the alleged partner) was
indeed a partner to whom the deceased partner owed
something. Administrators and executors, instead of
opposing the intervention of interested parties, should
welcome the participation of the same for their own
protection. Of course, mere intruders should not be al-
lowed. (Villanueva v. De Leon, 47 Phil. 780).]

731
Art. 1840 CIVIL CODE OF THE PHILIPPINES

Art. 1840. In the following cases creditors of the dis-

solved partnership are also creditors of the person or part-
nership continuing the business:
(1) When any new partner is admitted into an existing
partnership, or when any partner retires and assigns (or the
representative of the deceased partner assigns) his rights
in partnership property to two or more of the partners,
or to one or more of the partners and one or more third
persons, if the business is continued without liquidation of
the partnership affairs;
(2) When all but one partner retire and assign (or the
representative of a deceased partner assigns) their rights
in partnership property to the remaining partner, who
continues the business without liquidation of partnership
affairs, either alone or with others;
(3) When any partner retires or dies and the business
of the dissolved partnership is continued as set forth in
Nos. 1 and 2 of this article, with the consent of the retired
partners or the representative of the deceased partner, but
without any assignment of his right in partnership prop-
erty;
(4) When all the partners or their representatives
assign their rights in partnership property to one or more
third persons who promise to pay the debts and who con-
tinue the business of the dissolved partnership;
(5) When any partner wrongfully causes a dissolution
and the remaining partners continue the business under
the provisions of Article 1837, second paragraph, No. 2 ei-
ther alone or with others, and without liquidation of the
partnership affairs;
(6) When a partner is expelled and the remaining
partners continue the business either alone or with others
without liquidation of the partnership affairs.
The liability of a third person becoming a partner in
the partnership continuing the business, under this article,
to the creditors of the dissolved partnership shall be satis-
fied out of the partnership property only, unless there is a
stipulation to the contrary.

732
CIVIL CODE OF THE PHILIPPINES Art. 1841

When the business of a partnership after dissolution

is continued under any conditions set forth in this article
the creditors of the dissolved partnership, as against the
separate creditors of the retiring or deceased partner or the
representative of the deceased partner have a prior right
to any claim of the retired partner or the representative
of the deceased partner against the person or partnership
continuing the business, on account of the retired or de-
ceased partner’s interest in the dissolved partnership or on
account of any consideration promised for such interest or
for his right in partnership property.
Nothing in this article shall be held to modify any right
of creditors to set aside any assignment on the ground of
fraud.
The use by the person or partnership continuing the
business of the partnership name, or the name of a de-
ceased partner as part thereof, shall not of itself make the
individual property of the deceased partner liable for any
debts contracted by such person or partnership.

COMMENT:
(1) Right of Old Creditors to be Creditors of the New
Firm
Reason for the law (in making creditors of the dissolved
firm also creditors of the persons or partnership continuing
the business): So that said creditors will not lose their pref-
erential rights as creditors to the partnership property.

(2) Example
A and B are partners. Later, C was admitted as mem-
ber or partner and the firm’s business was continued. The
creditors of the old firm continue to be creditors of the new
partnership but the liability of C shall be satisfied out of
partnership property only. Exception: if there is a stipulation
to the contrary.

Art. 1841. When any partner retires or dies, and the

business is continued under any of the conditions set
forth in the preceding article or in Article 1837, second

733
Art. 1842 CIVIL CODE OF THE PHILIPPINES

paragraph, No. 2, without any settlement of accounts as

between him or his estate and the person or partnership
continuing the business, unless otherwise agreed, he or his
legal representative as against such person or partnership
may have the value of his interest at the date of dissolution
ascertained, and shall receive as an ordinary creditor an
amount equal to the value of his interest in the dissolved
partnership with interest, or, at his option or at the option
of his legal representative, in lieu of interests the profits
attributable to the use of his right in the property of the
dissolved partnership; provided that the creditors of the
dissolved partnership as against the separate creditors, or
the representative of the retired or deceased partner shall
have priority on any claim arising under this article as
provided by Article 1840, third paragraph.

COMMENT:
Retirement or Death of a Partner
(a) This Article speaks of the rights of retiring partners or
of the estate of a deceased partner when the business
is continued without any statement of accounts.
(b) As a general rule when a partner retires from the firm,
he is entitled to the payment of what may be due him
after a liquidation. But no liquidation is needed when
there already is a settlement as to what the retiring
partner shall receive. (Bonnevie v. Hernandez, 95 Phil.
175).

Art. 1842. The right to an account of his interest shall ac-

crue to any partner, or his legal representative as against the
winding up partners or the surviving partners or the person
or partnership continuing the business, at the date of dissolu-
tion, in the absence of any agreement to the contrary.

COMMENT:
(1) When Right to Account Accrues
(a) See Arts. 1807 and 1809 which also deal with the duty
to account. Under the present Article (1842), the right

734
CIVIL CODE OF THE PHILIPPINES Art. 1842

to demand the account accrues at the date of dissolution

in the absence of any contrary agreement.
(b) Note that the legal representative of a partner is also,
under Art. 1842, entitled to the accounting.

(2) Possible Defendants

The action can be against:
(a) the winding up partners;
(b) the surviving partners;
(c) the person or partnership continuing the business.

735
 CIVIL CODE OF THE PHILIPPINES

Chapter 4

LIMITED PARTNERSHIP

Art. 1843. A limited partnership is one formed by two or

more persons under the provisions of the following article,
having as members one or more general partners and one
or more limited partners. The limited partners as such shall
not be bound by the obligations of the partnership.

COMMENT:
Reason for and History of Limited Partnerships
“The business reason for the adoption of acts making
provisions for limited or special partners is that men in busi-
ness often desire to secure capital from others. There are
at least three classes of contracts which can be made with
those from whom the capital is secured: One, the ordinary
loan on interest; another, the loan where the lender, in lieu
of interest, takes a share in the profits of the business; third,
those cases in which the person advancing the capital secures,
besides a share in the profits, some measure of control over
the business.
“At first, in the absence of statutes, the courts, both
in this country and in England, assumed that one who is
interested in a business is bound by its obligations, carrying
the application of his principle so far that a contract where
the only evidence of interest was a share in the profits made
one who supposed himself a lender, and who was probably
unknown to the creditors at the time they extended their
credits, is unlimitedly liable as a partner for the obligations
of those actually conducting the business.
“Later decisions have much modified the earlier case. The
lender who takes a share in the profits, except possibly in one
or two of our jurisdiction, does not by reason of that fact, run
a risk of being held as a partner. If, however, his contract falls

736
CIVIL CODE OF THE PHILIPPINES Art. 1843

within the third class mentioned, and he has any measure of

control over the business, he at once runs serious risk of be-
ing liable for the debts of the business as a partner; the risk
increasing as he increase the amount of his control.
“The first Limited Partnership Act was adopted by New
York in 1822; the other commercial states, during the ensuing
30 years, following her example. Most of the statutes follow
the language of the New York statute with little material
alteration. Those statutes were adopted, and to a considerable
degree interpreted by the courts, during that period when it
was generally held that any interest in a business should
make the person holding the interest liable for its obligations.
As a result the courts usually assume in the interpretation
of those statutes two principles as fundamental.
“First: That a limited (or as he is also called, a “special”)
partner is a partner in all respects like any other partner,
except that to obtain the privilege of a limitation on his li-
ability, he has conformed to the statutory requirements in
respect to filing a certificate and refraining from participation
in the conduct of the business.
“Second: The limited partner, on any failure to follow the
requirement in regard to the certificate or any participation
in the conduct of his business, loses his privilege of limited
liability and becomes, as far as those dealing with the busi-
ness are concerned, in all respects a partner.
“The courts in thus interpreting the statutes, although
they made an American partnership with limited members
something very difficult from the French Societe in Comman-
dite from which the idea of the original statutes was derived,
unquestionably carried out the intent of those responsible for
their adoption. This is shown by the very wording of the stat-
utes themselves. For instance, all the statutes require that all
partners, limited and general, shall sign the certificate, and
nearly all state that: ‘If any false statement be made in such
certificate all the persons interested in such partnership shall be
liable for all the engagements thereof as general partners.’
“The practical result of the spirit shown in the language
and in the interpretation of existing statutes, coupled with the
fact that a man may now lend money to a partnership and

737
Art. 1843 CIVIL CODE OF THE PHILIPPINES

take a share in the profits in lieu of interest running serious

danger of becoming bound for partnership obligations, has,
to a very great extent, derived the existing statutory provi-
sions for limited partners of any practical usefulness. Indeed,
apparently their use is largely confined to associations in
which those who conduct the business have not more than
one limited partner.
“One of the causes forcing business into the corporate
form, in spite of the fact that the corporate form is ill-suited
to money business conditions, is the failure of the existing
limited partnership acts to meet the desire of the owners
of a business to secure necessary capital under the existing
partnership form of business association.
“The draft herewith submitted proceeds on the following
assumptions:
“First: No public policy requires a person who contributes
the capital of a business, acquires an interest in the profits,
and some degree of control over the conduct of business, pro-
vided creditors have no reason to believe at the times their
credits were extended that such person was so bound.
“Second: That persons in business should be able, while
remaining themselves liable without limit for the obligations
contracted in its conduct, to associate with themselves, others
who contribute to the capital and acquire rights of ownership,
provided that such contributors do not compete with creditors
for the assets of the partnership.
“The attempt to carry out these ideas has led to the
incorporation into the draft submitted of certain features, not
found in, or differing from, existing limited partnership acts.
“First: In the draft the person who contributes the capital,
though in accordance with custom called a limited partner,
is not in any sense a partner. He is, however, a member of
the association. (See Sec. 1).
“Second: As limited partners are not partners secur-
ing a certificate, the association is formed when substantial
compliance in good faith is had with the requirements of a
certificate. (Sec. 2[2]). This provision eliminates the difficul-
ties which arise from the recognition of de facto associations,

738
CIVIL CODE OF THE PHILIPPINES Art. 1843

made necessary by the assumption that the association is not

formed unless a strict compliance with the requirements of
the act is had.
“Third: The limited partner not being in any sense a
principal in the business, failure to comply with the require-
ments of the act in respect to the certificate, while it may
result in the non-formation of the association, does not make
him a partner or liable as such. The exact nature of his li-
ability in such cases is set forth in Sec. 11.
“Fourth: The limited partner, while not as such in any
sense a partner, may become a partner as any person not
a member of the association may become a partner, and,
becoming a partner, may nevertheless restrain his rights as
limited partner this last provision enabling the entire capital
embraced in the business to be divided between the limited
partners, all the general partners being also limited partners.
(Sec. 12).
“Fifth: The limited partner is not debarred from loaning
money or transacting other business with the partnership
as any other non-member; provided he does not, in respect
to such transactions, accept from the partnership collateral
security, or receive from any partner or the partner of the
partnership any payment, conveyance, release from liability,
if at the time the assets of the partnership are not sufficient
to discharge its obligation to persons not general or limited
partners. (Sec. 13).
“Sixth: The substitution of a person as limited partner
in place of an existing limited partner, or the withdrawal of
a limited partner, or the addition of new limited partners,
does not necessarily dissolve the association (Secs. 16[2b]);
no limited partner, however, can withdraw his contribution
until all liabilities to creditors are paid. (Sec. 16[1a]).
“Seventh: As limited partners are not principals in transac-
tions of the partnership, their liability, except, for known false
statements in the certificate (Sec. 6), is to the partnership, not to
the creditors of the partnership. (Sec. 17). The general partners
cannot, however, waive any liability of the limited partners to
the prejudice of such creditors.” [Sec. 17 (3)]. (Commissioner’s
Note, Vol. 8, Uniform Laws, Annotated, pp. 2-5).

739
Art. 1844 CIVIL CODE OF THE PHILIPPINES

Art. 1844. Two or more persons desiring to form a lim-

ited partnership shall:
(1) Sign and swear to a certificate which shall state —
(a) The name of the partnership, adding thereto
the word “Limited”;
(b) The character of the business;
(c) The location of the principal place of busi-
ness;
(d) The name and place of residence of each mem-
ber, general and limited partners being respectively
designated;
(e) The term for which the partnership is to ex-
ist;
(f) The amount of cash and a description of and
the agreed value of the other property contributed by
each limited partner;
(g) The additional contributions, if any, to be made
by each limited partner and the times at which or events
on the happening of which they shall be made;
(h) The time, if agreed upon, when the contribu-
tion of each limited partner is to be returned;
(i) The share of the profits or the other compen-
sation by way of income which each limited partner
shall receive by reason of his contribution;
(j) The right, if given, of a limited partner to
substitute an assignee as contributor in his place, and
the terms and conditions of the substitution;
(k) The right, if given, of the partners to admit
additional limited partners;
(l) The right, if given, of one or more of the lim-
ited partners to priority over other limited partners,
as to contributions or as to compensation by way of
income, and the nature of such priority;
(m) The right, if given, of the remaining general
partner or partners to continue the business on the

740
CIVIL CODE OF THE PHILIPPINES Art. 1844

death, retirement, civil interdiction, insanity or insol-

vency of a general partner; and
(n) The right, if given, of a limited partner to de-
mand and receive property other than cash in return
for his contribution.
(2) File for record the certificate in the Office of the
Securities and Exchange Commission.
A limited partnership is formed if there has been
substantial compliance in good faith with the foregoing
requirements.

COMMENT:
(1) Requisites in the Formation of a Limited Partnership
Two important things are needed:
(a) The signing under oath of the required certificate (with
all the enumerated items), and
(b) The filing for record of the certificate in the Office of the
Securities and Exchange Commission.

(2) Non-Fulfillment of the Requisites

If the proposed limited partnership has not conformed
substantially with the requirements of this article, as when
the name of not one of the general partners appear in the
firm name, it is not considered a limited partnership but a
general partnership. (Jo Chung Cang v. Pacific Com. Co., 45
Phil. 142; Mechem, Elements of Partnership, p. 412 and Coll.
of Int. Rev. v. Isasi, L-9186, Apr. 29, 1957). This is because a
firm transacting business as a partnership is presumed to be
a general partnership. (Vanhorn v. Gorcoran, 127 Pa. 255).

(3) Effect if Only Aggregate Contribution Is Stated

The law says that the contribution of each limited part-
ner must be stated. Therefore if the aggregate sum given by
two or more limited partners is given, the law has not been
complied with. (Spencer Optical Mfg. Co. v. Johnson, 53 S.C.
533).

741
Arts. 1845-1846 CIVIL CODE OF THE PHILIPPINES

(4) Effect of Omitting the Term “Limited” in the Firm

Name
The law requires the firm name to have the word
“Limited.” If this provision is violated, the name cannot be
considered the firm name of a limited partnership. (Hungman
Yoc v. Kieng-Chiong-Seng, 6 Phil. 498).

Art. 1845. The contributions of a limited partner may

be cash or other property, but not services.

COMMENT:
(1) What the Limited Partner Can Contribute
Note that a limited partner is not allowed to contribute
industry or services alone.

(2) Industrial Partner Can Join

An industrial partner can become a general partner in a
limited partnership, for the article speaks only of a “limited
partner.”

Art. 1846. The surname of a limited partner shall not

appear in the partnership name unless:
(1) It is also the surname of a general partner, or
(2) Prior to the time when the limited partner became
such, the business had been carried on under a name in
which his surname appeared.
A limited partner whose surname appears in a partner-
ship name contrary to the provisions of the first paragraph
is liable as a general partner to partnership creditors who
extend credit to the partnership without actual knowledge
that he is not a general partner.

COMMENT:
Non-Inclusion of Name of the Limited Partner
Note that a limited partner violating this article is li-
able as a general partner to innocent third parties, without
however the rights of a general partner.

742
CIVIL CODE OF THE PHILIPPINES Arts. 1847-1848

Art. 1847. If the certificate contains a false statement,

one who suffers loss by reliance on such statement may
hold liable any party to the certificate who knew the state-
ment to be false:
(1) At the time he signed the certificate, or
(2) Subsequently, but within a sufficient time before
the statement was relied upon to enable him to cancel or
amend the certificate, or to file a petition for its cancella-
tion or amendment as provided in Article 1865.

COMMENT:
Liability for a False Statement
This speaks of liability for a false statement. The person
who suffers loss can sue for damages.

Art. 1848. A limited partner shall not become liable as

a general partner unless, in addition to the exercise of his
rights and powers as a limited partner, he takes part in
the control of the business.

COMMENT:

Effect of Taking Part in the Control of the Business

(a) The following acts do not constitute taking “part in the
control of the business”:
1) mere dealing with a customer. (Rayne v. Terell, 33
La. Ann. 812).
2) mere consultation on one occasion with the general
partners. (Ulman v. Briggs, 32 La. Ann. 655).
(b) The following have been held to constitute taking “part
in the control of the business”:
1) selection of who will be the managing partners.
(Stranger v. Thomas, 114 Wis. 699).
2) supervision over a superintendent of the business of
the firm. (Richardson v. Hoggs, 38 Pa. St. 153).

743
Arts. 1849-1850 CIVIL CODE OF THE PHILIPPINES

(c) Participation in the control of the business makes the

limited partner liable as a general partner without how-
ever getting the latter’s rights.

Art. 1849. After the formation of a limited partnership,

additional limited partners may be admitted upon filing an
amendment to the original certificate in accordance with
the requirements of Article 1865.

COMMENT:
(1) When Additional Limited Partners May Be Admitted
Note that even after a limited partnership has already
been formed, the firm may still admit new limited partners,
provided there is a proper amendment to the certificate.

(2) Effect of Failure to Amend

If additional limited partners are taken in, without
proper amendment of certificate with the SEC, this does not
necessarily mean the dissolution of the limited partnership.
(See Tec Bi and Co. v. Collector of Int. Rev., 61 Phil. 351).

Art. 1850. A general partner shall have all the rights

and powers and be subject to all the restrictions and liabili-
ties of a partner in a partnership without limited partners.
However, without the written consent or ratification of the
specific act by all the limited partners, a general partner
or all of the general partner’s have no authority to:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to
carry on the ordinary business of the partnership;
(3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their rights
in specific partnership property, for other than a partner-
ship purpose;
(5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless the
right so to do is given in the certificate;

744
CIVIL CODE OF THE PHILIPPINES Art. 1851

(7) Continue the business with partnership property

on the death, retirement, insanity, civil interdiction or in-
solvency of a general partner, unless the right so to do is
given in the certificate.

COMMENT:
(1) Acts of Strict Dominion
Note that as a rule, in the instances enumerated, the gen-
eral partners (even if already unanimous among themselves)
must still get the written CONSENT or RATIFICATION of
ALL the limited partners.
Reason: In a sense the acts are acts of strict dominion
or ownership, and are not generally essential for the routine
or ordinary conduct of the firm’s business.

(2) Conflicts Rule Governing Capacity of the Limited Part-

ner
If a general partner in a limited partnership goes abroad,
his capacity to bind the firm is governed by the law of the
place where the limited partnership was formed. (Barrows v.
Downs, 3 R.I. 446 cited in 8 ULA, p. 21).

Art. 1851. A limited partner shall have the same rights

as a general partner to:
(1) Have the partnership books kept at the principal
place of business of the partnership, and at a reasonable
hour to inspect and copy any of them;
(2) Have on demand true and full information of all
things affecting the partnership, and a formal account of
partnership affairs whenever circumstances render it just
and reasonable; and
(3) Have dissolution and winding up by decree of
court.
A limited partner shall have the right to receive a share
of the profits or other compensation by way of income, and
to the return of his contribution as provided in Articles
1856 and 1857.

745
Art. 1852 CIVIL CODE OF THE PHILIPPINES

COMMENT:

Rights of a Limited Partner

(a) A limited partner necessarily has lesser rights than a
general partner. These rights are enumerated in the
Article.
(b) Note however that among other things he also has the
right to have dissolution and winding up by decree of
the court.
(c) He cannot however bind the firm by a contract. (Columbia
Land Co. v. Dally, 40 Kan. 504).

Art. 1852. Without prejudice to the provisions of arti-

cle 1848, a person who has contributed to the capital of a
business conducted by a person or partnership erroneously
believing that he has become a limited partner in a limited
partnership, is not by reason of his exercise of the rights of
a limited partner, a general partner with the person or in
the partnership carrying on the business, or bound by the
obligations of such person or partnership, provided that on
ascertaining the mistake he promptly renounces his inter-
est in the profits of the business, or other compensation by
way of income.

COMMENT:

(1) Contributor Who Erroneously Believes He Has Become

a Limited Partner
Example:
A, B, C, D, and E agreed to form a limited partnership,
with the first two as general partners and the rest as limited
partners, but as recorded in the Securities and Exchange
Commission and in the certificate, A and B were really named
general partners, but only C and D were included as limited
(special) partners. E, who had contributed money, was LEFT
OUT. If E erroneously believes that he has become a limited
partner (erroneously, for clearly, he is not) and thereupon

746
CIVIL CODE OF THE PHILIPPINES Art. 1853

exercises the rights of a limited partner, he should not gen-

erally be considered as liable as a general partner (general
because the public cannot be blamed for not considering him
a limited partner). (See In Re Marcuse, 281 Fed. 928).

(2) When He Becomes Liable As a General Partner

In the example given, however, he can still be liable as
a general partner:
(a) unless on ascertaining the mistake, he promptly renounces
his interest in the profits of the business, or other com-
pensation by way of income; or
(b) unless, even if no such renouncing is made, partnership
creditors are NOT prejudiced. (See In Re Marcuse, 281
Fed. 928).

(3) Limited Partner Who Participates in the Control Can-

not Take Advantage of the Article
The person referred to under Art. 1848 cannot take
advantage, naturally, of Art. 1852.

Art. 1853. A person may be a general partner and a

limited partner in the same partnership at the same time,
provided that this fact shall be stated in the certificate
provided for in Article 1844.
A person who is a general, and also at the same time a
limited partner, shall have all the rights and powers and be
subject to all the restrictions of a general partner; except
that, in respect to his contribution, he shall have the rights
against the other members which he would have had if he
were not also a general partner.

COMMENT:
(1) General — Limited Partner
Note that a person may be a general and a limited partner
at the same time, provided same is stated in the certificate.

747
Art. 1854 CIVIL CODE OF THE PHILIPPINES

(2) Rights
Generally, his rights are those of a general partner (hence,
third parties can go against his individual properties).
EXCEPTION: Regarding his contribution (like the right
to have it returned on the proper occasions) he would be con-
sidered a limited partner, with the rights of a limited partner,
insofar as the other partners are concerned.

Art. 1854. A limited partner also may loan money to and

transact other business with the partnership, and, unless
he is also a general partner, receive on account of result-
ing claims against the partnership, with general creditors,
a pro rata share of the assets. No limited partner shall in
respect to any such claim:
(1) Receive or hold as collateral security any partner-
ship property, or
(2) Receive from a general partner or the partnership
any payment, conveyance, or release from liability, if at
the time the assets of the partnership are not sufficient to
discharge partnership liabilities to persons not claiming as
general or limited partners.
The receiving of collateral security, or payment, con-
veyance, or release in violation of the foregoing provisions
is a fraud on the creditors of the partnership.

COMMENT:
Right of a Limited Partner to Lend Money and Transact
Other Business With the Firm
(a) Note that 3rd parties are always given preferential rights
insofar as the firm’s assets are concerned.
(b) Note also that while the limited partner, in the case of
a claim referred to in the article, is prohibited to “receive
or hold as COLLATERAL SECURITY any partnership
property,” still he if not prohibited to purchase partnership
assets which are used to satisfy partnership obligations
towards third parties.

748
CIVIL CODE OF THE PHILIPPINES Arts. 1855-1856

Art. 1855. Where there are several limited partners the

members may agree that one or more of the limited part-
ners shall have a priority over other limited partners as to
the return of their contributions, as to their compensation
by way of income, or as to any other matter. If such an
agreement is made it shall be stated in the certificate, and
in the absence of such a statement all the limited partners
shall stand upon equal footing.

COMMENT:
(1) Preference to Some Limited Partners
(a) Note that preference can be given to some limited part-
ners over the other limited partners.
(b) However, the preference must be “stated in the certifi-
cate.”

(2) Nature of the Preference

This preference may involve:
(a) the return of contributions;
(b) compensation;
(c) other matters.

Art. 1856. A limited partner may receive from the part-

nership the share of the profits or the compensation by way
of income stipulated for in the certificate; provided, that
after such payment is made, whether from the property of
the partnership or that of a general partner, the partner-
ship assets are in excess of all liabilities of the partnership
except liabilities to limited partners on account of their
contributions and to general partners.

COMMENT:
Profit or Compensation of Limited Partners
(a) Whereas Art. 1856 speaks of “profit or compensation
by way of income,” Art. 1857 deals generally with the
return of the contributions.

749
Art. 1857 CIVIL CODE OF THE PHILIPPINES

(b) Note that for Art. 1856 to apply, partnership assets must
be in excess of partnership liabilities to 3rd persons, not
liabilities to partners.

Art. 1857. A limited partner shall not receive from a

general partner or out of partnership property any part of
his contributions until:
(1) All liabilities of the partnership, except liabilities
to general partners and to limited partners on account of
their contributions, have been paid or there remains prop-
erty of the partnership sufficient to pay them;
(2) The consent of all members is had, unless the re-
turn of the contribution may be rightfully demanded under
the provisions of the second paragraph; and
(3) The certificate is canceled or so amended as to set
forth the withdrawal or reduction.
Subject to the provisions of the first paragraph, a
limited partner may rightfully demand the return of his
contribution:
(1) On the dissolution of a partnership, or
(2) When the date specified in the certificate for its
return has arrived, or
(3) After he has given a month’s notice in writing to
all other members, if no time is specified in the certificate,
either for the return of the contribution or for the dissolu-
tion of the partnership.
In the absence of any statement in the certificate
to the contrary or the consent of all members, a limited
partner, irrespective of the nature of his contribution has
only the right to demand and receive cash in return for
his contribution.
A limited partner may have the partnership dissolved
and its affairs wound up when:
(1) He rightfully but unsuccessfully demands the re-
turn of his contribution, or

750
CIVIL CODE OF THE PHILIPPINES Art. 1857

(2) The other liabilities of the partnership have not

been paid, or the partnership property is insufficient for
their payment as required by the first paragraph, No. 1,
and the limited partner would otherwise be entitled to the
return of his contribution.

COMMENT:
(1) When Contributions of Limited Partners Can Be Re-
turned
(a) The 1st paragraph deals with the CONDITIONS that
must exist before contributions (or part thereof) by a
limited partner can be returned to him.
(b) The second paragraph deals with the TIME when such
contributions can be returned, provided that the condi-
tions are complied with.
(c) Note that as a rule, even if a limited partner has con-
tributed property, he has the right to demand and receive
CASH in return.
(d) If paragraph one is violated, previous creditors can sue,
but they must allege and prove the non-existence of the
CONDITIONS. (Snipler v. Leland, 127 Mass. 291). Among
these in the same category as previous creditor is the
assignee in insolvency of a bankrupt limited partnership.
(Wilkins v. Davis, 29 Fed. Case No. 17, p. 644).

(2) Liability of a Limited Partner Who Has Withdrawn

Suppose a limited partner withdraws rightfully his con-
tribution (all conditions being fulfilled, particularly the com-
plete solvency of the firm as of the time of withdrawal) and
the certificate is amended properly, would he still be liable
to previous creditors if later on the firm becomes insolvent?
ANS.: Yes, if by chance, the very next day the partner-
ship assets are all destroyed by an earthquake, etc., it is
unfair for him to keep the cash, and leave the creditors with
nothing. His contribution (even if already returned to him) is
to be treated as a trust fund for the discharge of liabilities.
Moreover, the sum should include the interest presumably

751
Art. 1858 CIVIL CODE OF THE PHILIPPINES

earned. (See Kittredge v. Langley, 1933, 252 N.Y. 405; see

also last paragraph of Art. 1858).
[NOTE: Future creditors cannot make use of the princi-
ple enunciated in the above-cited case in view of the recorded
amended certificate, except of course if the money had been
wrongfully returned to the limited partner. (See Art. 1858).]

Art. 1858. A limited partner is liable to the partnership:

(1) For the difference between his contribution as
actually made and that stated in the certificate as having
been made, and
(2) For any unpaid contribution which he agreed in
the certificate to make in the future at the time and on the
conditions stated in the certificate.
A limited partner holds as trustee for the partnership:
(1) Specific property stated in the certificate as con-
tributed by him, but which was not contributed or which
has been wrongfully returned, and
(2) Money or other property wrongfully paid or con-
veyed to him on account of his contribution.
The liabilities of a limited partner as set forth in this
article can be waived or compromised only by the consent of
all members; but a waiver or compromise shall not affect the
right of a creditor of a partnership who extended credit or
whose claim arose after the filing and before a cancellation or
amendment of the certificate, to enforce such liabilities.
When a contributor has rightfully received the return
in whole or in part of the capital of his contribution, he is
nevertheless liable to the partnership for any sum, not in
excess of such return with interest, necessary to discharge
its liabilities to all creditors who extended credit or whose
claims arose before such return.

COMMENT:
(1) Liabilities of a Limited Partner
(a) This is a new provision of the new Civil Code.

752
CIVIL CODE OF THE PHILIPPINES Art. 1858

Source: Sec. 17, Uniform Limited Partnership Act.

(b) A and B are limited partners of a partnership. In the
certificate, it was stated that A contributed P1.8 mil-
lion when as a matter of fact he had given only P1.5
million. In the certificate too is a promise made by B to
pay P200,000 additional contribution on Dec. 1, 2004.
Should A and B make good the P300,000 and P200,000
respectively?
ANS.: Yes, A should pay now; B on Dec. 1, 2004.
(c) May the liabilities in the preceding problem be waived
or compromised?
ANS.: Yes, but two conditions must be followed:
(a) All the other partners must agree.
(b) Innocent third party creditors must not be preju-
diced. They are innocent when their claim for
extension of credit was before the cancellation or
amendment of the certificate.

(2) Problem Involving Liability to Creditors

A, a limited partner, received the return of his contribution
on the date stated in the certificate. It was discovered that
the remaining assets were insufficient to pay two creditors,
X and Y. X’s claim arose before the return; Y’s claim arose
after the return. Should A be compelled to give back what
he had received?
ANS.: I distinguish:
(a) X’s claim should be satisfied out of what has been re-
turned to A.
Reason: X’s claim arose before the return. If there
is a balance, it should be returned to A. If there is a
deficit, A is not liable for this because he is only a limited
partner.
(b) Y’s claim does not have to be satisfied from what has
been returned to A as contribution.
Reason: His claim arose after the return. Y’s claim
should be directed against the general partners.

753
Art. 1859 CIVIL CODE OF THE PHILIPPINES

Art. 1859. A limited partner’s interest is assignable.

A substituted limited partner is a person admitted to
all the rights of a limited partner who has died or has as-
signed his interest in a partnership.
An assignee, who does not become a substituted lim-
ited partner, has no right to require any information or
account of the partnership transaction or to inspect the
partnership books; he is only entitled to receive the share
of the profits or other compensation by way of income, or
the return of his contribution, to which his assignor would
otherwise be entitled.
An assignee shall have the right to become a substituted
limited partner if all the members consent thereto or if the
assignor, being thereunto empowered by the certificate,
gives the assignee that right.
An assignee becomes a substituted limited partner
when the certificate is appropriately amended in accord-
ance with Article 1865.
The substituted limited partner has all the rights and
powers, and is subject to all the restrictions and liabilities
of his assignor, except those liabilities of which he was ig-
norant at the time he became a limited partner and which
could not be ascertained from the certificate.
The substitution of the assignee as a limited partner
does not release the assignor from liability to the partner-
ship under Articles 1847 and 1858.

COMMENT:
(1) Assignment of a Limited Partner’s Interest
(a) This is a new provision of the new Civil Code.
Source: Sec. 19, Uniform Limited Partnership Act.
(b) May the interest of a limited partner be assigned?
ANS.: Yes. (Par. 1, Art. 1859).
(c) Does the assignee of the interest of the limited partner
become necessarily a substitute partner?

754
CIVIL CODE OF THE PHILIPPINES Art. 1859

ANS.: No.
1) In some cases, he becomes one.
2) In others, he remains a mere assignee.

(2) Some Problems

(a) A, a limited partner, assigned his interest to B. In the
certificate, A was expressly given the right to give the
assignee the right to become a substituted limited part-
ner. Is B now a substituted limited partner?
ANS.: Not yet. He has to wait until the certificate is
appropriately amended. (Pars. 4 and 5, Art. 1859, Civil
Code).
(b) A, a limited partner, assigned his right to X. In the cer-
tificate, A was not given the right to give his assignee
the right to become a substituted limited partner. How
can X acquire said right to become a substituted limited
partner?
ANS.: Only if all the members of the partnership
so consent. If they do consent, X acquires the right to
become a substituted limited partner, BUT is not yet
one, until after the certificate is appropriately amended.
(4th and 6th paragraphs, Art. 1869, Civil Code).
(c) Suppose in problem (b) X was not given the right to
become a substituted limited partner by the partners,
what will be his status and his rights?
ANS.: He will be a mere assignee. He has NO
RIGHT.
1) to require any information or account of the part-
nership transactions;
2) to inspect the partnership books.
BUT, he has the right to receive the share of the
profits or other compensation by way of income, or the
return of his contribution to which his assignor would
otherwise be entitled. (Par. 3, Art. 1859, Civil Code).

755
Art. 1860 CIVIL CODE OF THE PHILIPPINES

(3) Substituted Limited Partner

He is a person admitted to all the rights of a limited
partner who has died or has assigned his interest in a part-
nership. (2nd par., Art. 1859, Civil Code).

(4) Some Problems

(a) Is a substituted limited partner responsible for the li-
abilities of his assignor?
ANS.: Yes, except those liabilities of which he was
ignorant at the time he became a limited partner and
which could not be ascertained from the certificate. (Par.
6, Art. 1859, Civil Code).
(b) A, a limited partner, assigned his interest to X, who
subsequently became a substituted limited partner. Is
A completely relieved of all his liabilities to the partner
to the partnership?
ANS.: No. A is still liable under Art. 1847 to a
person who relies on a false statement in the certificate,
and under Art. 1858 to creditors who extended credit or
whose claims rose before the assignment. (Last par., Art.
1859, Civil Code).

Art. 1860. The retirement, death, insolvency, insanity

or civil interdiction of a general partner dissolves the part-
nership, unless the business is continued by the remaining
general partners:
(1) Under a right so to do stated in the certificate, or
(2) With the consent of all members.

COMMENT:
Some Causes for the Dissolution of a Limited Partner-
ship
(a) This is a new provision of the new Civil Code.
Source: Sec. 20, Uniform Limited Partnership Act.
Keyword: DRICI (death, retirement, insolvency, civil
interdiction, insanity of a GENERAL partner)

756
CIVIL CODE OF THE PHILIPPINES Art. 1861

(b) Example:
A, B, C, D, and E were partners, A and B being
general partners, and the rest, limited partners. A dies.
Is the partnership dissolved?
ANS.: Yes, unless it is continued by the remaining
general partners.
Query: When may the remaining general partners
continue the business?
ANS.:
1) If the right to do so is stated in the certificate; or
2) If all the members consent.
BUT, at any event, there should be an amendment
of the certificate.
[NOTE: The instances set forth in Art. 1860 (re-
tirement, etc.) do not apply in the case of the limited
partner, for in such a case, the firm is not dissolved.
(See Com. Note, 8 Uniform Laws Annotated, pp. 2-5).]

Art. 1861. On the death of a limited partner his executor

or administrator shall have the rights of a limited partner
for the purpose of settling his estate and such power as
the deceased had to constitute his assignee a substituted
limited partner.
The estate of a deceased limited partner shall be liable
for all his liabilities as a limited partner.

COMMENT:
(1) Death of a Limited Partner
(a) This is a new provision of the new Civil Code.
Source: Sec. 21, Uniform Limited Partnership
Act.
(b) A, a limited partner, while still alive contracted certain
liabilities as such. Is his estate liable for them?
ANS.: Yes. (2nd par., Art. 1861, Civil Code).

757
Art. 1862 CIVIL CODE OF THE PHILIPPINES

(2) Problem
A, a limited partner, was given the right to constitute
his assignee as a substituted limited partner. On his death,
may his administrator do the same?
ANS.: Yes. Furthermore, said administrator shall have
all the rights of a limited partner for the purpose of settling
the estate of the deceased.

Art. 1862. On due application to a court of competent

jurisdiction by any creditor of a limited partner, the court
may charge the interest of the indebted limited partner
with payment of the unsatisfied amount of such claim, and
may appoint a receiver, and make all other orders, direc-
tions, and inquiries which the circumstances of the case
may require.
The interest may be redeemed with the separate prop-
erty of any general partner, but may not be redeemed with
partnership property.
The remedies conferred by the first paragraph shall
not be deemed exclusive of others which may exist.
Nothing in this Chapter shall be held to deprive a
limited partner of his statutory exemption.

COMMENT:
(1) Charging the Interest of a Limited Partner
This is a new provision of the new Civil Code.
Source: Sec. 22, Uniform Limited Partnership Act.

(2) Example
A is a limited partner who is indebted to X. X applies to
the court to charge the interest of A in the partnership. May
the interest charged be redeemed by partnership property?
ANS.: No. The law says that the interest may be re-
deemed with the separate property of any general partner,
but cannot be redeemed with partnership property.

758
CIVIL CODE OF THE PHILIPPINES Arts. 1863-1864

Art. 1863. In settling accounts after dissolution the li-

abilities of the partnership shall be entitled to payment in
the following order:
(1) Those to creditors, in the order of priority as pro-
vided by law except those to limited partners on account
of their contributions, and to general partners;
(2) Those to limited partners in respect to their share
of the profits and other compensation by way of income on
their contributions;
(3) Those to limited partners in respect to the capital
of their contributions;
(4) Those to general partners other than to capital
and profits;
(5) Those to general partners in respect to profits;
(6) Those to general partners in respect to capital.
Subject to any statement in the certificate or to subse-
quent agreement, limited partners share in the partnership
assets in respect to their claims for capital, and in respect
to their claims for profits or for compensation by way of
income on their contribution respectively, in proportion to
the respective amounts of such claims.

COMMENT:
Payment of Liabilities of the Limited Partnership
(a) This is a new provision of the new Civil Code.
Source: Sec. 23, Uniform Limited Partnership Act.
(b) Notice that profits are given priority over capital.

Art. 1864. The certificate shall be cancelled when the

partnership is dissolved or all limited partners cease to be
such.
A certificate shall be amended when:
(1) There is a change in the name of the partnership
or in the amount or character of the contribution of any
limited partner;

759
Art. 1864 CIVIL CODE OF THE PHILIPPINES

(2) A person is substituted as a limited partner;

(3) An additional limited partner is admitted;
(4) A person is admitted as a general partner;
(5) A general partner retires, dies, becomes insolvent
or insane, or is sentenced to civil interdiction and the busi-
ness is continued under Article 1860;
(6) There is a change in the character of the business
of the partnership;
(7) There is a false or erroneous statement in the
certificate;
(8) There is a change in the time as stated in the
certificate for the dissolution of the partnership or for the
return of a contribution;
(9) A time is fixed for the dissolution of the partner-
ship, or the return of a contribution, no time having been
specified in the certificate; or
(10) The members desire to make a change in any other
statement in the certificate in order that it shall accurately
represent the agreement among them.

COMMENT:

(1) When Certificate Is Cancelled or Amended

This is a new provision of the new Civil Code.
Source: Sec. 24, Uniform Limited Partnership Act.

(2) Cancellation
When the partnership is dissolved, or when all the
limited partners cease to be limited partners, the certificate
shall be cancelled, not merely amended. This is obvious for
if there be no more limited partners, the limited partnership
cannot exist as such. The writing to cancel a certificate shall
be signed by all members. (Art. 1865, 2nd par.).

760
CIVIL CODE OF THE PHILIPPINES Art. 1865

Art. 1865. The writing to amend a certificate shall:

(1) Conform to the requirement of article 1844 as far
as necessary to set forth clearly the change in the certificate
which it is desired to make; and
(2) Be signed and sworn to by all members, and an
amendment substituting limited partner or adding a limited
or general partner shall be signed also by the member to
be substituted or added, and when a limited partner is to
be substituted, the amendment shall also be signed by the
assigning limited partner.
The writing to cancel a certificate shall be signed by
all members.
A person desiring the cancellation or amendment of a
certificate, if any person designated in the first and second
paragraphs as a person who must execute the writing refuses
to do so, may petition the court to order a cancellation or
amendment thereof.
If the court finds that the petitioner has a right to
have the writing executed by a person who refuses to do
so, it shall order the Office of the Securities and Exchange
Commission where the certificate is recorded, to record the
cancellation or amendment of the certificate, and when the
certificate is to be amended, the court shall also cause to be
filed for record in said office a certified copy of its decree
setting forth the amendment.
A certificate is amended or cancelled when there is
filed for record in the Office of the Securities and Exchange
Commission, where the certificate is recorded:
(1) A writing in accordance with the provisions of the
first or second paragraph; or
(2) A certified copy of the order of court in accordance
with the provisions of the fourth paragraph;
(3) After the certificate is duly amended in accordance
with this article, the amended certificate shall thereafter be
for all purposes the certificate provided for in this Chap-
ter.

761
Arts. 1866-1867 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Requisites for Amending or Cancelling the Certificate
This is a new provision of the new Civil Code.
Source: Sec. 25, Uniform Limited Partnership Act.

(2) Problems
(a) X, a limited partner, assigned his interest to Y, who
thereby acquired the right to be a substituted limited
partner. Aside from the others, should X and Y sign the
amendment?
ANS.: Yes.
(b) In the preceding problem, suppose X refuses to sign the
amendment, may Y petition the court to order the court
to order the amendment?
ANS.: Yes.

Art. 1866. A contributor, unless he is a general part-

ner, is not a proper party to proceeding by or against a
partnership, except where the object is to enforce a limited
partner’s right against or liability to the partnership.

COMMENT:

When Contributors (Other Than General Partners)

Should Be Made Parties to Proceedings
The Article is self-explanatory.

Art. 1867. A limited partnership formed under the law

prior to the effectivity of this Code, may become a limited
partnership under this Chapter by complying with the pro-
visions of Article 1844, provided the certificate sets forth:
(1) The amount of the original contribution of each
limited partner, and the time when the contribution was
made; and

762
CIVIL CODE OF THE PHILIPPINES Art. 1867

(2) That the property of the partnership exceeds the

amount sufficient to discharge its liabilities to persons not
claiming as general or limited partners by an amount greater
than the sum of the contributions of its limited partners.
A limited partnership formed under the law prior to
the effectivity of this Code, until or unless it becomes a
limited partnership under this Chapter, shall continue to
be governed by the provisions of the old law.

COMMENT:
Transitional Provisions on Limited Partnerships
(a) This is a new provision of the new Civil Code.
Source: Sec. 30, Uniform Limited Partnership
Act.
(b) On June 1, 1946, a limited partnership was formed. May
it become a limited partnership under the new Civil
Code?
ANS.: Yes, by following the conditions in Art.
1867.
(c) Suppose the limited partnership in question (b) does not
want to become one under the new Civil Code, what laws
will govern said partnership?
ANS.: The old law.

763
 CIVIL CODE OF THE PHILIPPINES

TITLE X
AGENCY

Chapter 1

NATURE, FORM, AND KINDS OF AGENCY

Art. 1868. By the contract of agency a person binds

himself to render some service or to do something in rep-
resentation or on behalf of another, with the consent or
authority of the latter.

COMMENT:
(1) Defective Definition of the Contract of Agency
The definition of AGENCY given in Art. 1868 is very
broad, and therefore, defective.
(a) As worded, the definition includes the relationship of
master and servant, of employer and employee, of lessor
and independent contractor. The servant, the employee,
and the independent contractor all render some work or
service in representation or on behalf of another.
(NOTE: What the agent really does for the principal
is a JURIDICAL ACT, and not merely a material one. In
other words, while an agent may exercise discretionary
powers, the lessee of services ordinarily performs only
ministerial functions.)
(b) As worded, it would seem that the agent must always
expressly represent the principal. This is not necessarily
so, for sometimes an agent does not disclose his principal;
he may even act in behalf of himself, but here the prin-

764
CIVIL CODE OF THE PHILIPPINES Art. 1868

cipal would still be BOUND “when the contract involves

things BELONGING to the principal.” (Art. 1883, 2nd
par., Civil Code).
[THUS, Justice J.B.L. Reyes had stated that “this
article does not draw clearly the distinction between lease
of services and agency without representation. The laborer
also does something or renders service on behalf of another.
The true essence of the distinction, it is submitted, lies in
that the agent enters or is designed to enter judicial rela-
tions, with or without representation of the principal.”
(Justice Jose B.L. Reyes’ Observation on the new Civil Code,
XVI Lawyers Journal, Mar. 31, 1951, p. 138).]

Bert Osmeña and Associates

v. Court of Appeals
GR 56545, Jan. 28, 1983
When a man designates himself as the seller in
a contract of sale (and not merely as the agent of the
seller), and he alone signs the contract, he will be re-
garded as the seller with resultant liabilities as such
(e.g., for damages).

Alfred Hahn v. CA & Bayerische

Motoren Werke Aktiengesellschaft (BMW)
GR 113074, Jan. 22, 1997
78 SCAD 240

FACTS: As to the service centers and showrooms

which he said he had put up at his own expense, petitioner
Hahn said that he had to follow BMW specifications as
exclusive dealer of BMW in the Philippines. According
to Hahn, BMW periodically inspected the service to see
to it that BMW standards were maintained. Indeed, it
would seem from BMW’s letter to Hahn that it was for
Hahn’s alleged failure to maintain BMW standards that
BMW was terminating Hahn’s dealership.
HELD: The fact that Hahn invested his own money
to put up these service centers and showrooms does
not necessarily prove that he is not an agent of BMW.
For as noted, there are facts in the record which sug-

765
Art. 1868 CIVIL CODE OF THE PHILIPPINES

gest that BMW exercised control over Hahn’s activities

as a dealer and made regular inspections of Hahn’s
premises to enforce compliance with BMW standards and
specifications. An agent receives a commission upon the
successful conclusion of a sale. Upon the other hand, a
broker earns his pay merely by bringing the buyer and
the seller together, even if no sale is eventually made.

(2) Other Definitions

(a) “An agency may be defined as a contract either express
or implied upon a consideration, or a gratuitous under-
taking, by which one of the parties confides to the other,
the management of some business to be transacted in
his name or on his account, and by which that other
assumes to do the business and renders an account of
it.” (2 Am. Jur. 13).
(b) “Agency is the relationship which results from the mani-
festation of consent by one person to another that the
other shall act on his behalf and subject to his control,
and consented by the other so to act.” (Restatement of
the Law of Agency, Sec. 1).
(c) “Agency is an act which one person gives to another
the power to do something for the principal and in his
name.” (French Civil Code; Holland, Jurisprudence, 12th
Ed., 302-303).

(3) Roman Law

In Roman Law, there was the contract of mandatum
where one person called mandans authorized another called
the mandatarius to do something for him. This originated
from the obligation or right of a son or a slave to represent
the pater familias. (Holland, Jurisprudence, pp. 302-303).
(NOTE: In Spanish, the principal is called mandante,
while the agent is referred to as the mandatario. The contract
itself is a mandato.)

(4) Importance of Agency

It enables a man to increase the range of his individual
and corporate activity by enabling him to be constructively

766
CIVIL CODE OF THE PHILIPPINES Art. 1868

present in many places and to carry on diverse activities at

the same time. (Mechem, Outlines of Agency, 3rd ed., p. 5).

Smith, Bell & Co., Inc. v. CA

GR 110668, Feb. 6, 1997
79 SCAD 38

Every cause of action ex contractu must be founded upon

a contract, oral or written; either express or implied. The only
involvement of petitioner in the subject contract of insurance
was having its name stamped at the bottom left portion of the
policy as “Claim Agent.” Without anything else to back it up,
such stamp cannot even be deemed by the remotest interpre-
tation to mean that petitioner participated in the preparation
of said contract. Hence, there is no privily of contract, and
correspondingly there can be no obligation or liability, and,
thus, no cause of action against petitioner attaches.
The Insurance Code is quite clear as to the purpose
and role of a resident agent. Such agent, as a representative
of the foreign insurance company, is tasked only to receive
legal processes on behalf of its principal and not to answer
personally for any insurance claims.

(5) History
Formerly, there was a difference between a commercial
agency or commission on the one hand, and a civil agency
on the other. A commercial agency was entered into for com-
mercial purposes; the civil agency, for other objectives.
Today, however, there is no more commercial agency or
commission in view of the repeal by the new Civil Code of
the Code of Commerce provisions thereon. (Art. 2270). There-
fore, today, whether the agency be for a civil or a commercial
purpose, it is now called a civil agency, and is governed by
the Civil Code.

(6) Characteristics
(a) Agency is a principal, nominate, bilateral, preparatory,
commutative, and generally onerous contract.

767
Art. 1868 CIVIL CODE OF THE PHILIPPINES

(b) Generally, it is also a representative relation, not a status

since agency is not inherent or permanent.
(c) It is a fiduciary relation since it is based on trust and
confidence. (See Severino v. Severino, 44 Phil. 343).

Philpotts v. Phil. Mfg. Co., et al.

40 Phil. 471

FACTS: W.G. Philpotts, a stockholder of the Philip-

pine Manufacturing Co., wanted to inspect the corporate
books thru his agent, but the Company refused, stating
that this right to inspect the books was purely personal,
and could not be exercised thru an agent. Philpotts pe-
titions for a writ of mandamus to compel the PMC to
show its books to his agent.
HELD: Mandamus can be issued, for the inspection
can be done thru an agent. This is in conformity with
the general rule that what a man may do in person, he
may do thru another. Nothing in the Corporation Law
is contrary to this general rule.
[NOTE: Some acts cannot however be made thru
an agent. An example is the making of a will, since this
is considered a strictly personal act under the law.]

(7) Parties to the Contract

The two parties to the contract are the principal and
the agent.
Definitions:
(a) Principal — he whom the agent represents and from
whom he derives authority; he is the one primarily
concerned in the contract. (Sec. 3, 2 C.J. 420).
(b) Agent — he who acts or stands for another. Usually, he
is given full or partial discretion, but sometimes he acts
under a specific command. (Bishop on Contracts, Sec.
1027).
(NOTE: He, therefore, acts in another’s name. If he
acts under another name, that is, if he pretends to be

768
CIVIL CODE OF THE PHILIPPINES Art. 1868

someone else, he is not an agent, for here he certainly

acts in his own name.)
(NOTE: An agent may have his own agent, who is
thus referred to as sub-agent.)

Gelano v. Court of Appeals

L-39050, Feb. 24, 1981
103 Phil. 90
The word “trustee” as used in the corporation
statute must be understood in the general concept, and
may include the attorney prosecuting the case filed by
the corporation.

(8) Capacity of the Principal

(a) In general, if he is capacitated to act for himself, he can
act thru an agent. He must, therefore, be capacitated to
give consent. (2 C.J. 429-430). If any special capacity is
needed, it is he who must possess it and not the agent,
for the latter merely acts in his behalf.
(b) The principal may be natural or a juridical person. (As
a matter of fact, a private corporation and a partnership
can only act thru agents.) (Mechem, p. 33).
(NOTE: A social club or any other organization
cannot act as a principal if it has no juridical personal-
ity. Individual members thereof can be bound only if an
express or implied agency has been consented to by each
of them.)
(c) Generally, an emancipated minor can be a principal. So
may a married woman. As a matter of fact, the husband
may appoint her as agent or administrator of his capi-
tal or of the conjugal partnership. Similarly, a married
woman may appoint her husband as an agent of her
paraphernal property.
(d) A husband, as administrator of the conjugal partnership
(Art. 165, Civil Code) is in that sense an agent who
can bind conjugal property, subject to legal restrictions,
such as those imposed by Art. 166, Civil Code. Thus, a
conveyance of conjugal real property without the needed

769
Art. 1868 CIVIL CODE OF THE PHILIPPINES

consent of the wife is VOIDABLE, and the wife is given

ten years within which to bring an action for annulment.
(Rodolfo Lanuza v. Martin de Leon, L-22331, Jun. 6,
1967). Ratification may of course be made by the wife.
(Ibid.)

(9) Capacity of an Agent

His capacity is in general the same as in the law of
contracts, that is, he must be able to bind himself, but only
insofar as his obligations to his principal are concerned. In-
sofar as third persons are concerned, however, it is enough
that his principal be the one capacitated, for generally an
agent assumes no personal liability. Usually, therefore, the
contract with a stranger is valid, even if the agent be a minor
so long as his principal was capacitated. However, as between
them (principal and agent), the minor-agent can set up his
incapacity, provided he is not in estoppel.

Mendoza v. De Guzman
33 O.G. 1505
FACTS: P appoints A, a minor, as his agent to sell certain
goods. A sells the goods to a buyer B. P afterwards seeks to
disaffirm the sale, and brings an action to recover the goods
on the ground that A’s act was void, as an infant cannot be
an agent. Judgment for whom and why?
HELD: Judgment should be for the buyer B and against
the principal P. The agent A is deemed to be an extension
of the personality of the principal, who himself is of legal
age. Hence, P cannot avoid the contract on the ground of the
agent’s incapacity.

Gelano v. Court of Appeals

L-39050, Feb. 24, 1981

A lawyer who has been defending the interests of a

corporation may, in the case of a litigation in court still
pending after the expiration of the three-year period after
dissolution, still continue as TRUSTEE of the corporation at
least with respects to the matter in litigation. This would
be in substantial compliance with the law which allows the

770
CIVIL CODE OF THE PHILIPPINES Art. 1868

conveyance of the properties of a corporation to a trustee

to enable it to prosecute and defend suits by or against the
corporation beyond the three-year period.

(10) Distinctions
(a) Agency from Partnership
An agent acts not for himself, but for his principal;
a partner acts for himself, for his firm, and for his part-
ners. It may even be said that partnership is a branch
of the law on agency.
(b) Agency from Loan
An agent may be given funds by the principal to
advance the latter’s business, while a borrower is given
money for purposes of his own, and he must generally
return it, whether or not his own business is successful.
A lot however depends on the intent of the parties. (2
CJS 1030).

Atcheson R. Co. v. Maber

23 Kan. 163

FACTS: A furnished B with money for current

expenses. B was obliged to render monthly accounts of
such expenses to A. It was also agreed that eventually
B would pay for them. B then obtained goods from C on
credit. Issue: May C sue A on the theory that A is B’s
principal, and that B is only an agent?
HELD: No, for it is clear that B was a borrower,
not an agent of A.
(c) Agency from Guardianship

AGENCY GUARDIANSHIP

1) The agent represents a 1) A guardian repre-

capacitated person. sents an incapaci-
tated person.

771
Art. 1868 CIVIL CODE OF THE PHILIPPINES

2) The agent is appointed 2) The guardian is ap-

by the principal and pointed by the court,
can be removed by the and stands in loco
latter. parentis.
3) The agent is subject 3) The guardian is NOT
to the directions of the subject to the direc-
principal. tions of the ward, but
must of course act for
the benefit of the lat-
ter.
4) The agent can make 4) The guardian has
the principal personally no power to impose
liable. personal liability on
the ward.

(See 2 Am. Jur. 15 and 18 Fessenden v. Jones, 52 N.C.

14).
(d) Agency from Judicial Administration

AGENCY JUDICIAL
ADMINISTRATION

1) Agent is appointed by 1) Judicial administrator

the principal. is appointed by the
court.
2) He represents the prin- 2) He represents not only
cipal. the court but also the
heir and creditors of
the estate.
3) Agent generally does 3) The administrator files
not file a bond. a bond.
4) Agent is controlled by 4) His acts are subject
the principal thru their to specific orders from
agreement. the court.

(See San Diego v. Nombre & Escamlar, L-19265, May 29,

1964).
772
CIVIL CODE OF THE PHILIPPINES Art. 1868

(e) Agency from Lease of Property

AGENCY LEASE OF PROPERTY

1) The agent is controlled 1) The lease is not con-

by the principal. trolled by the lessor.
2) The agency may involve 2) Obviously, a lease
things other than prop- of property involves
erty. property only.
3) The agent can bind the 3) The lessee, as such,
principal. cannot bind the lessor.

(See Mechem, p. 16; 2 C.J. 246).

Hawley v. Curry
74 Ill. A. 309

FACTS: A Bon was allowed by his father to use

the latter’s land and to make improvements on it. The
son was also authorized to get profits as a result of
whatever improvements may be introduced. One day,
the son purchased certain materials which he needed
for the improvements. Is the father liable?
HELD: The father is not liable, since he did not
constitute his son his agent. The relationship between
them insofar as the land is concerned is similar to that
of lessor and lessee, not that of principal and agent.

State v. Page
40 Am. D. 608

FACTS: A hotel and X entered into a contract which

allowed the latter to keep the hotel for 7 years. X was to
reside in the hotel with his family, but would be allowed
free rent and board. X’s duty was to run the hotel with
books of account subject to inspection by the board of
directors of the hotel. X was also authorized to hire a

773
Art. 1868 CIVIL CODE OF THE PHILIPPINES

bookkeeper, who however could be discharged by him, at

the instance of the board of directors. X was forbidden
to contract debts in behalf of the hotel without prior
permission from the hotel board. Issue: Is X a lessee or
an agent?
HELD: It is clear from the foregoing facts that X
is not a lessee. He is an agent, subject to the control of
the board of directors of the hotel.

(f) Agency from Lease of Services (or Master-Servant Rela-

tionship)

AGENCY LEASE OF SERVICES

1) Agent represents the 1) The worker or the les-

principal. sor of services does
not represent his em-
ployer.
2) Relationship can be 2) Generally, the rela-
terminated at the will tionship can be termi-
of either principal or nated only at the will
agent. of both.
3) Agent exercises discre- 3) The employee has min-
tionary powers. isterial functions.
4) Usually involves 3 per- 4) Usually involves only
sons: the principal, the two persons.
agent, and a stranger.

(See Mechem, p. 11).

(NOTE: It should be understood however that an

agent may incidentally render acts of service, while a
lessor of services or employee may incidentally make
contracts.)

774
CIVIL CODE OF THE PHILIPPINES Art. 1868

(g) Agency from a Contract with an Independent Contrac-

tor

AGENCY INDEPENDENT
CONTRACTOR

1) The agent acts under 1) The independent con-

the control of the prin- tractor is authorized
cipal. to do the work accord-
ing to his own method,
without being subject
to the other party’s
control, except inso-
far as the RESULT of
the work is concerned.
(Fressel v. Uy Chaco
and Sons, 34 Phil.
122).
2) The agent of the agent 2) The employees of the
may be controlled by contractor are not the
the principal. employees of the em-
ployer of the contrac-
tor. (Mechem, pp. 13-
14).
3) Agent can bind the 3) Ordinarily, the in-
principal. dependent contractor
cannot bind the em-
ployer by tort. (Mec-
hem, pp. 13-14).
4) The negligence of the 4) The negligence of the
agent is imputable to independent contrac-
the principal. (Shell Co. tor is generally not
v. Firemen’s Ins. Co., imputable to his em-
100 Phil. 757). ployer.

Shell Co. v. Firemen’s Ins. Co.

100 Phil. 757

FACTS: Operators of gasoline station owned by the

Shell Company sell only products of the company; use

775
Art. 1868 CIVIL CODE OF THE PHILIPPINES

company equipment lent to them; dispose of stock at

prices fixed by the company; are in fact appointed and
are removable by the company. If said operators by their
negligence cause damage to third parties, will the Shell
Company be liable?
HELD: Yes, for clearly, they are agents, not in-
dependent contractors. The negligence of an agent if
certainly imputable to the principal.

(h) Agency from Negotiorum Gestio

AGENCY NEGOTIORUM
GESTIO

1) There is a contract 1) This is only a quasi-

caused by a meeting of contract, there having
the minds, expressly or been no meeting of
impliedly. the minds. Hence, the
representation was not
agreed upon.
(NOTE: Once there is
an agreement or ratifi-
cation, there arises an
express agency.)
2) Agent is controlled by 2) The officious manager
the principal. follows his judgment
and the presumed will
of the owner.
(NOTE: The manager
is of course supposed
to act with due dili-
gence.)
3) The legal relation is 3) The legal relation is
created by the parties. created by the law (oc-
casioned of course by
the acts of the man-
ager).

776
CIVIL CODE OF THE PHILIPPINES Art. 1868

(i) Agency from Trust

AGENCY TRUST

1) Agent usually holds no 1) Trustee may hold legal

title at all. title to the property.
2) Usually, agent acts in 2) The trustee may act in
the name of the prin- his own name.
cipal.
3) Usually, agent may be 3) The trust is usually
terminated or revoked ended by the accom-
at any time. plishment of the pur-
poses for which it was
formed.
4) Agency may not be 4) Trust involves control
connected at all with over property.
property.
5) Agent has authority to 5) Trustee does not nec-
make contracts which essarily or even pos-
will be binding on his sess such authority to
principal. bind the trustor or the
cestui que trust.
6) Agency is really a con- 6) A trust may be the re-
tractual relation. sult of the contract or
not; it may be created
also by law.

(j) “Agency to Sell” from Sale

AGENCY TO SELL SALE

1) Ownership of the goods 1) Ownership is trans-

is not transferred to the ferred to the buyer
agent. (after delivery).
2) Here, the agent DELIV- 2) The buyer PAYS the
ERS the price. price.
(See Quiroga v. Parsons, 38
Phil. 501).

777
Art. 1868 CIVIL CODE OF THE PHILIPPINES

[NOTE: The mere testimony of the person who

drafted the contract that it was one of agency is of no
importance, for a contract is what the law defines it to
be, and not what it is called by the contracting parties.
(Quiroga v. Parsons, 38 Phil. 501).]

Quiroga v. Parsons Hardware Co.

38 Phil. 501
FACTS: Quiroga granted Parsons (in the Visayas)
exclusive right to sell “Quiroga” bed in the Visayas. Qui-
roga was to furnish beds to Parsons, and would demand
the price sixty days from shipment, minus a commission
or deduction of 25%. Parsons agreed not to sell any other
kind of bed, and to pay the price as agreed upon. Issue: Is
this a contract of agency to sell, or a contract of sale?
HELD: This is a contract of SALE. In order to
classify a contract, due regard must be given to its es-
sential clauses. In the contract in question, what was
essential, as constituting its cause and subject matter, is
that Quiroga was to furnish the Parsons with the beds,
which the latter might order at the price stipulated. The
price agreed upon was the one determined by Quiroga
with a certain discount. Payment was to be made at
the end of sixty days. These are precisely the essential
features of a contract of purchase and sale. There was
the obligation on the part of Quiroga to supply the beds,
and on the part of Parsons to pay their price. These
features exclude the legal conception of an agency or
order to sell whereby the mandatary or agent received
the thing to sell it, but does not pay its price. Instead,
he is supposed to deliver to the principal the price he
obtains from the sale of the thing to a third person, and
if he does not succeed in selling it, he returns it. By
virtue of the contract between Quiroga and Parsons, the
latter, on receiving the beds, was necessarily obliged to
pay their price within the term fixed, without any other
consideration, and regardless as to whether he had or
had not sold the beds.
[NOTE: If there is an agreement to return all unsold
goods, with no obligation to pay for them, this is not a

778
CIVIL CODE OF THE PHILIPPINES Art. 1868

sale, but an agency to sell or a contract of CONSIGN-

MENT. (Brown v. John Church Co., 55 Ill. App. 615).]
(k) “Agency to Buy” from Sale

SALE AGENCY TO BUY

1) The buyer acquires 1) The agent acquires

ownership for himself. ownership in behalf of
the principal.
2) The buyer who obtains 2) The agent must ac-
a discount does not count for all benefits
have to reveal such or discounts received
fact to its own buyer. from the seller.
(See Gonzalo Puyat
and Sons, Inc. v. Arco
Amusement Co., 72
Phil. 402).
3) The buyer pays the 3) The agent delivers the
price. price.

Gonzalo Puyat and Sons, Inc. v. Arco

Amusement Co.
72 Phil. 402
FACTS: Gonzalo Puyat and Sons was the exclu-
sive agent of an American Piano Company, the Starr
Piano Company of Richmond, Indiana, U.S.A. The Arco
Amusement entered into a contract with Puyat and Sons,
whereby the latter would order, on behalf of the Arco
Amusement Company, certain sound equipment. It was
also agreed that the company would pay Puyat and Sons
a 10% commission, plus all expenses.
Puyat and Sons cabled the U.S. company for the
price without discount. The price given was P1,700. Puyat
and Sons, with the approval of the Amusement Company,
placed the order when it came. Puyat and Sons received
P1,700 from the company plus 10%. Puyat and Sons
however did NOT reveal to the Amusement Company
that the former was always given a DISCOUNT by the

779
Art. 1868 CIVIL CODE OF THE PHILIPPINES

U.S. Company. When the amusement Company discov-

ered that the P1,700 was only the list price, and not the
net price, it sued Puyat and Sons for reimbursement of
the difference, on the ground that the latter was only
its AGENT in obtaining the equipment. Puyat and Sons
however countered that the contract was not an agency to
buy, but was one of sale. Issue: Is the contract between
them a sale, or an agency to buy?
HELD: The contract between them is a SALE, and
not an agency to buy; therefore, Puyat and Sons will not
be required to reimburse the difference. It is clear from
the facts that had there been a change of price upwards
or a mistake, Puyat and Sons would have been required
to give the equipment to the Arco Amusement Co. at
only the agreed amount of P1,700 plus 10%. It follows
therefore that Puyat and Sons could not have been an
agent of the Amusement Company, for a true agent is
entitled to indemnity for damages incurred in carrying
out the agency without fault, that Puyat and Sons was
to receive a 10% commission, this does not necessarily
make it an agent of the Amusement Company. The pro-
vision only meant that the Amusement Company bound
itself to pay an additional price. This stipulation is not
incompatible with the contract of purchase and sale.
Moreover, since it is an admitted fact that Puyat
and Sons was the agent of the U.S. Company, it is out
of the ordinary for it to be also the agent of the Amuse-
ment Company. Seldom is the seller also the agent of the
buyer.
(NOTE: A similar ruling was made in a WHISKY
transaction in Velasco v. Universal Trading Co., Inc., 45
O.G. 4504).

(11) ‘Agent’ and ‘Broker’ Distinguished

Manuel B. Tan, Gregg M. Tecson & Alexander

Saldaña v. Eduardo R. Gullas & Norma S. Gullas
GR 143978, Dec. 3, 2002
An agent receives a commission upon the successful
conclusion of a sale. Upon the other hand, a broker earns

780
CIVIL CODE OF THE PHILIPPINES Art. 1869

his pay merely by bringing the buyer and the seller together,
even if no sale is eventually made. (Alfred Hann v. CA &
Bayerische Motorer Worke Aktiengesellschaft [BMW], 266 SCRA
537 [1997]).
A broker is “one who is engaged, for others, on a com-
mission, negotiating contracts relative to property with the
custody of which he has no concern; the negotiator between
other parties, never acting in his own name but in the name
of those who employed him. A broker is one whose occupation
is to bring the parties together, in matters of trade, commerce,
or navigation.” (Schmid & Oberly v. RJL Martinez Fishing
Corp., 166 SCRA 493 [1988]).

Art. 1869. Agency may be express, or implied from the

acts of the principal, from his silence or lack of action, or
his failure to repudiate the agency, knowing that another
person is acting on his behalf without authority.
Agency may be oral, unless the law requires a specific
form.

COMMENT:
(1) Kinds of Agency According to Manner of Constitution
(a) express
(b) implied — from
1) acts of the principal;
2) principal’s silence;
3) principal’s lack of action;
4) principal’s failure to repudiate the agency.
(NOTE: In these cases of implied agency the prin-
cipal knows that another person is acting on his behalf
without authority.)

De la Peña v. Hidalgo
16 Phil. 450
FACTS: The properties of De la Peña were being
administered by his agent Federico Hidalgo, who, for
reasons of health, informed De la Peña that he (Fed-

781
Art. 1869 CIVIL CODE OF THE PHILIPPINES

erico) was turning over the administration to Antonio

Hidalgo. Federico also informed his principal that he
had conferred a general power of attorney on Antonio,
and requested that in case this would not be sufficient,
De la Peña could send to Antonio a new power of at-
torney. De la Peña did not repudiate the designation
of Antonio, nor did he appoint a new agent. Moreover,
he remained silent for 9 years, all the while allowing
Antonio to administer the property. Issue: Was Antonio
the agent of De la Peña?
HELD: Yes. From the facts given, this is a clear
case of an implied agency. In permitting Antonio to
administer, De la Peña created in Antonio’s favor an
implied agency.
(NOTE: In Gutierrez Hermanos v. Orense, 28 Phil.
571, it was held that if an owner of land testifies that he
consented to its sale by a hitherto unauthorized person,
such person becomes his agent. The principal now has
the duty of fulfilling the obligations contracted by the
agent in pursuit of such agency.)
(NOTE: In Soliman v. U.S. Life Ins. Co., L-11975,
Jun. 27, 1958, it was held that if an applicant for insur-
ance allows the insurance agent to answer some of the
blank spaces in the health certificate, and then signs the
same, he is responsible for the agent’s acts, the latter
having become his agent for that purpose.)

Lim v. People
L-34338, Nov. 21, 1984
P told A to surrender proceeds of the sale after A
has sold the tobacco. This is not a contract of sale, but
an agency to sell, with A as the agent.
The turnover of the proceeds to the principal must
be made immediately. The court need not fix a period
under Art. 1197 of the Civil Code for this case already
contains a definite period.

(2) Kinds of Agency According to Form

(a) Oral — (Generally, this is sufficient.)

782
CIVIL CODE OF THE PHILIPPINES Arts. 1870-1872

(b) Written
(NOTE: An example of an instance when the law
requires a specific form for the agency is in Art. 1874
which states that “when a sale of land or any interest
therein is through an agent, the authority of the latter
shall be in writing; otherwise, the sale shall be void.”)

Art. 1870. Acceptance by the agent may also be express,

or implied from his acts which carry out the agency, or from
his silence or inaction according to the circumstances.

COMMENT:
Express and Implied Agencies
The Article is self-explanatory.

Art. 1871. Between persons who are present, the ac-

ceptance of the agency may also be implied if the principal
delivers his power of attorney to the agent and the latter
receives it without any objection. (n)

COMMENT:

Another Form of Implied Agency

Note that here the persons are “present” — meaning
“face to face”, or conversing with each other thru mobile
cellphone.

Art. 1872. Between persons who are absent, the accept-

ance of the agency cannot be implied from the silence of
the agent except:
(1) When the principal transmits his power of attorney
to the agent, who receives it without any objection;
(2) When the principal entrusts to him by letter or
telegram a power of attorney with respect to the business
in which he is habitually engaged as an agent, and he did
not reply to the letter or telegram.

783
Art. 1873 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Rules if the Parties Are “Absent” (Not “Present”)
In No. (1) as distinguished from No. (2), just because
the offeree did not reply does not mean that the agency has
been accepted. For if this would be equivalent to implied ac-
ceptance, there would be no difference between No. (1) and
No. (2).
A good instance of implied acceptance in No. (1) would
be when the offeree writes a letter acknowledging the receipt
of the offer, but offers no objection to the agency. If he does
not write such a letter, it may be because he simply wants to
ignore the offer, or he may have forgotten about it, or he is
still undecided; hence, in this latter case, it would be unfair
to presume acceptance.
Another instance of implied acceptance is when the silent
offeree begins to act under the authority conferred upon him.
(George v. Sandel, 18 La. Ann. 535). Indeed, acceptance can be
implied from acts which carry out the agency. (Art. 1870).

Garvey v. Scott
9 Ill. A. 19

FACTS: A had a horse deposited with B. One day A

asked a friend C if C would take the horse from B and sell
it for him (A) — If A would write him (C) a letter to that
effect. C answered “yes.” Subsequently A wrote C to get the
horse from B and to sell it. C did not answer, but proceeded
to get the horse, and was subsequently able to sell it. Issue:
Did C act as A’s agent?
HELD: Yes, for the acceptance of the agency could clearly
be inferred from his acts.

Art. 1873. If a person specifically informs another or

states by public advertisement that he has given a power
of attorney to a third person, the latter thereby becomes
a duly authorized agent, in the former case with respect
to the person who received the special information, and in
the latter case with regard to any person.

784
CIVIL CODE OF THE PHILIPPINES Art. 1873

The power shall continue to be in full force until the

notice is rescinded in the same manner in which it was
given. (n)

COMMENT:
(1) Informing Other People of the Existence of the Agency
Two ways are given here:
(a) special information;
(b) public advertisement.

(2) Comment of Justice J.B.L. Reyes

To forestall fraud, the following paragraph must be added
to Art. 1873.
“But revocation made in any manner shall be effective
against all persons having actual knowledge thereof.” (Observa-
tions on the new Civil Code, 16 Lawyer’s Journal, p. 138).

(3) Problem
A company wrote a circular letter to its customers
introducing a certain X as its duly authorized agent. One
customer then dealt with the company thru X. One day, X’s
authority was revoked, but the customer continued to deal
thru X since it never was informed by circular or otherwise
of the revocation. Issue: Is the Company still liable for X’s
acts even after the revocation of the agency?
ANS.: Yes, for the customer was in good faith, not hav-
ing been informed by circular or otherwise, of the revocation.
(See Compania Gen. de Tabacos v. Diaba, 20 Phil. 321 and
Rallos v. Yangco, 20 Phil. 269).

(4) Agency by Estoppel

If A leads B to believe that C is his (A’s) agent, when
as a matter of fact such is not true, and B acts on such mis-
representation, A cannot disclaim liability, for he has created
an agency by estoppel.

785
Art. 1874 CIVIL CODE OF THE PHILIPPINES

Thus, our Supreme Court in Macke, et al. v. Camps, 7

Phil. 553, has said: “One who clothes another with appar-
ent authority as his agent, and holds him out to the public
as such, cannot be permitted to deny the authority of such
person to act as his agent, to the prejudice of innocent third
parties dealing with such person in good faith, and in the
honest belief that he is what he appears to be.”

(5) Agency by Estoppel Distinguished from Implied Agency

(a) As between the principal and the agent:
1) In an implied agency, the agent is a true agent,
with rights and duties of an agent.
2) In an agency by estoppel (caused for instance by
estoppel on the part of the agent), the “agent” is
not a true agent; hence he has no rights as such.
(See 2 C.J. 444-445).
(b) As to third persons:
1) If the estoppel is caused by the principal, he is
liable, but only if the third person acted on the
misrepresentation; in an implied agency, the prin-
cipal is always liable. (See 2 C.J. 444-445).
2) If the estoppel is caused by the agent, it is only the
agent who is liable, never the alleged principal; in
an implied agency, the agent is never personally
liable.

Art. 1874. When a sale of a piece of land or any inter-

est therein is through an agent, the authority of the latter
shall be in writing; otherwise, the sale shall be void.

COMMENT:
(1) Agency to Sell Land or Any Interest Therein
Note that this refers to the sale of a “piece of land or
any interest therein.” “Any interest therein” includes usuf-
ruct, easement, etc. Does it also include “buildings”? Strictly

786
CIVIL CODE OF THE PHILIPPINES Art. 1875

speaking it does not, but if this would be the construction, it

would follow that in an agency to sell a building, it does not
have to be in writing. Could this have been the intent of the
Code Commission?

(2) Effect if the Article is Violated

Note also that if Art. 1874 is violated, the sale is VOID,
not merely unenforceable. Therefore, the principal cannot tech-
nically RATIFY. If he does so, there should be no retroactive
effect.

Jimenez v. Rabat
38 Phil. 318
FACTS: A brother wrote his sister to sell his parcels of
land. The lands were purchased by a third person, but the
sister did not forward the money. The brother now wants to
recover the parcel of lands.
HELD: Since the agency was in writing, the sale is
VALID, hence the lands cannot be recovered. The letter was
sufficient authority.

Rosario S. Juat, et al. v. Land Tenure

Administration
L-17080, Jan. 28, 1961
Under Com. Act 539 the President is authorized to ac-
quire private lands and thereafter subdivide the same into
small lots for resale at reasonable prices to their bona fide
tenants or occupants. The act of the Secretary of Agriculture
and Natural Resources in making the sale has the same ef-
fect as if done by the President himself by virtue of the legal
truism that the acts of a department secretary are presumed
to be the acts of the Chief Executive. (See Villena v. Sec. of
Interior, 67 Phil. 461 and Donnelly v. Agregado, L-4510, May
31, 1954).

Art. 1875. Agency is presumed to be for a compensation,

unless there is proof to the contrary.

787
Art. 1875 CIVIL CODE OF THE PHILIPPINES

COMMENT:

(1) Agency Is Presumed to Be Onerous

Under the old Civil Code (Art. 1711), agency was presumed
to be gratuitous. In the present Code, agency is presumed to
be for a compensation.

(2) Form of Compensation

Compensation may be in the form of gratuitous use by
the agent of the principal’s real estate. (Acuña v. Larena, 57
Phil. 630). In the absence of stipulation, the agent is entitled
to compensation only after he has completely or substan-
tially completed his obligation as agent. (Arts. 1233, 1234).
The compensation may be contingent or dependent upon the
realization of profit for the principal. This is so in case there
is a stipulation to this effect.

Fiege and Brown v. Smith, Bell and

Co. and Cowper
43 Phil. 118

FACTS: Fiege and Brown acted as the agents of Smith,

Bell and Co., for the sale of machinery. It was agreed that the
agents were to receive one-half of the profits derived from the
sale of the machines. They were able to sell the goods, and
as soon as the customers’ contracts were signed the agents
demanded their 50% fee, although the buyers had not yet paid
for the machines. Issue: Were they entitled to their share as
soon as the properties were sold?
HELD: No, because the machines had not yet been paid
for. Said the court: “Until such time as the company made a
profit on a given contract, plaintiff’s commission was not earned
as to that contract. There was no profit thru the mere signing
of the contract by the purchaser and its acceptance by the
company. There would not be any profit until the purchaser
paid all the money and complied with his contract. Until such
time as the company realized a profit on the contract, there
was nothing to share or divide.”

788
CIVIL CODE OF THE PHILIPPINES Art. 1875

(3) Brokers
A broker is one who in behalf of others, and for a com-
mission or fee, negotiates contracts relative to property (with
the custody of which he has no concern). He is the negotiator
between parties, never acting in his own name, but in the
name of those who employ him; he is strictly a middleman,
and for some purposes, the agent of both parties. Indeed, he
is one whose occupation is to bring parties together to bar-
gain, or to bargain for them in matters of trade, commerce, or
navigation. (Behn, Meyer and Co., Ltd. v. Nolting and Garcia,
35 Phil. 274 [1916].)
Although a broker is an agent, he is distinguishable from
an agent generally by reason of the fact that his authority is of
a special and limited character in most respects. As to physical
activities, he is an independent contractor. (8 Am. Jur. 991).

(4) Compensation of Brokers

(a) Since his only job is to bring together the parties to a
transaction (Pac. Com. Co. v. Yatco, 68 Phil. 398), it fol-
lows that if the broker does not succeed in bringing the
mind of the purchaser and the vendor to an agreement
with reference to the terms of a sale, he is not entitled to
a commission. (Rocha v. Prats and Co., 43 Phil. 397).
(b) The doctrine stated above is true even if the sale can
later on be effected between buyer and seller, BUT thru
a DIFFERENT broker. The first broker can be called
UNSUCCESSFUL even if it was he who first interested
the purchaser in the sale, negotiated with him, and
even indirectly influenced him to come to terms. The
fact remains that he did not succeed in bringing about
the sale. It was the second broker that accomplished
the sale. (Quijano v. Esguerra, et al., 40 O.G. [11th S.]
p. 166). Even if no subsequent broker had intervened,
still if authority of the first broker had already been
withdrawn prior to the sale, such broker is not entitled
to any fee. (See Reyes, et al. v. Mosqueda, et al., 53 O.G.
2158, L-8669, May 25, 1956).
(c) So long as the sale is pushed thru, the broker is entitled
to a commission, even if the sale had been temporarily

789
Art. 1875 CIVIL CODE OF THE PHILIPPINES

delayed due to the principal’s lack of tact. The important

thing is that the sale really eventually was entered into.
(Ysmael and Co., Inc. v. William Lines, Inc., L-9614,
May 12, 1952). Indeed, a broker should not be made to
suffer for the consequences of the principal’s lack of tact
in handling a delicate situation. (Ibid.).
(d) A broker, however, is not entitled to recover his expenses
during the negotiations for the sale, such expenses hav-
ing been incurred at his own risk, and in consideration
of the commission agreed upon. (Ysmael and Co., Inc.
v. William Lines, Inc., L-9614, May 12, 1952).

Reyes, et al. v. Mosqueda and the Court

of Appeals
L-8699, May 25, 1956, 53 O.G. 2158

FACTS: Mosqueda authorized a certain Mrs. Reyes

to sell his land for P7.50 a square meter, promising to
give her a 5% commission. Reyes found a buyer (Lim)
who wanted to pay only P7.30 per square meter, but
Mosqueda refused to sell at this price. He then wanted
to withdraw the authority, but Reyes asked for one more
day to find another buyer. This request was granted, but
when Reyes failed to find another buyer the next day,
Mosqueda informed her that he was cancelling her au-
thority to look for a buyer. Subsequently, Lim contacted
Mosqueda personally, and the two were able to agree on
the sale. When Reyes learned of this she asked Mosqueda
for her 5% commission, on the ground that the sale had
been perfected thru her efforts. Mosqueda refused to pay.
Hence, this action was instituted by Reyes.
HELD: Reyes is not entitled to any commission,
for the actual sale was made without her intervention.
Furthermore her authority to sell had already been with-
drawn prior to the sale. It is true that there are times
when the principal cannot revoke the authority given
to a broker, as when the negotiations thru the broker’s
efforts have reached such a stage that it would be unfair
to deny the commission earned. This is especially true
when the property owner acts in bad faith, and revokes

790
CIVIL CODE OF THE PHILIPPINES Art. 1875

the authority only to evade the payment of the commis-

sion. In this case, however, Mosqueda did not act in bad
faith in cancelling the authority to Reyes.
[NOTE: If the principal breaks off from negotiations
with a buyer brought by the agent in order to deliberately
deal later with the buyer personally, this is evident bad
faith. In such a case, justice demands compensation for
the agent. (See Infante v. Cunanan, et al., 93 Phil. 691
and Perez de Tagle v. Luzon Surety Co., C.A., 38 O.G.
1213).]

Perez de Tagle v. Luzon Surety Co.

(C.A.) 38 O.G. 1213

FACTS: The Luzon Surety Co. wanted to sell in

Ermita, Manila, a house and lot for P15,000. Tagle, a
licensed real estate broker, asked the Company if it was
willing to pay a commission of 5%. The Company sug-
gested that Tagle first find a buyer, and then make an
offer stating his (Tagle’s) fees. Tagle found a prospective
buyer, one Rodriquez. Rodriquez signed a letter prepared
by Tagle, offering to pay P14,000. Tagle delivered this
offer to the Company and asked for a 5% commission.
The Company then promised to take up the matter with
its Board of Directors. Finally, Tagle was informed that
the buyer’s offer was REJECTED by the Company. Sub-
sequently, however, Tagle discovered that the Company
had dealt with Rodriquez personally, and had accepted
the latter’s offer (with the same terms and conditions as
those made thru Tagle). Tagle wanted to get his com-
mission, but the Company refused. Hence, this action
was brought.
HELD: Tagle is entitled to the 5% usual commission,
which incidentally is the amount he has demanded for
his services. It is evident under the facts that Tagle’s
service were taken advantage of by the Company, and
it cannot now justly refuse to compensate him.
(NOTE: The court cited the rule that “a broker is
entitled to a commission on a sale effected by the owner
to the person produced by the broker after the breaking

791
Arts. 1876-1877 CIVIL CODE OF THE PHILIPPINES

of the original negotiations, if the breaking up was a

mere subterfuge, and the sale was in fact brought about
by what the broker had done.”)
[NOTE HOWEVER that “where the person intro-
duced by the broker is not able, ready, and willing to
buy on the terms prescribed by the owner, the broker
is not entitled to compensation on a sale subsequently
made on those terms by the principal to the same person
thru another broker.” (Quijano v. Esguerra, 40 O.G. 11th
Supp. 166).]

Art. 1876. An agency is either general or special.

The former comprises all the business of the principal.
The latter, one or more specific transactions.

COMMENT:
General and Special Agencies
(a) The distinction here depends on the EXTENT of the
business covered.
(b) In a sense, the more special the power is, the more
specific it is.

PROBLEM:
Question: Absent substantial evidence to show a
special agent’s authority from his principal to give con-
sent to the creation of a tenancy relationship, can the
former’s actions give rise to an implied tenancy?
Answer: No. (Dionisia L. Reyes v. Ricardo L. Reyes,
et al., GR 140164, Sept. 6, 2002).

Art. 1877. An agency couched in general terms com-

prises only acts of administration, even if the principal
should state that he withholds no power or that the agent
may execute such acts as he may consider appropriate, or
even though the agency should authorize a general and
unlimited management.

792
CIVIL CODE OF THE PHILIPPINES Art. 1877

COMMENT:
(1) Agency Couched in General Terms and in Special
Terms
According to the POWER or AUTHORITY conferred, the
agency may be:
(a) couched in general terms (Art. 1877);
(b) or couched in specific terms (special power of attorney).
(Art. 1878). (Here what is important is the nature of the
juridical act.) (11 Manresa 466).

(2) Observation
A general agency may be:
(a) couched in general terms;
(b) or couched in specific terms.
A special agency may be:
(a) couched in general terms;
(b) or couched in specific terms.
[NOTE: An agency couched in general terms comprises
only ACTS OF ADMINISTRATION (even if the management
be apparently unlimited, and even if the principal states that
he withholds no power from the agent).]

(3) Example
Conchita made Sonia her agent in this manner:
“I make you my agent for all my properties. I withhold
no power from you. You may execute such acts as you may
consider appropriate. You are hereby given general and un-
limited management.”
(a) May Sonia compromise in behalf of Conchita?
ANS.: No.
(b) May Sonia accept or repudiate an inheritance for Con-
chita?
ANS.: No.

793
Art. 1878 CIVIL CODE OF THE PHILIPPINES

(c) May Sonia sell or mortgage Conchita’s lands?

ANS.: No.
Reason for all the answers: These are acts of strict
dominion, not mere acts of administration. To do the acts
above-mentioned, an agency couched in general terms is
not sufficient; special powers of attorney are needed.
(NOTE: A power given to an agent to sell ALL of
the properties of the principal is NOT an agency couched
in general terms; it is a special power of attorney.)

(4) Examples of Acts of Mere Administration

(a) To sue for the collection of debts. (Germane and Co. v.
Donaldson, Sim and Co., 1 Phil. 63)
(b) To employ workers or servants and employees needed
for the conduct of a business. (Yu Chuck v. Kong Li Po,
46 Phil. 608).
(c) To engage counsel to preserve the ownership and pos-
session of the principal’s property. (Gov’t. v. Wagner, 54
Phil. 132).
(d) To lease real property to another person for one year or
less, provided the lease is not registered. (See Art. 1878,
No. 8 by implication).
(e) To make customary gifts for charity or to employees in the
business managed by the agent. (See Art. 1878, No. 6).
(f) To borrow money if it be urgent and indispensable for
the preservation of the things under administration. (See
Art. 1878, No. 7).
(NOTE: In order to SELL, an agent must have a
special power of attorney, unless the act of selling itself
is part of ADMINISTRATION, as in the case of the sale
of goods in a retail store.)

Art. 1878. Special power of attorney are necessary in

the following cases:
(1) To make such payments as are not usually consid-
ered as acts of administration;

794
CIVIL CODE OF THE PHILIPPINES Art. 1878

(2) To effect novations which put an end to obligations

already in existence at the time the agency was constituted;
(3) To compromise, to submit questions to arbitra-
tion, to renounce the right to appeal from a judgment, to
waive objections to the venue of an action or to abandon
a prescription already acquired;
(4) To waive any obligation gratuitously;
(5) To enter into any contract by which the ownership
of an immovable is transmitted or acquired either gratui-
tously or for a valuable consideration;
(6) To make gifts, except customary ones for charity
or those made to employees in the business managed by
the agent;
(7) To loan or borrow money, unless the latter act be
urgent and indispensable for the preservation of the things
which are under administration;
(8) To lease any real property to another person for
more than one year;
(9) To bind the principal to render some service with-
out compensation;
(10) To bind the principal in a contract of partnership;
(11) To obligate the principal as a guarantor or surety;
(12) To create or convey real rights over immovable
property;
(13) To accept or repudiate an inheritance;
(14) To ratify or recognize obligations contracted before
the agency;
(15) Any other act of strict dominion.

COMMENT:
(1) When Special Powers of Attorney Are Needed
According to Justice J.B.L. Reyes, the acts referred to
in this article can be reduced to three:

795
Art. 1878 CIVIL CODE OF THE PHILIPPINES

(a) acts of strict dominion or ownership (as distinguished

from acts of mere administration)
(b) gratuitous contracts
(c) contracts where personal trust or confidence is of the
essence of the agreement. (J.B.L. Reyes, Observations
on the new Civil Code, 16 L.J. 138).

PNB v. CA
70 SCAD 37
1996
Where payment has been made to an agent, aside
from proving the existence of a Special Power of At-
torney, it is also necessary for evidence to be presented
regarding the nature and extent of the alleged powers
and authority granted to the agent.

(2) Reason for the Rule

In the cases enumerated under this article, we have in
general acts of strict ownership or dominion, and not mere
acts of administration, hence the necessity of special powers
of attorney except in the cases expressly so mentioned.

(3) Meaning of “Special Powers of Attorney”

This refers to a clear mandate (express or implied) spe-
cifically authorizing the performance of the act, and must
therefore be distinguished from an agency couched in general
terms. (See Strong v. Repide, 6 Phil. 680). A general power of
attorney may however include a special power if such special
power is mentioned or referred to in the general power, e.g.,
“I authorize you to sell ALL my properties.” (This does not
need a special power to sell for each property involved, since
such special power has already been given.
[NOTE: In general, the execution of a power of attorney
does not need the intervention of any notary public. (Barretto
v. Tuason, 59 Phil. 845).]

(4) Re Paragraph 1
Note that if the payment is usually considered an act
of administration, no, special power of attorney is needed. It

796
CIVIL CODE OF THE PHILIPPINES Art. 1878

should be noted, however, that some acts of administration

carry with them the exercise of acts of dominion, e.g., the
sale by an administrator of fertile land or the products of the
land. (See 11 Manresa 469-470).

Dominion Insurance Corp. v.

CA, Rodolfo S. Guevarra & Fernando Austria
GR 129919, Feb. 6, 2002

FACTS: The instruction of petitioner as principal could

not be any clearer. Respondent Guevarra was authorized to
pay the claim of the insured, but payment shall come from
the revolving fund or collection in his possession.
Issue: Is the payment of claims an act of administra-
tion?
HELD: No. The settlement of claims is not included among
the acts enumerated in the Special Power of Attorney (SPA)
under Art. 1878; neither is it of a character similar to acts
enumerated therein. Under said Art. 1878, special power of
attorney are necessary in the following cases including, inter
alia: to make such payments as are not usually considered as
acts of administration, or any other act of strict dominion.
An SPA is required before respondent Guevarra could set-
tle the insurance claims of the insured. Guevarra’s authority to
settle claims is embodied in the Memorandum of Management
Agreement dated Feb. 18, 1987 which enumerates the scope
of Guevarra’s duties and responsibilities as agency manager
for San Fernando, Pampanga. In settling the claims, respond-
ent Guevarra’s authority is limited by the written standard
authority to pay, which provides that payment shall come
from respondent Guevarra’s revolving fund or collection.
By the contract of agency, a person binds himself to
render some service or to do something in representation or
on behalf of another, with the consent or authority of the
latter. (Art. 1869). The basis for agency is representation.
(Bordador v. Luz, 347 SCRA 154 [1997]). On the part of the
principal, there must be an actual intention to appoint or an
intention naturally inferable from his words or actions. On

797
Art. 1878 CIVIL CODE OF THE PHILIPPINES

the part of the agent, there must be an intention to accept

the appointment and act on it, and in the absence of such
intent, there is generally no agency. (Victorias Milling Co.,
Inc. v. CA, 333 SCRA 663 [2000]). A perusal of the SPA would
show that petitioner (represented by third-party defendant
[Austria] and respondent by Guevarra intended to enter into
a principal-agent relationship. Despite the word “special” in
the title of the document, the contents reveal that what was
constituted was actually a general agency.)
Agency comprises all the business of the principal (Art.
1876), but, couched in general terms, it is limited only to
acts of administrations. (Art. 1877). A general power permits
the agent to do all acts for which the law does not require a
special power. Thus, the acts enumerated in the Special Power
of Attorney cited in the case at bar, do not require a SPA. As
already alluded to, Art. 1878 enumerates the instances when
an SPA is required.

(5) Re Paragraph 2
Note here that the obligations must already be in exist-
ence at the time of the constitution of the agency.

(6) Re Paragraph 3
Note that there are five (5) different powers mentioned
here. A right given regarding one is not enough to grant the
others.

(7) Re Paragraph 4
This is similar to a donation or remission.

(8) Re Paragraph 5
Note that this refers only to immovables. (Examples: To
sell or to buy land.) Note the use of the term “transmitted”
or “acquired.”
Under paragraph 15, however, generally the sale or pur-
chase of personal property should also be covered by a special
power of attorney, since this is an act of strict dominion.

798
CIVIL CODE OF THE PHILIPPINES Art. 1878

B.H. Macke, et al. v. Camps

7 Phil. 553

FACTS: Camps, the owner of the Washington Café,

left Mr. Flores in charge as managing agent of the Café. As
manager, Flores purchased goods for the Café from Macke,
et al. Is Camps liable for the purchase price of the goods.
HELD: Yes. Flores, as managing agent of the Washing-
ton Café, had authority to buy such reasonable quantities of
supplies as might from time to time be necessary in carrying
on the business of the Café.

Scope of Authority to Purchase:

Where an agent’s power to purchase is general and unre-
stricted, he has implied authority to do whatever is usual and
necessary in the exercise of such power. He may determine
the usual and necessary details of the contract, agree upon
the price, modify or rescind the contract of purchase, accept
delivery for his principal, give directions for the delivery of
the property purchased, and may borrow money to pay for
the care and preservation of the property purchased (Art.
1878, par. 7); but he has NO special power to settle a contest
between his principal and a third person as to the ownership
of the goods purchased, or to agree to an account stated, or to
do anything not usual and necessary to the exercise of such
authority.
Where the agency is a special one, or is restricted to
purchases upon certain terms and conditions, the agent has
no authority to purchase upon different terms and conditions
from those authorized or to modify or rescind a contract of
purchase made by the principal. (2 C.J. 588-590).

(9) Re Paragraph 6
The making of customary gifts is considered here as an
act of administration only.
(10) Re Paragraph 7
Note that the exception here refers to the latter act,
namely, “borrow,” not “loan.”

799
Art. 1878 CIVIL CODE OF THE PHILIPPINES

Rural Bank of Caloocan v. Court of Appeals

L-32116, Apr. 21, 1981

For a person to be able to borrow money in behalf of

another, the latter must give him a special power of attorney.
If the would-be borrower gets the loan, the same cannot be
regarded as having been made thru an agent.

(11) Re Paragraph 8
Note here that the lease of real property is referred to,
and not the lease of personal property. Note also that if the
lease of the real property is for one year or less, the act is
one of mere administration.

(12) Re Paragraph 9
Reason: Here the contract is gratuitous.

(13) Re Paragraph 10
Reason: The principal has to personally have trust and
confidence in the proposed partners.

(14) Re Paragraph 11

Director of Public Works v. Sing Juco, et al.

53 Phil. 205

FACTS: Tan Ong Sze gave a power of attorney to Mariano

de la Rama to sell or to lease her property and generally “to
perform and execute all and every lawful and reasonable act
as fully and effectually as I might or could do if personally
present.” With the authorization, Rama signed in behalf of
his principal a security bond in favor of the government in
connection with the purchase of certain materials dredged
from a fish pond. When the buyer failed to pay suit was in-
stituted against Tan Ong Sze on the strength of the contract
of suretyship (security bond). Tan contended that she was
NOT bound by such contract.
HELD: Tan is NOT bound, for the power of attorney given
De la Rama did not authorize him to create an obligation in

800
CIVIL CODE OF THE PHILIPPINES Art. 1878

the nature of surety binding on his principal. The power to

execute a contract of so exceptional a nature as a contract of
suretyship or guaranty cannot be inferred from the general
words contained in Rama’s power of attorney.

Bank of the Phil. Islands v. De Coster

47 Phil. 594

FACTS: A businesswoman authorized her husband to

“loan or borrow any sum of money or fungible things at the
rate of interest and for the time and under the conditions
which he might deem convenient.” Later the husband mort-
gaged his wife’s property as security for HIS own personal
debt. Was he authorized to do so?
HELD: No, for it is evident from the face of the instru-
ment that the whole purpose of the power of attorney was to
authorize the husband to look after the interest of his wife
and the business, and not for his own interest.

(15) Re Paragraph 12
Examples: to mortgage, to create an easement.

(16) Cases

Domingo Lao v. Estrella Villones-Lao

GR 126777, 106 SCRA 42
Apr. 29, 1999

A special power of attorney cannot be the basis of a valid

mortgage contract.

Guillermo Adriano v. Romulo Pangilinan

GR 137471, Jan. 16, 2002

FACTS: Petitioner entrusted and delivered his TCT

and Residence Certificate (now known as “Community Tax
Certificate”) to Angelina Salvador, but only for the purpose of
helping him find a money lender. No power of attorney was
made giving her authority to act on his behalf in procuring
the mortgage.

801
Art. 1879 CIVIL CODE OF THE PHILIPPINES

HELD: Not having executed a power of attorney in her

favor, petitioner clearly did not authorize her to be his agent
in procuring the mortgage. He only asked her to look for pos-
sible money lenders.

Manuel B. Tan, et al. v.

Eduardo R. Gullas & Norma S. Gullas
GR 143978, Dec. 3, 2002
FACTS: Following the stipulation in the Special Power
of Attorney, petitioners contends they are entitled to a 3%
commission for the sale of the land in question. Petitioners
maintain that their commission should be based on the price
at which the land was offered for sale, i.e., P530 per square
meter. Issue: How much commission are petitioners entitled
to?
HELD: The actual purchase price for which the land was
sold was only P200 per sq.m. Therefore, equity be based on
this price. To rule otherwise would constitute unjust enrich-
ment on the part of the petitioners as brokers.
Petitioners, as brokers, should be entitled to the commis-
sion whether or not the sale of the property subject matter of
the contract was concluded three thru their efforts, although
there was no dispute as to the role that petitioners played in
the transaction. At the very least, petitioners set the sale in
motion. They were not able to participate in its consumma-
tion only because they were prevented from doing so by the
arts of private respondents.

Naawan Community Rural Bank, Inc. v.

CA & Spouses Alfredo and Annabelle Lumo
GR 128573, Jan. 13, 2003
A special power of attorney (SPA) may be executed in
favor of an agent authorizing him to borrow money and use
of subject lot as security.

Art. 1879. A special power to sell excludes the power

to mortgage, and a special power to mortgage does not
include the power to sell.

802
CIVIL CODE OF THE PHILIPPINES Art. 1879

COMMENT:
(1) Power to SELL
The power to sell carries with it the:
(a) power to find a purchaser or to sell directly;
(b) power to deliver the property;
(c) power to make the usual representation and warranty;
(d) power to execute the necessary transfer documents (like
the execution of the contract itself of sale) (Robinson,
Fleming & Co. v. Cruz & Tan Chong Say, 49 Phil. 42;
2 Am. Jur. 97-98);
(e) power to fix the terms of the sale, including the time,
place, mode of delivery, price of the goods, and the mode
of payment unless there be set conditions stipulated by
the principal (2 Am. Jur. 98-99);
(f) power to sell only for CASH:
(In the absence of special authority, mere authority
to sell does not give the agent authority to sell on credit.
See Art. 1905 of the Civil Code, which reads:
“The commission agent cannot without the express
or implied consent of the principal, sell on credit. Should
he do so, the principal may demand from him payment in
cash, but the commission agent shall be entitled to any
interest or benefit which may result from such sale.”
(g) power to receive the price, unless he was authorized only
to solicit orders. (2 C.J. 605-607).
[NOTE: “Where payments are made over the coun-
ter of the principal’s store to a salesman accustomed
to receive money there for his employer, authority to
receive payment will be implied in favor of innocent
persons, because the principal by his own act gives the
agent apparent authority to receive payment. But if a
salesman authorized to receive money over the counter
only receives money elsewhere than in the shop, the
payment is not good.” (See 2 C.J. 605-607).]
[NOTE: The power to sell DOES NOT carry with
it the power:

803
Art. 1879 CIVIL CODE OF THE PHILIPPINES

1) to barter or to exchange;
2) to mortgage or to pledge. (See Art. 1879 and 2 Am.
Jur. 98).]

(2) Power to MORTGAGE

The power to mortgage does not include the power:
(a) to sell (Art. 1879);
(b) or to execute a second mortgage (Skaggs v. Murchison,
63 Tex. 348);
(c) to mortgage for the agent’s personal benefit or for the
benefit of any third person, unless contrary has been
clearly indicated. (2 C.J. 651).
Ordinarily, the mortgage can be made only on the
present property of the principal, and not on hereafter
acquired property (acquired after the execution of the
power of attorney) but the contrary can be stipulated
upon. It is essential, however, that at the time of the
execution of the mortgage itself, the principal must al-
ready be the owner; otherwise, the mortgage is VOID.
(Art. 2085 and See C.J. 651).

(3) Jurisprudence

Bicol Savings and Loan Association

v. CA, et al.
GR 85302, Mar. 31, 1989
The pivotal issue is the validity of the extrajudicial
foreclosure sale of the mortgaged property instituted by pe-
titioner bank which, in turn, hinges on whether or not the
agent-son exceeded the scope of his authority in agreeing to
a stipulation in the mortgage deed that petitioner bank could
extrajudicially foreclose the mortgaged property.
The sale proscribed by a special power to mortgage under
Art. 1879 is a voluntary and independent contract, and not
an auction sale resulting from extrajudicial foreclosure, which
is precipitated by the default of a mortgagor. Absent that
default, no foreclosure results. The stipulation granting an
authority to extrajudicially foreclose a mortgage is an ancil-

804
CIVIL CODE OF THE PHILIPPINES Art. 1880

lary stipulation supported by the same cause or consideration

for the mortgage and forms an essential or inseparable part
of that bilateral agreement. The power to foreclose is not an
ordinary agency that contemplates exclusively the representa-
tion of the principal by the agent but is primarily an authority
conferred upon the mortgagee for the latter’s own protection.
That power survives the death of the mortgagor. In fact, the
right of the mortgagee bank to extrajudicially foreclose the
mortgage after the death of the mortgagor, acting through
his attorney-in-fact, did not depend on the authorization in
the deed of mortgage executed by the latter.
The right existed independently of said stipulation and
is clearly recognized in Sec. 7, Rule 86 of the Rules of Court,
which grants to a mortgagee three (3) remedies that can be
alternatively pursued in case the mortgagor dies, to wit: (1) to
waive the mortgage and claim the entire debt from the estate
of the mortgagor as an ordinary claim; (2) to foreclose the
mortgage judicially and prove any deficiency as an ordinary
claim; and (3) to rely on the mortgage exclusively, foreclos-
ing the same at any time before it is barred by prescription,
without right to file a claim for any deficiency. It matters not
that the authority to extrajudicially foreclose was granted
by an attorney-in-fact and not by the mortgagor personally.
The stipulation in that regard, although ancillary, forms an
essential part of the mortgage contract and is inseparable
therefrom. No creditor will agree to enter into a mortgage
contract without that stipulation intended for its protection.
Petitioner bank, therefore, in effecting the extrajudicial fore-
closure of the mortgaged property, merely availed of a right
conferred by law. The auction sale that followed in the wake
of that foreclosure was but a consequence thereof.

Art. 1880. A special power to compromise does not

authorize submission to arbitration.

COMMENT:
(1) Special Power to Compromise
(a) An agent authorized to compromise can do anything which
the principal himself can do to effect a settlement (See 2

805
Art. 1881 CIVIL CODE OF THE PHILIPPINES

C.J. 652-653) unless there is a contrary legal provision,

as in this Article.
(b) A special power to submit to arbitration does not author-
ize the power to compromise. This is the logical inference
that can be made from Art. 1880.

(2) Reason for the Article

Reason why a special power to compromise does not
authorize submission to arbitration.
A principal may authorize his agent to compromise
because of absolute confidence in the latter’s judgment and
discretion to protect the former’s rights and obtain for him
the best bargain in the transaction. If the transaction would
be left in the hands of an arbitrator, said arbitrator may
not enjoy the trust of the principal. A fundamental principle
of agency shall have been violated, namely, that an agent
must possess the trust and confidence of the principal. (See
11 Manresa 471).

(3) Special Power to Submit to Arbitration

When an agent is specifically empowered to submit a
matter to arbitration, the arbitral award binds the principal,
provided the agent acted within the scope of his authority.
In the case of Cox v. Fay, 54 Vt. 446, it was held that if the
principal had specifically designated who the arbitrators should
be, the agent has no authority to submit the question to other
arbitrators. However, when no designation had been made by
the principal and on the contrary the agent was authorized
to submit the controversy to ANYONE, it was held that the
agent could agree to an arrangement for the appointment of
ADDITIONAL arbitrators; moreover, it would be permissible
for the agent to agree that an award could be validly made
by LESS than the FULL number of the arbitrators selected.
(See Security Livestock Ins. Ass’n. v. Brigg, 22 Ill. A. 107).

Art. 1881. The agent must act within the scope of his
authority. He may do such acts as may be conducive to the
accomplishment of the purpose of the agency.

806
CIVIL CODE OF THE PHILIPPINES Art. 1881

COMMENT:
(1) Fundamental Principles of Agency
There are two very important principles of a true agency:
(a) The agent must act within the scope of his authority.
(b) The agent must act in behalf of his principal.
[NOTE: It is therefore conceivable that an agent may
act under the 2 conditions given, or under only one of
them, or under neither. Thus, four instances may arise:
1) The agent acts with authority and in behalf of the
principal.
2) The agent acts with authority but in behalf of him-
self (not the principal).
3) The “agent” acts without authority but in behalf of
a “principal.”
4) The “agent” acts without authority and in his own
behalf (not a “principal”).]
[NOTE: In (3) and (4), “agent” and “principal”
are in quotation marks because they are NOT really
such.]

(2) Effects
(a) WITH AUTHORITY:
1) In PRINCIPAL’S behalf — VALID (principal is
bound; agent not personally liable unless he bound
himself). (Art. 1897 and Macias & Co. v. Warner,
Barnes and Co., 43 Phil. 155).
2) In AGENT’S behalf — APPLY Art. 1883 (generally
not binding on principal; agent and stranger are the
only parties, except regarding things belonging to
the principal). (Smith, Bell & Co. v. Sotelo Matti,
44 Phil. 874).
(b) WITHOUT AUTHORITY:
1) In “PRINCIPAL’S” behalf — UNAUTHORIZED AND
UNENFORCEABLE (Art. 1403, No. 1) but may be

807
Art. 1881 CIVIL CODE OF THE PHILIPPINES

RATIFIED, in which case it may be validated from

the very beginning. (Art. 1407).
2) In “AGENT’S” behalf — VALID, whether or not
the subject matter belongs to the principal, pro-
vided that at the time delivery is to be made, the
“agent” can transfer legally the ownership of the
thing. Otherwise, he will be held liable for breach
of warranty against eviction. Art. 1883 does NOT
apply. (Nat. Bank v. Agudelo, 58 Phil. 655).

(3) Illustrative Examples

(a) With Authority and in Principal’s Behalf:
P authorized A to sell his (P’s) car. A then sold the
car in P’s name. The transaction is VALID. A assumes
no personal liability. (See Lorca v. Dineros, L-10919, Feb.
28, 1958).
(b) With Authority but in Agent’s Behalf:
P authorized A to sell his (P’s) car. A then sold
the car in his (A’s) own name, without disclosing who
the principal was. Ordinarily, the agent can only have
recourse against the buyer, and the buyer can have
recourse only against the agent under Art. 1883. HOW-
EVER, in this particular case, since the car belonged to
the principal, P can have recourse against the buyer and
the buyer can have recourse against P. (See exception in
the second paragraph of Art. 1883.)

THE TRUE EXAMPLE IS GIVEN HEREUNDER:

If P authorized A to find for him (P) a singing en-
gagement at the Manila Grand Opera House, and A acts
in his own (A’s) behalf, that is, A wanted to sing, and he
got the job, only A and the Opera House would be bound
to each other. This example clearly illustrates the general
rule referred to in the second paragraph of Art. 1883.
(c) Without Authority but in “Principal’s” Behalf:
Without P’s authority, A sold P’s car to a buyer in
P’s behalf. The transaction, insofar as P is concerned is

808
CIVIL CODE OF THE PHILIPPINES Art. 1881

unauthorized, hence unenforceable. (Art. 1403, No. 1). P

is therefore not bound, unless he ratifies the transaction.
Without the necessary ratification, the buyer can have
a claim only against the alleged agent A. The moment
a ratification is made, A steps out of the picture, since
he would no longer be personally liable, and now it is
P who will have to deal with the buyer.
(d) Without Authority and in “Agent’s” Behalf:
A, without authority from P, and representing
himself to be the owner of P’s car, sold it to a buyer.
Here, A acted without authority. Moreover, he acted in
his own behalf. It is clear that the transaction (sale) is
valid, provided that at the time delivery is to be made,
the “agent” can transfer legally the ownership of the
thing. Otherwise, he will be held liable for breach of
warranty against eviction. It is also clear that only A
is liable to an innocent purchaser. Here, Art. 1883 does
NOT apply because Art. 1883 presupposes AUTHORITY.
(See Nat. Bank v. Agudelo, 58 Phil. 655).

(4) Authority Discussed

(a) Authority defined. The right of the agent to effect the
legal relations of his principal by the performance of acts
effectuated in accordance with the principal’s manifesta-
tion of consent.
(b) Kinds of Authority:
1) express (here, the authority is clearly defined)
2) implied (this includes necessary acts to accomplish
the purpose)
3) general (the agent’s discretion is COMPLETE)
4) special (here, particular instructions are given)
5) apparent (here, the “agent” or a third person was
led by the principal’s conduct or words to believe
that the “agent” was really authorized, when in fact
he was not. The effect here is as if there really was
authority).

809
Art. 1881 CIVIL CODE OF THE PHILIPPINES

(c) Examples of Implied Authority:

1) If an agent is authorized to collect a debt, he usually
is also impliedly authorized to employ an attorney
as counsel, and to bring suit for the enforcement
of the payment. (See 2 C.J. 633-643).
2) If an agent is authorized “to exact the payments
of the debt by legal means,” he has the right to
institute a legal suit for its recovery. (Germann
and Col. v. Donaldson, Sim and Co., 1 Phil. 63).
3) An agent or attorney-in-fact who is authorized to pay
the debts of the principal and to employ an attorney
to defend the interests of the latter is naturally im-
pliedly empowered to pay the fees of the attorney for
services rendered in the interest of said principal.
Moreover, he is empowered to effect the payment of
the fees by assignment to the attorney of the judg-
ment awarded to his principal. (See Mun. Council
of Iloilo v. Evangelista, 55 Phil. 290).
(NOTE: True, there can be no valid assignment
of things in litigation in favor of the participating
lawyers — Art. 1491, No. 5 — but after the litiga-
tion, there can be such an assignment.)
4) In the very nature of things an agent cannot sell
hemp in a foreign (or even in our) country with-
out making some kind of a contract, and if he has
authority to sell, it would carry with it authority
to make and enter into the usual and customary
contract of sale. (Robinson, Fleming and Co. v. Cruz
and Tan Chong Say, 49 Phil. 42).
(d) No Implied Authority in the Following:
1) An agent authorized to borrow necessary funds
has no authority to pay his own personal debts
therewith. (Hodges v. Salas, 63 Phil. 567).
2) An agent authorized to collect a debt has no right
to make a novation of the contract and to release
the sureties of the debtor. (Villa v. Garcia, Bosque,
49 Phil. 126).

810
CIVIL CODE OF THE PHILIPPINES Art. 1881

3) An agent authorized to collect money belonging to

his principal does not possess the implied authority
to indorse the checks which had been received by
him in payment. (Insular Drug Co. v. Nat. Bank,
58 Phil. 684).
4) An agent authorized to borrow is not impliedly
authorized to pay the loan at maturity, nor is he
allowed to give the money received to a third person.
(2 C.J. 658).
5) Authority to collect does not carry with it authority
to receive partial payment (Heitsch v. Minneapolis
Threshing Mach. Co., 150 N.W. 457), nor the au-
thority to accept commercial paper as payment of
the debt (2 Am. Jur. 135-136). It should be noted,
however, that although receipt of a check is unau-
thorized still if the agent is able to collect the mon-
etary equivalent, the payment should be considered
GOOD, and the debt is therefore extinguished. (2
Am. Jur. 135-136).
[NOTE: If an agent is authorized to conduct a
business involving the acceptance of checks or notes
there is naturally an implied authority to accept
and to indorse such commercial paper as will come
to the agent in the course of the business. (2 C.J.
628-629).]

(5) Some Cases

Germann and Co. v. Donaldson Sim & Co.

1 Phil. 63

FACTS: Germann and Co. authorized its agent Kom-

merzell to direct and administer its commercial business,
and, among others, “to collect sums of money and exact their
payment by legal means.” with this authority, can the agent
principal’s name, bring a court action for collection?
HELD: Yes. The collection of a claim is necessarily a part
of administration, but even if it be regarded as an act of strict
ownership, still the right to exact payment by legal means

811
Art. 1881 CIVIL CODE OF THE PHILIPPINES

carries with it the right to sue in court for collection. Indeed,

it cannot be reasonably supposed that it was the intention of
the principal to withhold from his agent a power so essential
to the efficient management of the business entrusted to his
control as that to sue for the collection of debts.

Deen v. Pacific Commercial Co.

42 Phil. 738

FACTS: The Pacific Commercial Co. thru Mr. Pond, its

vice-president and general manager, wrote to its local man-
ager in Cebu, Mr. Francisco, authorizing the latter to look
around for buyer of certain company land and to submit the
terms of the sale for approval by the Company. Francisco
then wrote a real estate broker, Deen, authorizing him to
sell the property. Later, Pond told Francisco that the land
in question was no longer for sale. When Francisco conveyed
this information to Deen, Deen said he had already found
a buyer, and therefore, could not repudiate the transaction.
When the Company persisted in refusing to sell the land,
Deen sued for alleged commission fees which he could have
earned had the sale been pushed thru. Issue: Did Francisco
have authority to sell the land?
HELD: Francisco had no authority to sell. His only au-
thority was to look for a buyer, and to present the terms of
the proposed sale to the Company for its approval. Inasmuch
as the act was not authorized, it follows that the Company
cannot be held liable.

Linan v. Puno, et al.

31 Phil. 259

FACTS: Linan authorized in a public instrument a cer-

tain Puno “to administer the interest I possess within this
municipality, purchase, sell, collect and pay, as well as sue
and be sued before any authority, appear before the courts of
justice and administrative officers in any proceeding or busi-
ness concerning the good administration and advancement of
my said interests.” Under this document, Puno sold a parcel of
land belonging to Linan. Linan, however, said that he merely

812
CIVIL CODE OF THE PHILIPPINES Art. 1881

granted Puno the right to administer, not the right to sell.

Issue: Did Puno have authority to sell the land?
HELD: Yes, in view of the precise words used in the
document, which granted authority not only to administer, but
also to sell. The clear words of the document should prevail,
considering the fact that Puno presumably acted in good faith
and in accordance with his power as he understood it.

Villa v. Garcia Bosque

49 Phil. 126
FACTS: Villa authorized Pirretas to sell her printing
establishment and book store partly for cash and partly on
credit, with two sureties for the buyer. The two sureties were
France and Goullete. Subsequently, Pirretas left the Philip-
pines but before doing so, he executed a document transferring
to Figueras Hermanos the authority to collect the sums still
due from the buyer. While acting as such agent, Figueras en-
tered into an agreement with the buyer, relieving France and
Goulette from all liabilities and sureties. When the buyer later
on failed to pay, Villa sued the buyer and the two sureties.
Issue: Could the sureties still be liable despite their release
by Figueras Hermanos?
HELD: Assuming that Pirretas could validly substitute
Figueras Hermanos in his place, still the authority granted by
him to Figueras Hermanos was merely to collect, not release
the sureties. It follows that Figueras Hermanos could not
discharge any of the debtors without payment, or to novate
the contract, by releasing the sureties. In fact, the terms of
the substitution clearly indicate the limited extent of the
authority of Figueras Hermanos. Therefore, the sureties have
not been relieved of their obligation, and are consequently
still liable.

Katigbak v. Tai Hing Co.

52 Phil. 622

FACTS: In 1921, Po Tecsi authorized Gabino-Barretto Po

Ejap to sell any land that “might belong” to him (Po Tecsi).
In 1923, Gabino-Baretto sold his own land to Po Tecsi. In

813
Art. 1881 CIVIL CODE OF THE PHILIPPINES

1924, Gabino-Baretto sold the same land to Katigbak on the

strength of the authority conferred on him in 1921. The sale
was impugned on the theory that the power of attorney had
been executed long before Po Tecsi became the owner of the
land. Issue: Did Gabino-Baretto act within the scope of his
authority.
HELD: Yes, in view of the words “might belong” (perten-
ezcen) instead of the word “belong” (pertenecen). The use of
the subjunctive mood indicates that Po Tecsi referred not
only to the property he had at the time of the execution of
the power, but also such as he might afterwards have during
the time it was in force. (See 2 C.J., p. 614)

Veloso v. La Urbana
58 Phil. 681

FACTS: A forged a power of attorney in his favor, and

on its alleged strength, he mortgaged land belonging to the
purported makers of the power of attorney. He was then able
to register the mortgages thus made. What is the effect of
the mortgages and the registration thereof?
HELD: The mortgages and their registration are abso-
lutely null and void, and cannot in any way affect the rights
of the registered owners.

Yu Eng Yu v. A.C. Ransom Philippine Corp.

(C.A.) 40 O.G. Supp., Aug. 23, 1941, p. 65

FACTS: Without P’s authority, A sold the business

establishment of P in P’s name in favor of a buyer. What
right if any has the buyer? HELD: The buyer has no title to
the property, since the sale was unauthorized and therefore
unenforceable. His only remedy is to proceed against A.

Markham v. Jandon
41 N.Y. 235
FACTS: The plaintiff usually transacted with a broker
thru the “margin plan” whereby the broker would extend
credit to the plaintiff in buying stocks for him, but the stocks

814
CIVIL CODE OF THE PHILIPPINES Art. 1881

were to be in possession of the broker. A short while after

certain stocks had been purchased in behalf of the plaintiff,
the broker notified the plaintiff that his (the plaintiff’s) mar-
gin was insufficient, and that unless additional money would
be deposited, he the broker, would sell the stocks even if by
virtue of such sale, the plaintiff would lose. When the plaintiff
failed to give the needed money, the broker sold the stocks.
The plaintiff now sues the broker for damages. The broker
offered to prove the existence of a custom of their local board
of brokers authorizing the sale of stock once the margin is ex-
hausted. Issue: Was the broker authorized to sell the stock?
HELD: No, the broker was not authorized to sell the
stock. The transaction between the plaintiff and the broker
amounts to a pledge of the stocks. And it is well-settled that
although the pledgor defaults, the pledgee does not automati-
cally become the owner of the property. Ownership is still with
the pledgor. The pledgee must therefore comply with all the
requirements of the law so that his claim can be satisfied. A
custom not sanctioned by law cannot prevail over the law.

Keeler Elec. Co. v. Rodriguez

44 Phil. 1

Payment to an unauthorized “agent” does not extinguish

one’s obligation, for the payment is not valid. Payment to
an authorized person is at the payor’s risk. Indeed persons
dealing with an assumed agent, whether the assumed agency
e general or a special one, are bound at their peril, if they
would hold the principal, to ascertain not only the fact of the
agency, but also the nature and extent of the authority and
in case either is controverted, the burden of proof is upon
such persons to establish it.

Caram, Jr. v. Laureta

L-28740, Feb. 24, 1981

If agents, acting for a principal, purchased property in

bad faith, the principal (under the rules of agency) must be
presumed to have also acted in bad faith.

815
Art. 1881 CIVIL CODE OF THE PHILIPPINES

(6) Doctrine of Agency by Necessity

Strictly speaking, an agency can never be created by
necessity. What is meant by the phrase “agency by necessity”
is, however, this: that by virtue of the existence of an emer-
gency, the authority of an agent is correspondingly enlarged
in order to cope with the exigencies or the necessities of the
moment. In the case of Vandalia R. Co. v. Bryan, 60 Ind. App.
233, five conditions were laid down for “authority of agency
by necessity” (agent ex necessitate):
(a) the real existence of an emergency;
(b) inability of the agent to communicate with the principal;
(c) the exercise of the additional authority for the principal’s
own protection;
(d) the adoption of fairly reasonable means, premises duly
considered;
(e) the ceasing of the authority the moment the emergency
no longer demands the same.
Example:
If a bus conductor is seriously hurt, the driver is
authorized to engage the services of a physician, in the
company’s name, so that the conductor may survive. This
is really for the best interest of all concerned. (See Terre
Haute v. McMurray, 98 Ind. 358 for an analogous case).

(7) ‘Authority’ Distinguished from ‘Power’

While “authority” and “power” may be often used as
synonymous terms, still there is a slight distinction in that
authority may be considered the cause, while power is the
effect. In other words, authority emanates from a principal,
and is given to the agent, who thus becomes empowered. The
agent who is thus authorized now possesses power.
(NOTE: Power may thus be express, implied, or inciden-
tal.)
[NOTE: A power of attorney or letter of attorney is au-
thority given in writing. (1 Mechem, Sec. 35). The agent given
the power of attorney may be referred to as an attorney in
fact. (1 Mechem, Sec. 35).]

816
CIVIL CODE OF THE PHILIPPINES Art. 1882

[NOTE: Attorneys-at-law are agents, being distinguished

from agents generally by reason of the fact that their authority
is of a special and limited character in most respects. (2 Am.
Jur. 14). Therefore, notice to counsel of a party is notice to
the latter, and the time to appeal from the dismissal of the
client’s complaint should be counted from the notice to said
counsel, even if the client was not notified of the dismissal.
(Valeriano, et al. v. Kerr, et al., L-10657, May 16, 1958 and
Perez v. Araneta, L-11728, May 16, 1958). But notice to the
client being represented by counsel, is not notice in law.
(Visayan Surety & Ins. Co. v. Central Bank, L-12139, Sept.
17, 1958).]

(8) ‘Authority’ Distinguished from ‘Instruction’

AUTHORITY INSTRUCTIONS

(a) Principal affects only (a) Concern only the principal

third persons, because if and the agent.
the act is done outside
the scope of the agent’s
authority, the principal
is not bound.
(b) Third persons must there- (b) Third persons do not have
fore verify or investigate to investigate or verify the
the authority. instructions.
(NOTE: If a person
makes an inquiry, he is
chargeable with knowl-
edge of the agent’s au-
thority, and his ignorance
of the authority will not
be any excuse.)

Art. 1882. The limits of the agent’s authority shall not

be considered exceeded should it have been performed in
a manner more advantageous to the principal than that
specified by him.

817
Art. 1882 CIVIL CODE OF THE PHILIPPINES

COMMENT:

(1) When Agent’s Performance of Authority is Deemed Still

Authorized
This is justified because of the greater benefit that would
accrue to the principal. “Advantageous,” however, does not
only refer to a financial gain, which may be offset by a moral
or ethical loss.

(2) Example
If an agent was asked to sell on the installment plan an
object for P100,000, but he is able to get P100,000 cash for
the object, he is deemed not to have exceeded his authority.

(3) Sale at a Lower or Higher Price

The agent should not sell things received by him from
his principal at a price less than that fixed by the latter.
But there is NO prohibition against his selling the goods
at a better price, if said price can be obtained. (Tan Tiong
Teck v. Com. de Valores y Bolsas, 40 O.G. [6th S] p. 125, 69
Phil. 425). However, the conditions of the sale must remain
unaltered, hence authorization to sell for cash does not carry
with it authorization to sell on credit, even if by such device
a higher price can be obtained. (See Art. 1905).

(4) Bar
An agent with general powers for administration, de-
sirous of improving the financial condition of his principal’s
business, sold a piece of land belonging to his principal for
double the price that appeared in an inventory prepared by
the principal before leaving the place. Do you think the agent
has exceeded his power? Why?
ANS.: Yes, the agent has exceeded his powers despite
the fact that the price obtained was double the value of the
property. The important fact is that he made a sale, a trans-
action which requires a special power of attorney. (Art. 1878).
As a mere administrator, he had no right to alienate.

818
CIVIL CODE OF THE PHILIPPINES Art. 1883

Art. 1883. If an agent acts in his own name, the prin-

cipal has no right of action against the persons with whom
the agent has contracted; neither have such persons against
the principal.
In such case the agent is the one directly bound in
favor of the person with whom he has contracted, as if the
transaction were his own, except when the contract involves
things belonging to the principal.
The provisions of this article shall be understood to
be without prejudice to the actions between the principal
and agent.

COMMENT:

(1) Agency With an Undisclosed Principal

This Article speaks of a case where the agent WAS AU-
THORIZED, but instead of acting in behalf of the principal,
he acts in his own behalf. Thus, Art. 1883 does not apply if
the agent was unauthorized or he acts in excess ‘of his au-
thority.’ (See Nat. Bank v. Agudelo, 58 Phil. 655).
(NOTE: Refer to Comments Nos. 1, 2, and 3 under Art.
1881.)

(2) Example of the General Rule

Jose asked Pedro to borrow money from Juan. Pedro did
not disclose to Juan that he (Pedro) was borrowing in Jose’s
behalf; that is, Pedro borrowed in his own name. Can Juan
ask Jose to pay the debt?
ANS.: No. Only Pedro has the duty to pay Juan.

Phil. Bank of Commerce v. Jose M. Aruego

L-25836-37, Jan. 31, 1981
102 Phil. 530

If an alleged agent signs a bill of exchange without

indicating thereon that he was signing as an agent or repre-
sentative of the Philippine Education Foundation Company
(of which he was president), he is personally liable.

819
Art. 1883 CIVIL CODE OF THE PHILIPPINES

(3) Example of the Exception

A principal told his agent to sell his (the principal’s) car
for him (the principal). The agent sold it to a third party. The
agent acted in his own name. Can the third party sue the
principal in case the car has hidden defects?
ANS.: Yes. In this case, although the agent acted in
his own name, still the sale involved a car belonging to the
principal. Here we apply the exception stated in the second
paragraph of Art. 1883. As a matter of fact, the sale is com-
pletely valid.

(4) When Agent Transacts Business in His Own Name

If an agent transacts business in his own name, it is
not necessary for him to state who is the principal, and he is
directly liable as if the business were for his own account, to
the person with whom he transacts the same. (Lim v. Ruiz y
Rementeria, 15 Phil. 367).

(5) When Authorized Agent Buys in His Own Name But

Really in Behalf of His Principal
If an authorized agent buys in his own name but really
in behalf of his principal, the seller has the option to look to
EITHER for payment unless:
(a) he trusted the agent exclusively;
(b) or by the usage and understanding of business, the
agent only is held;
(c) or unless the special circumstances of the case reveal
that only the agent was intended to be bound and the seller
knew it, or was chargeable with knowledge of it. (Wing Lee
v. Bark “Monogabela,” 44 Phil. 464).

(6) When Authority of Agent is Doubtful

If it cannot be determined whether or not the agent was
authorized, or had disclosed a principal, the action must be
directed against both the “agent” and the “principal.” (Beau-
mont v. Prieto, 41 Phil. 670).

820
CIVIL CODE OF THE PHILIPPINES Art. 1883

(7) Regarding “Things Belonging to the Principal”

This means that in the case of this exception, the agent’s
apparent representation yields to the principal’s true repre-
sentation; and that, in reality and in effect, the contract must
be considered as entered into between the principal and the
third person and consequently, if the obligations belong to
the former, to him alone must also belong the rights arising
from the contract. (Sy-Juco and Viardo v. Sy-Juco, 40 Phil.
634).
Examples:
(a) If the agent buys with money belonging to the principal, was
authorized to so buy but acted in his own name, the principal
nevertheless has a right of action against the seller, and the
seller has a right of action against the principal. (See Sy-Juco
and Viardo v. Sy-Juco, supra).
(b) The Philippine rule is that where merchandise is bought
from an agent with an undisclosed principal, and without
knowledge on the part of the buyer that the seller is merely
an agent, the buyer takes title to the merchandise and the
principal cannot maintain successfully an action against him
for the recovery of the merchandise or for damages, but can
only proceed against the agent. (Awad v. Filma Mercantile
Co., 49 Phil. 816).
(NOTE: In the above-mentioned case, the agent was
authorized to sell; this is why the transaction is valid. Had
the agent not been authorized, the whole transaction would
have been null and void, considering the fact that he acted
in his own name.)
[NOTE: The exception provided for in the second para-
graph of Art. 1883 cannot be invoked if the contract of sale
did not cover property of the supposed principal, but involved
the property of a third person. (See Lion Tek Goan v. Jose
Azores, 42 O.G. 2840).]

821
 CIVIL CODE OF THE PHILIPPINES

Chapter 2

OBLIGATIONS OF THE AGENT

Art. 1884. The agent is bound by his acceptance to carry

out the agency and is liable for the damages which, through
his non-performance, the principal may suffer.
He must also finish the business already begun on the
death of the principal, should delay entail any danger.

COMMENT:

(1) Duty of Agent to Carry Out the Agency

An agent who does not carry out the agency is liable for
damages. Upon the other hand, if he fulfills his duty, he is
not personally liable unless he so binds himself.

Bank of the Phil. Islands v. Pineda

GR 62441, Dec. 14, 1987
The agents of a disclosed principal the owner of a ship
cannot be held liable for repairs made on the vessel to keep
them in good running condition in order to earn revenue, if
there is no showing that said agents exceeded their author-
ity.

(2) Liability of Lawyer Who Fails to Perfect an Appeal

The mere fact that a lawyer fails to perfect an appeal
of his client does not give rise to damages in the absence of
showing that the decision which became final was unjust.
(Heridia v. Salinas, 10 Phil. 157).

(3) Effect of Principal’s Death

Angel was Pedro’s agent. Angel was performing a business
of the agency when suddenly Pedro died. Although as a rule,

822
CIVIL CODE OF THE PHILIPPINES Arts. 1885-1886

the death of the principal extinguishes the agency, Angel is

obliged to finish the business already begun if delay should
entail any danger. (Art. 1884, par. 2).

(4) Agent Who Sells to Himself

An agent who has been authorized to sell some merchan-
dise is not allowed to bind the principal by selling to himself
(the agent) directly or indirectly. Hence, if an agent, through
his own sub-agent, buys from the principal, the principal is
not required to fill such orders unless said principal ratifies
the sale after he has had full knowledge of the facts of the
case. (Barton v. Leyte Asphalt, 46 Phil. 938).

Art. 1885. In case a person declines an agency, she is

bound to observe the diligence of a good father of a family
in the custody and preservation of the goods forwarded to
him by the owner until the latter should appoint an agent.
The owner shall as soon as practicable either appoint an
agent or take charge of the goods.

COMMENT:

(1) Rule if a Person Declines the Agency

A person is of course free to refuse to be an agent; how-
ever, equity demands the rule set forth in the first sentence
of this Article.

(2) Duty of Owner

Upon the other hand, the owner must also act as soon
as possible:
(a) by appointing an agent, or
(b) by taking charge of the goods.

Art. 1886. Should there be a stipulation that the agent

shall advance the necessary funds, he shall be bound to do
so except when the principal is insolvent.

823
Art. 1887 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Stipulation for Agent to Advance Necessary Funds
Example:
Angel is Pedro’s agent. Both agreed that Angel would
advance the necessary funds, but later Pedro became insolvent.
Is Angel still bound to furnish such necessary funds?
ANS.: No more, in view of the principal’s insolvency.

Art. 1887. In the execution of the agency, the agent shall

act in accordance with the instructions of the principal.
In default thereof, he shall do all that a good father of a
family would do, as required by the nature of the business.

COMMENT:
(1) Agent’s Duty to Follow Instruction
(a) Instruction, as we have already seen, differ from author-
ity.
(b) In commenting upon this article (Art. 1887) Dalloz, after
laying down the admitted proposition that the acts of
an agent beyond his limited powers are invalid, states
three qualifications which would bind the principal:
1) where the principal’s acts have contributed to de-
ceived a third person in good faith;
2) where the limitations upon the power created by
the principal could not have been known by a third
person; and
3) where the principal has placed in the hands of
the agent instruments signed by him in blank.
(Jurisprudence Generale, Vol. 10, title “Mandata,”
Art. 142 — cited by the Supreme Court in Strong,
et al. v. Gutierrez Repide, 6 Phil. 680).

(2) Effect if Agent Follows Instruction

If an agent carrying out the orders of the principal car-
ried out the instruction he has received from said principal,

824
CIVIL CODE OF THE PHILIPPINES Art. 1887

he cannot be held responsible for the failure of his principal

to accomplish the object of the agency unless the said agent
exceeded his authority or has acted with negligence, deceit,
or fraud. (Gutierrez Hermanos v. Oria Hermanos, 30 Phil.
491).

(3) Clarity of Instructions

It is the duty of the principal, if he desires an authority
executed in a particular manner to make his terms so clear
and unambiguous that they cannot reasonably be misconstrued.
If he does this, it is the agent’s duty to the principal to ex-
ecute the authority strictly and faithfully; and third persons
who know of the limitations, or who from the circumstances
of the case ought to have known of them can claim no rights
against the principal based upon their violation. (1 Mechem
on Agency, Sec. 792).

(4) Different Interpretations Re Instructions

If on the other hand, the authority be couched in such
uncertain terms as to be reasonably susceptible of two dif-
ferent meanings, and the agent in good faith and without
negligence adopts one of them, the principal cannot be heard
to assert, either as against the agent or against third persons
who have, in like good faith and without negligence, relied
upon the same construction, that he intended the authority
to be executed in accordance with the other interpretation.
If in such a case, the agent exercises his best judgment and
an honest discretion, he fulfills his duty, and though a loss
ensues, it cannot be cast upon the agent. (Mechem on Agency,
Sec. 793).

(5) How Instructions Are to Be Construed

An instrument conferring authority is generally, it is
said, to be construed by those having occasion to act in ref-
erence to it, as a “plain man acquainted with the object in
view, and attending reasonably, to the language used, has
in fact, construed it. He is not bound to take the opinion of
an attorney concerning the meaning of a word not technical
and apparently employed in a popular sense. (1 Mechem on
Agency, Sec. 793).

825
Art. 1888 CIVIL CODE OF THE PHILIPPINES

(6) How Execution May Fail

The execution of the authority in a given case may fail,
either:
(a) because the agent has negligently failed to fully exercise
his authority;
(b) or because he has exceeded it. (1 Mechem on Agency,
Sec. 159).

(7) Excessive Execution

If there has been a complete execution of the power and
the excess can be distinguished and disregarded, the author-
ized portion may be given effect. (1 Mechem on Agency, Sec.
159).

Art. 1888. An agent shall not carry out an agency if

its execution would manifestly result in loss or damages
to the principal.

COMMENT:

(1) When Agency Should Not Be Carried Out

(a) The reason for the Article is because an agent should
exercise due diligence.
(b) Furthermore, the agent must presumably act for the
benefit, and not to the detriment of the principal.
(c) “Manifestly” means that the execution would damage
ANY principal.

(2) Example
P instructed his agent A to charter a boat from Japan
to Manila and to load the principal’s goods with the specific
instructions to sail from Japan to Manila on Feb. 14, 2005,
and to thereafter sell the goods upon arrival in Manila. The
weather report on the date of the scheduled departure showed
that a strong typhoon was directly going to cross the path of
the boat. Considering the circumstances, it would be safe to

826
CIVIL CODE OF THE PHILIPPINES Arts. 1889-1890

sail only after one week. In the meantime, the prices of the
goods at Manila went down by 50%. P thus fell short of the
profits he expected to realize. Would A be liable to P?
ANS.: No. A would not be liable to P because had A car-
ried out the agency, it would have resulted in loss or damage
to his principal (P).

Art. 1889. The agent shall be liable for damages if,

there being a conflict between his interests and those of
the principal he should prefer his own.

COMMENT:
(1) Rule if Agent Prefers His Own Interests
The Article applies whether the agency is onerous or
gratuitous for here the law does not distinguish.

(2) Example
P owns a Mercedes Benz car, model 2005. He appoints A to
sell the car. A also is an owner of a Mercedes car of the same
model as P’s. X a third person, is interested in buying either
P’s or A’s car for P12 million — an attractive price. If A sells
his own car (and not that of P’s), P may sue A for damages
for it is clear that A has preferred his own interest.

Art. 1890. If the agent has been empowered to borrow

money, he may himself be the lender at the current rate of
interest. If he has been authorized to lend money at interest,
he cannot borrow it without the consent of the principal.

COMMENT:
(1) Authority to Borrow or Lend Money
Examples:
(a) Angel was authorized to borrow money. May Angel lend
his own money to the principal?
ANS.: Yes, at the current rate of interest. Reason
— Principal suffers no injury.

827
Art. 1891 CIVIL CODE OF THE PHILIPPINES

[NOTE: Justice J.B.L. Reyes has questioned the

wisdom of Art. 1890. He says: “It is preferable that the
agent be not permitted to occupy inconsistent positions,
and not allow him to be lender and borrower at the same
time. The temptation to insert terms unfavorable to the
principal is too great, and lending money involves other
considerations besides rate of interest. (Observations on
the new Civil Code, XVI Lawyer’s Journal 138).]
(b) Angel has been authorized to lend money at interest.
May Angel borrow the money for himself?
ANS.: No, unless the principal consents. Reason for
the law: The agent may not be a good borrower or he
may be insolvent or he may not be a good risk. There
is danger here that the interests of the principal would
be jeopardized.

(2) Benefit of Principal

The borrowing of the money must be for the benefit of
the principal, and not for the agent’s personal benefit.

(3) Prohibition to Purchase

It should be noted that under Art. 1491, agents cannot
acquire by purchase, even at public or judicial auction, either
in person or thru the mediation of another, the property whose
administration or sale may have been entrusted to them, un-
less the consent of the principal has been given.

Art. 1891. Every agent is bound to render an account

of his transactions and to deliver to the principal whatever
he may have received by virtue of the agency, even though
it may not be owing to the principal.
Every stipulation exempting the agent from the obliga-
tion to render an account shall be void.

COMMENT:

(1) Duty of Agent to account

Example of par. 1:

828
CIVIL CODE OF THE PHILIPPINES Art. 1891

An overprice received by the agent for goods he was to

sell at a certain price.
(NOTE: The Article does not apply to case, of solutio
indebiti for in such cases, recovery can be had by the payor
against the agent himself. Therefore, the agent meantime can
keep what had been given to him by error.)

Domingo v. Domingo
42 SCRA 131

FACTS: An agent did not reveal to his principal that

he (the agent) was able to obtain a secret profit from the
transaction in the nature of a bonus, gratuity, or personal
benefit. Does he still have the right to collect the commission
that ordinarily should be due to him?
HELD: No more, on account of his breach of loyalty to the
principal. The forfeiture of the commission will take place, even
if the principal does not suffer any injury by reason of such
breach of loyalty. It does not even matter that the agency was
a gratuitous one, or that the principal obtained better results,
or that usage or custom allows the receipt of such a bonus.
Indeed, an agent has an absolute duty to make a full disclosure
or accounting to his principal of all transactions and material
facts that may have some relevance with the agency.

(2) Stipulation Exempting Agent from Duty to Account

Reason for par. 2:

Against public policy because it would be conducive to
fraud.

(3) Duty to Deliver Funds

If nothing in the contract of agency provides otherwise,
this Art. 1891 imposes on the agent the obligation to deliver
to his principal all funds collected on his (the principal’s) ac-
count. (U.S. v. Kiene, 7 Phil. 736). As a matter of fact, lawyers
are required to render a prompt accounting for money or
property received by them on behalf of their clients. Failure

829
Art. 1891 CIVIL CODE OF THE PHILIPPINES

to do this constitutes professional misconduct. While it is true

that the lawyer may perhaps possess a lien on the money in
his hands — money that had been collected on behalf of the
clients — still this fact will not excuse him from the duty of
accounting promptly for the funds received. (In re Bamberger,
49 Phil. 962).

(4) No Co-Ownership Over Funds Despite Right to Com-

mission
Although the agent is entitled to receive a commission,
this fact by itself would not make him a co-owner regarding
the money that have been collected. Co-ownership is not es-
tablished. The relationship of principal and agent subsists.
If the agent subtracts from the money more than what he is
entitled to obtain as his commission, it cannot be denied that
he has committed estafa. (U.S. v. Reyes, 36 Phil. 791).

(5) Agent Should Not Profit for His Own Account

Neither an agent nor a trustee is allowed to make a
profit for his own benefit as long as the agency exists or the
trust relations continue. To hold otherwise would be to coun-
tenance an unlawful inducement. Thus, if an agent should
conceal certain facts from his own principal, he should under
no condition be permitted to profit thereby. A principal on the
other hand is entitled to recover from the agent what may
be due him (the principal) as a consequence of the agency.
(Ojinaga v. Estate of Perez, 9 Phil. 185).

(6) Doctrines on the Duty to Account

(a) Whoever administers another’s affairs must render an
account because of the representative relation and because
of the fiduciary position. (See Dorman v. Crooks State
Bank, 225 N.W. 661).
(b) If an agent refuses to account when it is his duty to do
so, the principal may at once terminate the agency and
sue for the balance due. (2 C.J. 738-739). If the principal
dies, the agency is extinguished, BUT the duty to account
subsists, and can be demanded by the principal’s heirs
or legal representatives. (See 11 Manresa 513).

830
CIVIL CODE OF THE PHILIPPINES Art. 1891

(c) The principal, or his legal representative, has the right to

pass upon the correctness of the accounting. (11 Manresa
513).
(d) Corollary to his right to demand an accounting, a princi-
pal has the right to make a reasonable inspection of the
books of account and memoranda, including the original
entries. (2 Am. Jur. 227).
(e) An agent, as a consequence of his duty to account, can-
not dispute his principal’s title to the property in his
possession. (2 C.J. 744).

(7) Some Cases

United States v. Kiene

7 Phil. 736

FACTS: An insurance agent named Kiene refused count

to his principal, the China Mutual Life Insurance Company,
for approximately P1,500 which came to him in the course
of the agency. Because he refused to turn over the amount
and to account for them, he was prosecuted for estafa. His
only defense was the allegation that no law compelled him
to deliver the amount referred to.
HELD: He is guilty because the duty to turn over the
fund is stated in Art. 1891 of the Civil Code.

United States v. Igpuara

27 Phil. 619

FACTS: Igpuara, an agent for Juana Montilla and Eu-

genio Veraguth had in his possession P2,498 belonging to the
principals. At the time the accounts were settled, he executed
the following instrument:
“We hold at the disposal of Eugenio Veraguth the sum
of P2,498, the balance from Juana Montilla’s sugar. Iloilo,
June 26, 1911 Jose Igpuara for Ramirez and Company.”
On Aug. 23, 1911, Veraguth demanded the return of
the amount but the agent failed to do so. When Igpuara was
accused of estafa, he claimed no crime had been committed,

831
Art. 1891 CIVIL CODE OF THE PHILIPPINES

and that he was civilly liable because the contract referred

to above was in the nature of a loan.
HELD: The contract was not a loan, otherwise the lender
could not recover until after the expiration of a legal stipulated
period. Indeed, the money in the possession of the agent but
at the principal’s disposal acquired the character of a deposit
demendable at anytime. Moreover, Igpuara could not lawfully
dispose of it without incurring criminal responsibility for ap-
propriating or diverting to his own use another’s property.
Inasmuch as he has abused the confidence reposed in him by
his misappropriation of the money, there is no doubt that he
is guilty of estafa.

Ojinaga v. Estate of Perez

9 Phil. 185
FACTS: Ojinaga’s properties were being administered
by Perez. Perez rendered an accounting showing a profit of
P1,700. He then turned the amount to Ojinaga who knew
that the profits were much more, about P12,000. But Ojinaga
accepted the accounting without any protest. When Ojinaga
died, his heirs wanted the accounting set aside on the ground
of fraud.
HELD: The accounting cannot be set aside on the ground
of fraud, for although Ojinaga knew of the true amount of
the profits, still, he approved the accounting report.

Severino v. Severino
44 Phil. 343
FACTS: An agent, Guillermo Severino, for his brother Mel-
ecio Severino, registered the latter’s land in his (the agent’s) own
name, and was granted a Torrens Title therefor. Years after the
decree became final, the estate of Melecio (now dead) sued for
reconveyance of the land but Guillermo claimed ownership over
it by virtue of the registration under his name. It was proved
however that Guillermo was only the trustee, administrator, or
agent of Melecio with respect to the land.
HELD: Reconveyance can be made. The relations were
fiduciary in nature and the agent is estopped from acquiring
or asserting a title adverse to that of his principal. True,

832
CIVIL CODE OF THE PHILIPPINES Art. 1892

Guillermo is the owner insofar as third persons are concerned,

but not insofar as his principal is concerned. The remedy of
reconveyance does not mean the reopening of the decree of
registration. That can no longer be done since the one-year
period has already prescribed. But reconveyance can still
be done. Surely, no reason of public policy demands that a
person guilty of fraud or breach of trust be permitted to use
his certificate of title as a shield against the consequences of
his own wrong.
(To the same effect: Consunji v. Tison, 15 Phil. 81; Uy
Aloc v. Cho Jan Ling, 19 Phil. 202 and Sy-Juco & Viardo v.
Sy-Juco, 40 Phil. 634.)

Art. 1892. The agent may appoint a substitute if the

principal has not prohibited him from doing so; but he shall
be responsible for the acts of the substitute:
(1) When he was not given the power to appoint one;
(2) When he was given such power, but without des-
ignating the person, and the person appointed was notori-
ously incompetent or insolvent.
All acts of the substitute appointed against the prohibi-
tion of the principal shall be void.

COMMENT:

(1) Appointment of Substitute for the Agent

(a) A is P’s agent. In their contract of agency, nothing was
mentioned as to whether or not A could appoint a substi-
tute. A appointed S as his substitute. Is the appointment
of the substitute valid?
ANS.: Yes, but A shall be responsible for the acts
of the substitute. (1st par., Art. 1892).
(b) In problem (a), suppose the substitute violated the in-
structions of P, whom can P hold liable?
ANS.: P can hold A liable (Art. 1892) and P can
also hold S liable. (Art. 1893).

833
Art. 1893 CIVIL CODE OF THE PHILIPPINES

(c) A is P’s agent. A asked P for permission to appoint a

substitute, but A did not mention who the substitute
would be. P agreed. Now, the substitute violated P’s
instructions as well as A’s instructions, causing damage
to P. Can P hold A liable for the substitute’s actuations,
in case for example, the substitute is insolvent?
ANS.: It depends. If the substitute appointed by A
was at the time of appointment notoriously incompetent
or insolvent, then P can hold A liable, subsidiarily or even
primarily. If the substitute at the time of appointment
was neither notoriously incompetent or insolvent, then
P cannot hold A liable, either primarily or subsidiarily.
(Art. 1892, No. 2).
(d) A is P’s agent. A was prohibited by P to appoint a sub-
stitute. Nevertheless A appointed S as substitute. S sold
goods belonging to P to B, who was a purchaser in good
faith. Is the sale valid?
ANS.: The sale is completely null and void. The law
says that all acts of the substitute appointed against the
prohibition of the principal shall be void. (Last par., Art.
1892).

(2) Soundness of the article

Is Art. 1892 sound?
ANS.: Yes, for while ordinarily the agent upon whom
the principal has reposed confidence must do the act himself,
still the principal need not fear prejudice for in some cases,
he can still exact responsibility from his agent. (11 Manresa
518-519).

Art. 1893. In the cases mentioned in Nos. 1 and 2 of the

preceding article, the principal may furthermore bring an
action against the substitute with respect to the obligations
which the latter has contracted under the substitution.

COMMENT:
(1) When the Principal Can Sue the Substitute
(a) Under the premises given in the Article the principal
can sue both the agent and the substitute.

834
CIVIL CODE OF THE PHILIPPINES Arts. 1894-1895

(b) This is one exception to Art. 1311 respecting the privity

of contracts.

(2) Art. 1311 (Who Are Bound By Contracts)

Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obliga-
tions arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from
the decedent.
If a contract should contain some stipulation in favor of
a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revo-
cation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.

Art. 1894. The responsibility of two or more agents, even

though they have been appointed simultaneously, is not
solidary, if solidarity has not been expressly stipulated.

COMMENT:

Joint Not Solidary Liability

(a) The liability referred to here as well as in the next article
is the liability of the agents towards the principal, and
not that towards third parties.
(b) The liability is indeed joint and personal, but only if
each can act separately. But if it be essential that all
agents act, and one is unable to do so, then that one is
the ONLY agent liable.

Art. 1895. If solidarity has been agreed upon, each of the

agents is responsible for the non-fulfillment of the agency,
and for the fault or negligence of his fellow agents, except
in the latter case when the fellow agents acted beyond the
scope of their authority.

835
Arts. 1896-1897 CIVIL CODE OF THE PHILIPPINES

COMMENT:
When Solidarity Has Been Agreed Upon
(a) Example: P appointed A and B as agents. Solidarity be-
tween the agents was agreed upon. Thru B’s fault, the
agency was not fulfilled. Can P sue A for damages?
ANS.: If B acted within the scope of his authority,
A, being solidary agent, can be made responsible for the
entire damages, without prejudice to his right later on
to recover from the erring agent.
(b) Example where one acts beyond the scope of his authority:
two solidary agents were appointed to sell the Cadillac
car of the principal. Unfortunately, one of them sold the
Mercury automobile. Here, the innocent agent cannot be
liable at all to the principal, even if solidarity had been
agreed upon.

Art. 1896. The agent owes interest on the sums he has

applied to his own use from the day on which he did so, and
on those which he still owes after the extinguishment of the
agency.

COMMENT:
Liability of the Agent for Interest
(a) Under the old Civil Code, after the word “agency,” there
was the clause “from the time he is put in default.” Under
the new Civil Code, said clause had been eliminated.
(b) This Article is without prejudice to a criminal action
that may be brought because of conversion.
(c) On the other hand, there is no liability for interest on
sums which have not been converted for the agent’s own
use (De Borja v. Borja, 58 Phil. 811), unless of course,
at the expiration of the agency, the agent still owes the
principal certain sums. (2nd part, Art. 1896).

Art. 1897. The agent who acts as such is not personally

liable to the party with whom he contracts, unless he ex-
pressly binds himself or exceeds the limits of his authority
without giving such party sufficient notice of his powers.

836
CIVIL CODE OF THE PHILIPPINES Art. 1897

COMMENT:
(1) No Personal Liability for Agent
(a) Reason for the law: Said agent who acts as agent does
not represent himself but the principal.
(b) In case of acts by the agent in excess of authority, the
principal cannot be bound unless he ratifies the act.
(c) If an agent obligates himself personally, aside from act-
ing in behalf of his principal, both are bound. (Tuazon
v. Orozco, 5 Phil. 596).
(d) If an executor or administrator of the estate of a de-
ceased person, without proper court authority, makes a
contract regarding said estate, he imposes upon himself
a personal obligation. This is true even though in signing
the contract, he has described himself as administrator
or executor, with the intent to bind the estate. (Pacific
Commercial Co. v. Hernaez, et al., 51 Phil. 494).
(e) Even if an agent has bound himself to pay the debt, this
fact will not relieve from liability a principal for whose
benefit the debt has been incurred. The further liability
of the agent can be considered as a further security in
favor of the creditor, and will not preclude or eliminate the
liability of the principal. (Tuazon v. Orozco, supra).
(f) It is manifest upon the simplest principles of jurisprudence
that one who has intervened in the making of a contract as
an agent cannot be permitted to intercept and appropriate
the thing which the principal is bound to deliver. If he
does this, this would make performance by the principal
impossible. In any event, the agent must be prohibited
to perform any positive act that could prevent fulfillment
on the part of his principal. Good faith towards the other
contracting party requires this much. (National Bank v.
Welch, Fairchild and Co., 44 Phil. 780).

(2) Proper Parties to the Suit

An action against a person who merely acted in behalf of
another should be dismissed. The suit should be against the
principal, not against the agent, except where the agent acts

837
Art. 1897 CIVIL CODE OF THE PHILIPPINES

in his own name or exceeds the limit of his agency. (Lorca v.

Dineros, L-10919, Feb. 28, 1958; Singh v. Dulce, 49 Phil. 563
and Macias and Co. v. Warner, Barnes & Co., 43 Phil. 155)

Jovito R. Salonga v. Warner, Barnes

and Co., Ltd.
L-2246, Jan. 31, 1951

FACTS: In 1946, Westchester Fire Insurance Co. of New

York entered into a contract with Tina J. Gamboa, whereby
said company insured one case of rayon yardage which said
Gamboa shipped from San Francisco, California, on steamer
“Clavis Victory,” to Manila and consigned to Jovito Salonga,
plaintiff herein. According to the contract of insurance, the
insurance company undertook to pay to the sender or her con-
signee the damages that may be caused to the goods shipped
subject to the condition that the liability of the company will
be limited to the actual loss which the insured may suffer, not
to exceed the sum of P2,000. When the shipped goods arrived
in Manila, there was a shortage in the shipment amounting to
P1,723.12. In Oct., plaintiff filed a claim for damages against
the American President Lines, agents of the ship “Clavis Vic-
tory” demanding settlement; and when apparently no action
was taken on his claims, plaintiff demanded payment thereof
from Warner, Barnes and Co., Ltd. as agent of the Insurance
Co. in the Philippines and his agent having refused to pay
the claim, plaintiff instituted the present action. The defend-
ant, among other defenses, claimed that it cannot be made
responsible because it had no contractual relation with either
the plaintiff or his consignor. Should the defendant pay?
HELD: The defendant is not obliged to pay. It is a well-
known rule that a contractual obligation or liability, or an action
ex contractu, must be founded upon a contract: oral or written,
either express or implied. This is axiomatic. If there is no con-
tract, there is no corresponding liability, and no cause of action
may arise therefrom. The defendant did not take part, directly
or indirectly, in the contract in question. The contract is purely
bilateral, binding only upon Gamboa and the insurance company.
In the case of Morris and Co. v. Warner, Barnes and Co., 43 Phil.
155, it was held that even in the case of an agent who signs for
his company, said agent, as long as he acts within the scope of

838
CIVIL CODE OF THE PHILIPPINES Art. 1898

his authority, does not assume personal liability for a contract

entered into by him in behalf of his principal. It was also held
that in such a case only the principal was bound. In this case,
this principle acquires added force and effect when we consider
the fact that the defendant did not sign the contract as agent of
the foreign insurance company.

(3) Authority to Sell All of the Principal’s Property

A power of attorney allowing the agent to sell all the
property of the principal is sufficient to validate the sale
of any single parcel of land which may be included in said
properties. (Jimenez v. Rabat, 38 Phil. 378).

(4) Authority to Agree on Certain Stipulations

If an agent is authorized generally to sell merchandise,
he is also allowed to include in the contract of sale, the
stipulation which are customary in the trade in such goods.
(Robinson, Fleming and Co. v. Cruz and Tan Chong Say, 49
Phil. 42).

Art. 1898. If the agent contracts in the name of the

principal, exceeding the scope of his authority, and the
principal does not ratify the contract, it shall be void if
the party with whom the agent contracted is aware of the
limits of the powers granted by the principal. In this case,
however, the agent is liable if he undertook to secure the
principal’s ratification.

COMMENT:
(1) Contracts Entered Into in Excess of Authority
(a) This Article refers only to the liability of the agent to-
wards the third person. It is clear that under the premises
given, the principal is not at all bound, except of course
if there is subsequent ratification by him.
(b) Therefore “it shall be void” refers to the tie between the
agent and the third party. Regarding the principal, other
articles are applicable. (See Arts. 1403, No. 1 and 1910,
par. 2).

839
Arts. 1899-1900 CIVIL CODE OF THE PHILIPPINES

(2) Example
An agent was authorized to sell his principal’s car. The
agent sold in the principal’s name the principal’s radio cabi-
net to a third person who knew that the agent was not so
authorized. Give the status of the sale.
ANS.: Even as between the agent and the third person
third person, such a sale is completely null and void. However,
if the agent had promised to obtain the principal’s ratifica-
tion, said agent would be liable in case of failure to obtain
such ratification. If ratification has been obtained, then the
principal would be bound.

Art. 1899. If a duly authorized agent acts in accordance

with the orders of the principal, the latter cannot set up
the ignorance of the agent as to circumstances whereof he
himself was, or ought to have been, aware.

COMMENT:
(1) Effect of Agent’s Ignorance
(a) This article is based on equity, for after all the agent
had complied with his duty.
(b) It is the principal’s fault should he have appointed an
ignorant agent. Equity demands that the principal should
be made responsible.

(2) Compliance With Authority and Instruction

Notice that under this Article, it is not enough for the
agent to act within the scope of his authority. It is also im-
perative for such agent to have complied with the orders and
instruction of the principal.

Art. 1900. So far as third persons are concerned, an

act is deemed to have been performed within the scope
of the agent’s authority, if such act is within the terms of
the power of attorney, as written, even if the agent has in
fact exceeded the limits of his authority according to an
understanding between the principal and the agent.

840
CIVIL CODE OF THE PHILIPPINES Art. 1901

COMMENT:
(1) Act Performed Within Terms of Written Authority
(a) This is designed to protect the interest of third persons.
(b) Notice that for this article to apply, the authority must
be in writing.

PROBLEM
Question: The scope of the agent’s authority is what
appears in the written terms of the power of attorney. While
third persons are bound to inquire into the extent or scope
of the agent’s authority, are they required to go beyond the
terms of the written power of attorney?
Answer: No. Third persons cannot be adversely affected
by an understanding between the principal and his agent as
to the limits of the latter’s authority. In the same way, third
persons need not concern themselves with instructions given
by the principal to his agent outside of the written power of
attorney. (Siredy Enterprises, Inc. v. CA & Conrado de Guz-
man, GR 129039, Sept. 17, 2002).

(2) Example
P gave his agent A a power of attorney, wherein was
written A’s right to sell 2 parcels of land belonging to P. P
and A however had an understanding to the effect that A
should only sell one parcel of land. A sold both. P did not
ratify the contract. Is P bound by the sale of both parcels?
ANS.: Yes. While it is true that a third party deals with
an agent at his (the third party’s) own risk, and while it is the
duty of the third party to investigate the extent of an agent’s
authority, nevertheless, in this case the power of attorney as
written showed complete authorization. It is unfair to demand
that the third person inquire further than the terms of said
power of attorney as written. To hold otherwise would be to
open the door to countless frauds and machinations.

Art. 1901. A third person cannot set up the fact that the
agent has exceeded his powers, if the principal has ratified,
or has signified his willingness to ratify the agent’s acts.

841
Art. 1902 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Effect of Ratification
(a) Ratification in effect grants authority to the agent.
(b) Note that the ratification may be in the future.

Art. 1902. A third person with whom the agent wishes to

contract on behalf of the principal may require the presenta-
tion of the power of attorney, or the instructions as regards
the agency. Private or secret orders and instructions of the
principal do not prejudice third persons who have relied
upon the power of attorney or instructions shown them.

COMMENT:
(1) Private or Secret Orders
Note that innocent third persons are not to be preju-
diced.

(2) Case

Cruz v. CA
GR 85685, Sep. 11, 1991
FACTS: In its complaint Purefoods alleged that Lauro
Cruz applied for a credit line, which was approved, and Lauro
Cruz made various purchases. The unpaid account of Lauro
Cruz, according to Purefoods, amounted to P55,246. The
parties who signed the credit application card as applicants,
however, are ME Cruz who signed over the printed words
“Name of Signatory” and Marilou Cruz who signed over the
printed words “Authorized Signature.” The application card
indicated Mang Uro Store, as the Trade Name; and Lauro
Cruz as owner and manager. Lauro Cruz contends that he did
not sign any of the invoices attached to the complaint. The
trial court ordered Lauro Cruz to pay Purefoods P55,246 as
unpaid account plus interest. The Court of Appeals sustained
the trial court.
HELD: The Supreme Court reversed the Court of Appeals’
decision and held that the trial court even without laying

842
CIVIL CODE OF THE PHILIPPINES Art. 1903

the factual premises made a sweeping conclusion that it was

Lauro Cruz who applied for a credit line with Purefoods. But
as correctly pointed by Lauro Cruz, the documents themselves
show that he did not sign any of them. The credit application
card is a form prepared and supplied by Purefoods. There is
no evidence, much less an allegation that it was Lauro who
filled up the entries in said form. It is logical to presume that
the parties who signed it made the entries.
Since on the face of the document, the owner-manager
of the Mang Uro Store which is written on the column Trade
Name is Lauro Cruz and not the parties signing the same, it
was incumbent upon Purefoods to inquire into the relation-
ship of the signatories to Lauro or satisfy itself as to their
authority to act for or represent Lauro. Under the circum-
stances, Lauro had no participation and the two applicants
could have acted without authority from him or as his duly
authorized representatives. In either case, for the protection
of its interest, Purefoods should have made the necessary
inquiry verification as to the authority of the applicants and
to find out from them whether Lauro is both the owner and
manager or merely the owner or the manager, for that is
what owner/manager in its form could signify.

Art. 1903. The commission agent shall be responsible

for the goods received by him in the terms and conditions
and as described in the consignment, unless upon receiving
them he should make a written statement of the damage
and deterioration suffered by the same.

COMMENT:
(1) ‘Commission Agent’ Defined
One in which the commission agent must be a merchant
or broker, the agent having the option of acting in his own
name or in that of the principal.

(2) Distinction Between a Commission Agent and a Broker

A commission agent is one engaged in the purchase and
sale for a principal of personal property, which for this pur-
pose, has to be placed in his possession and at his disposal.

843
Arts. 1904-1905 CIVIL CODE OF THE PHILIPPINES

He has a relation not only with his principal, and the buyers
or sellers, but also with the property which constitutes the
object of the transaction.
A broker, upon the other hand, maintains no relation
with the thing which he purchases or sells. He is supposed to
be merely a go-between, an intermediary between the seller
and the buyer. As such, he does not have either the custody
or the possession of the thing that he disposes of. His only
function is, therefore, to bring the parties to the transaction.
(Pacific Commercial Co. v. Yatco, 68 Phil. 398).

(3) Established Place of Business

It may be said that a commission agent is an agent,
with an established place of business, allowed to have in his
possession the goods of the principal.

(4) Presumption as to When the Damage to the Goods Oc-

curred
This Article gives a presumption to the effect that the
damage to the merchandise were suffered while in the pos-
session and custody of the agent; such a presumption is only
a disputable one however. (3 Echavarri 105).

Art. 1904. The commission agent who handles goods of

the same kind and mark, which belong to different owners,
shall distinguish them by countermarks, and designate the
merchandise respectively belonging to each principal.

COMMENT:
Duty of Commission Agent to Place Countermarks
The reason for the Article is obvious.

Art. 1905. The commission agent cannot, without the

express or implied consent of the principal, sell on credit.
Should he do so, the principal may demand from him pay-
ment in cash, but the commission agent shall be entitled to
any interest or benefit, which may result from such sale.

844
CIVIL CODE OF THE PHILIPPINES Art. 1905

COMMENT:
(1) Sale by the Commission Agent on Credit (Not Cash)
Example:
A was P’s commission agent who was asked to sell P’s
car on cash. A sold it on credit. What are P’s rights?
ANS.: P may demand from A payment in cash. On the
other hand, A shall be entitled to any interest or benefit which
may result from such a sale on credit.

Green Valley Poultry v. Intermediate

Appellate Court
L-49395, Dec. 26, 1984
An agent who sells the goods on credit without the
consent of the principal is liable for the price of the goods.
However, the agent shall get the extra benefits derived from
selling goods on credit.

(2) Untenable Defense of Agent

The commission agent is not allowed to escape the effects
of this article by proving that the profits would have been
less had the sale been made on a cash basis. This defense
on the part of the agent is not tenable because if this were
to be allowed, the way will be open for delay, fraud and bad
faith. (1 Malagarriaga 467).

(3) Choices Given to the Principal

Two choices are given to the principal:
(a) Require cash payment — If this is done, the principal
should not be allowed to enrich himself at the agent’s
expense.
(b) Ratify the sale on credit — here the principal will have
both the risks and the advantages. (See 3 Echavarri,
p. 100).

(4) Example
If an agent was authorized to sell a Godin electric acoustic
guitar for P100,000 cash, but sells it on credit for P120,000,

845
Arts. 1906-1907 CIVIL CODE OF THE PHILIPPINES

the principal can demand from said agent the sum of P100,000
cash. However, should the agent eventually collect the entire
P120,000, he can keep this entire sum of P120,000. In other
words, he gets an ultimate personal gain of P20,000. This
situation must not be confused with the case of an agent who,
being authorized to sell for P100,000 cash, sells the property
for P120,000 cash. Here, the entire P120,000 must be turned
over to the principal — as already previously explained.

Art. 1906. Should the commission agent, with authority

of the principal, sell on credit, he shall so inform the prin-
cipal, with a statement of the names of the buyers. Should
he fail to do so, the sale shall be deemed to have been made
for cash insofar as the principal is concerned.

COMMENT:
(1) Duty of Agent to Inform the Principal
(a) In this Article, an authorized sale on credit may be
treated of as one on a cash basis.
(b) This Article only talks of the relations between the com-
mission agent and the principal; third parties should not
be prejudiced.

(2) Reason for the Law

To prevent the commission agent from stating that a
sale which was “in cash” in reality, was made on the credit
basis. (See 1 Malagarriaga 470).

Art. 1907. Should the commission agent receive on a

sale, in addition to the ordinary commission, another called
a guarantee commission, he shall bear the risk of collection
and shall pay the principal the proceeds the sale on the
same terms agreed upon with the purchaser.

COMMENT:
(1) Guarantee Commission
(a) The guarantee commission, also called a del credere
commission is different from the ordinary commission.

846
CIVIL CODE OF THE PHILIPPINES Art. 1908

(NOTE: An agent who receives a guarantee com-

mission is called a del credere agent.)
(b) The guarantee commission is given in return for the risks
the agent will have to bear in the collection of credits.

(2) Example of the Purpose

If an agent receives a guarantee commission, and the
third party does not pay, the agent will have to pay the
principal just the same. Thus, an agent was authorized to
sell on credit an Ibañez electric guitar for P40,000 with a
10% ordinary commission (P4,000). He was also paid a guar-
anteed commission of 5% (P2,000). His total profit would be,
therefore, P6,000. However’ every time the customer fails to
pay an installment that is due, the agent himself pay said
amount to the principal. Thus, the agent bears the risk. This
is the reason for the “guarantee commission.”

(3) Applicability to Both Cash and Credit Sales

Does Art. 1907 include both cash and credit sales?
ANS.: Yes, since the law makes no distinction. Moreover,
there are cash sales which may give a short term or period.
(See 1 Malagarriaga 466-467).

(4) When Insolvency of Debtor Is Not a Defense

If the agent receives a guarantee commission, he cannot put
up the defense that the debtor-third person possesses property.
This is precisely the risk the commission agent assumed. This
bother need not worry the principal. (See Echavarri 112).

Art. 1908. The commission agent who does not collect

the credits of his principal at the time when they become
due and demandable shall be liable for damages, unless he
proves that he exercised due diligence for that purpose.

COMMENT:
(1) Failure of Agent to Collect Credits
(a) This Article particularly applies to a case where there
is no guarantee commission. But even if there be one,

847
Art. 1909 CIVIL CODE OF THE PHILIPPINES

should the agent not apply the proceeds of the sale on

the same terms agreed upon by the purchaser, said agent
is liable for interest in lieu of damages. This, it must be
noted, can be monetary obligation.
(b) Even if a commission agent can prove that he exercised
due diligence on collecting the credits, he would still be
responsible for non-payment on time in case he assumed
the risks of collection by receiving a guarantee commis-
sion.

(2) When Agent is Not Liable in Case of Failure to Col-

lect
If a commission agent without a guarantee commission
should prove he exercised due diligence in the collection of the
credit, and the credit is not collected for example, because of
the fault of the third party, the agent is freed from respon-
sibility. In such an eventuality, the debtor can be directly
proceeded against by the principal. The principal need not
fear in this case that the debtor can put up defenses which
he (the debtor) could have set up against the agent. (See 3
Echavarri 111).

(3) Due Diligence of Agent

One way of showing due diligence is by making use at
the proper time of the legal means to obtain payment.

Art. 1909. The agent is responsible not only for fraud,

but also for negligence, which shall be judged with more or
less rigor by the courts, according to whether the agency
was or was not for a compensation.

COMMENT:
(1) Responsibility Not Only for Fraud But Also for Negli-
gence
(a) Whether the agency is gratuitous or not is important in
considering the liability of the agent for negligence.
(b) For fraud, the agent is of course always liable.

848
CIVIL CODE OF THE PHILIPPINES Art. 1909

(2) Duty of Agent to Insure

If an agent is instructed to insure the goods under his
custody, and he does not do so, he is responsible, but if no
such obligation has been imposed by the principal, the agent
cannot be held liable because the obligation to insure is not
one of the duties required by the law to be performed by the
agent. (International Films [China] v. Lyric Film Exchange,
63 Phil. 778).

(3) Some Decided Cases

International Films (China) v.

Lyric Film Exchange
63 Phil. 778
FACTS: The Lyric Film Exchange leased a film entitled
“Monte Carlo Madness” from the International Films (China)
thru the latter’s agent named Gabelman. After the film had
been shown, the Exchange thru Vicente Albo, chief of its film
department, asked the company where the film was to be re-
turned. Gabelman replied that the film should be deposited in
the vaults of the Exchange. Later the film was destroyed by
accidental fire without fault on the part of the Exchange or
its employees. The Exchange had NOT insured the film, but
there was NO stipulation that it should do so. International
Films (China) then sued the Exchange for damages.
HELD: Granting that Albo of the Exchange was a sub-
agent of International Films insofar as the custody of the film
was concerned, still Albo and the Exchange were not in any
way negligent. The fact that the film was not insured against
fire does not constitute fraud or negligence on the part of the
defendant company because, as a sub-agent, it had received
no instruction to that effect from its principal and the insur-
ance of the film does not form a part of the obligation imposed
upon it by law.

Tan Tiong Teck v. La Comision de Valores Bol-

sas y Cua Oh and Co.
69 Phil. 425
FACTS: A stock broker was ordered by his client, Tan
Tiong Teck, to sell the former’s mining shares (10,000) for

849
Art. 1909 CIVIL CODE OF THE PHILIPPINES

at least P0.15 each on Jun. 15, 1957. Although the price

prevailing that day was P0.17-1/2 for each share, the broker
nevertheless still sold the shares for only P0.15 each. Is the
broker liable for the difference?
HELD: Yes, for an agent must act with the prudence of
a good father of a family, by trying to obtain the best pos-
sible price for the shares. The broker is, therefore, liable to
his principal.

Nepomuceno, et al. v. Heredia

7 Phil. 563

FACTS: Nepomuceno instructed his agent Heredia to buy

good real estate for P2,000, but unfortunately, although Heredia
was careful, the land he purchased had a questionable title.
Nepomuceno sued Heredia for the recovery of the P2,000.
HELD: The agent is not liable, for he had exercised
reasonable care and diligence in the pursuit of the agency.

Gutierrez Hermanos v. Oria

Hermanos and Co.
30 Phil. 491
FACTS: Oria Hermanos authorized its agent Gutierrez
Hermanos to insure against all war risks a stock of hemp in
Catarman, Samar. The agent complied with the instructions,
and had the goods insured with a London Company thru
the latter’s Philippine representative, Stevenson & Co. The
hemp was eventually seized by insurgents, but the insurance
company refused to pay on the ground of certain fraudulent
concealments on the part of Oria Hermanos, the insured. When
Oria Hermanos could not recover in court the amount of the
insurance indemnity, it sued its agent for damages, including
the amount of the insurance indemnity, the premiums paid
and the expenses of litigation.
HELD: The agent should not be held liable, for it had
faithfully complied with all the instructions that had been
given to it. There was neither negligence nor deceit on the
part of the agent.

850
CIVIL CODE OF THE PHILIPPINES Art. 1909

Austria v. Court of Appeals

39 SCRA 527

FACTS: An agent who had been entrusted by her principal

with a diamond pendant for sale was robbed of said pendant.
Is said agent excused from the civil liability attendant to the
loss of the pendant even if the robber is not yet convicted?
HELD: Yes, for it is sufficient that the fortuitous event
(the robbery) took place without the agent’s fault. Proof on this
point can be arrived at by mere preponderance of evidence.

Caoile v. CA
44 SCAD 1040
1993

An agent who signed the receipt as a witness but never

received the alleged amount is NOT LIABLE.

851
 CIVIL CODE OF THE PHILIPPINES

Chapter 3

OBLIGATIONS OF THE PRINCIPAL

Art. 1910. The principal must comply with all the ob-
ligations which the agent may have contracted within the
scope of his authority.
As for any obligation wherein the agent has exceeded
his power, the principal is not bound except when he rati-
fies it expressly or tacitly.

COMMENT:
(1) Principal’s Duty to Comply With Agent’s Commit-
ments
Under Par. 1 — aside from acting within the scope of
his authority, the agent must also act in the name of the
principal, and not in his own name; otherwise, the principal
is not bound except when the transaction concerns things
belonging to the principal. (See Art. 1883).

(2) Ratification by Principal

If an agent misrepresents to a purchaser, and the principal
accepts the benefits of such misrepresentation, he cannot at
the same time deny responsibility for such misrepresentation.
(Gonzales & Gomez v. Haberer, 47 Phil. 380).

(3) Case

Bedia v. White
GR 94050, Nov. 21, 1991
FACTS: Bedia and White entered into a participation
contract, which reads: “I/We, the above-mentioned company
hereby agrees to participate in the 1980 Dallas State Fair
to be held in Dallas, Texas on Oct. 3 to Oct. 19, 1980. I/We

852
CIVIL CODE OF THE PHILIPPINES Art. 1910

request for a 15-square-meter booth space worth $2,250 U.S.

Dollars. I/We further understand that this participation con-
tract shall be deemed non-cancelable after payment of the said
downpayment, and that any intention on our part to cancel
the same shall render whatever amount we have paid forfeited
in favor of HONTIVEROS & ASSOCIATED PRODUCERS
PHILIPPINE YIELDS, INC.
For the above consideration, I/We understand that Hon-
tiveros and Associated Producers Phil. Yields, Inc. shall reserve
said booth for our exclusive perusal; we also understand that
the above cost includes overall exterior booth decoration and
materials but does not include interior designs which will
be per our specifications and expenses. Participant’s Author-
ized Signature (Sgd) Emily White Participation Accepted by:
(Sgd) Sylvia H. Bedia.” White and her husband sued Bedia
and Hontiveros & Associated Producers Phil. Yields, Inc.
for damages caused by their fraudulent violation of their
agreement. She averred that Bedia had approached her and
persuaded her to take part in the State Texas Fair, and that
she made a downpayment of $500 to Bedia on the agreed
display space. In due time, she enplaned for Dallas with her
merchandise but was dismayed to learn later that the defend-
ants had not paid for or registered any display space in her
name, nor were they authorized by the State Fair Director to
recruit participants. She said she incurred losses as a result
for which the defendants should be held solidarily liable.
Defendants denied White’s allegation that they had deceived
her. No display space was registered in her name as she was
only supposed to share the spaced leased by Hontiveros. She
was not allowed to display her goods in that space because
she had not paid her balance of $1,750 in violation of their
contract. Bedia made the particular averment that she did
not sign the participation contract on her own behalf but as
an agent of Hontiveros and that she had later returned the
advance payment of $500 to White. The trial court dismissed
the complaint against Hontiveros, but found Bedia liable for
fraud and awarded White actual and moral damages. The
Court of Appeals sustained the trial court.
ISSUE: In what capacity did Bedia enter into the par-
ticipation contract with White? Both the trial and appellate
courts held she was acting in her own personal behalf.

853
Art. 1911 CIVIL CODE OF THE PHILIPPINES

HELD: The Supreme Court reversed and set aside the

decision of the Court of Appeals saying that Bedia acted as
agent of Hontiveros and held that White acknowledged that
Bedia was only acting for Hontiveros when it recruited her
as a participant in the Texas State Fair and charged her a
partial payment of $500. This amount was to be forfeited to
Hontiveros in case of cancellation by her of the agreement.
The fact that the contract was typewritten on the letterhead
stationery of Hontiveros bolsters this conclusion in the absence
of any showing that said stationery had been illegally used
by Bedia. Hontiveros itself has not repudiated Bedia’s agency
as it would have if she had really not signed in its name. In
the answer it filed with Bedia, it did not deny the latter’s
allegation that she was only acting as its agent when she
solicited White’s participation. If White had any doubt about
the capacity in which Bedia was acting, what she should
have done was verify the matter with Hontiveros. She did
not. Instead, she simply accepted Bedia’s representation that
she was an agent of Hontiveros and dealt with her as such.
Hence, White cannot now hold Bedia liable for acts performed
by her for and imputable to Hontiveros as her principal. Since
Bedia was not acting beyond the scope of her authority when
she entered into the Participation Contract on behalf of Hon-
tiveros, it is the latter that should be held answerable for any
obligation arising from the agreement. By moving to dismiss
the complaint against Hontiveros, White virtually disarmed
herself and forfeited whatever claim she might have proved
against the latter under the contract signed for it by Bedia.

Art. 1911. Even when the agent has exceeded his au-
thority, the principal is solidarily liable with the agent if
the former allowed the latter to act as though he had full
powers.

COMMENT:
(1) Liability of Principal Because of Estoppel
Reason for the law: The principal may be said to be in
estoppel and therefore innocent third persons should not be
prejudiced. It cannot be denied that here the principal failed
to adopt the needed measures to prevent misrepresentation.

854
CIVIL CODE OF THE PHILIPPINES Arts. 1912-1913

(2) Solidary Liability

This is an instance when solidarity is imposed by law.
It would seem, however, that this Article is unjust for if the
agent is considered innocent and acting within the scope of
his authority, he should be exempted from liability. (See Art.
1897).

Art. 1912. The principal must advance to the agent,

should the latter so request, the sums necessary for the
execution of the agency.
Should the agent have advanced them, the principal
must reimburse him therefor, even if the business or un-
dertaking was not successful, provided the agent is free
from all fault.
The reimbursement shall include interest on the sums
advanced, from the day on which the advance was made.

COMMENT:
(1) Advancing of Necessary Funds
(a) Failure of the agency through no fault of the agent must
be borne solely by the principal. It is unfair to hold this
failure against an innocent agent.
(b) Even if the agency be gratuitous, this Article will also
apply; hence, the agent will still be entitled to reimburse-
ment and interest. This is so because the reimbursement
and interest spoken of in this Article do not refer to
compensation or commission. (See Fortis v. Gutierrez
Hermanos, 6 Phil. 100).

(2) Broker’s Fee

A broker is entitled to a commission if the sale is ef-
fected, but not if there is no perfected transaction. (See Perez
v. Luzon Surety Co., 38 O.G. 1213).

Art. 1913. The principal must also indemnify the agent for
all the damages which the execution of the agency may have
caused the latter, without fault or negligence on his part.

855
Arts. 1914-1915 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Principal to Compensate Agent for Damages
(a) This Article is based on equity, and applies even if the
agency be gratuitous, as a matter of fact, even more so.
(b) Naturally, this Article can be made use of only if the
agency exists, otherwise the Article cannot apply. In such
a case, the supposed agent is not acting in behalf of a
true principal, and the reason for the law would cease.
(Albaladejo y Cia v. Phil. Refining Co., 45 Phil. 556).

Art. 1914. The agent may retain in pledge the things

which are the object of the agency until the principal ef-
fects the reimbursement and pays the indemnity set forth
in the two preceding articles.

COMMENT:
Right of Agent to Retain by Way of Pledge
The Article speaks of one kind of pledge by operation of
law.

Art. 1915. If two or more persons have appointed an

agent for a common transaction or undertaking, they shall
be solidarily liable to the agent for all the consequences of
the agency.

COMMENT:
(1) Solidary Liability of Principals
Solidarity is the rule under this Article because of the
common transaction. Thus, even if the agent have been ap-
pointed separately, the rule should apply in the interest of
justice.

(2) Examples
(a) W, X and Y employ agent A to sell land owned in com-
mon by the three, with A receiving a commission of
P1,500,000. If A is successful, A can collect from any

856
CIVIL CODE OF THE PHILIPPINES Art. 1916

of the three the amount of P1,500,000 because of their

solidary liability. Of course, if X pays the P1,500,000,
he can recover reimbursement of P500,000 each from Y
and W.
(b) C, D and E appoint F as their agent to sell their sepa-
rate houses. The liability of C, D and E are merely joint
and not solidary even if the appointment is made in
one instrument. This is because this is NOT a common
transaction or undertaking.

(3) Case

Constante Amor de Castro v. CA

GR 115838, Jul. 18, 2002

The rule in Art. 1915 applies even when the appointments

were made by the principals in separate acts, provided that
they are for the same transaction. The solidarity arises from
the common interest of the principals, and not from the act
of constituting agency.
By virtue of this solidarity, the agent can recover from
any principal the whole compensation and indemnity owing
to him by the others. The parties, however, may, by express
agreement, negate this solidary responsibility. The solidar-
ity does not disappear by the mere partition effected by the
principals after the accomplishment of the agency.
If the undertaking is one in which several are interested,
but only some create the agency, only the latter are solidarily
liable, without prejudice to the effects of negotiorum gestio
with respect to the others. And if the power granted includes
various transactions some of which are common and others
are not, only those interested in each transaction shall be
liable for it.

Art. 1916. When two persons contract with regard to the

same thing, one of them with the agent and the other with
the principal, and the two contracts are incompatible with
each other, that of prior date shall be preferred, without
prejudice to the provisions of Article 1544.

857
Art. 1916 CIVIL CODE OF THE PHILIPPINES

COMMENT:
QUESTION — (When Both Principal and Agent Contract
with Respect to the Same Thing)
On Jan. 31, 2000, A who owns a piece of agricultural
land, gave a general power of attorney to B. On Feb. 20,
2005, A, without the knowledge of B, executed in favor of C
a special power of attorney to sell said piece of land. On Feb.
25, 2005, B as attorney-in-fact of A, executed a deed of sale
in favor of D. On the same date, Feb. 25, 2005, C, under the
special power given by A, sold the same piece of land to E.
Assuming that the vendees have not yet registered their
respective documents or have taken possession of the land,
which of the two sales is valid and enforceable and who is
responsible for damages, if any? Reasons.
ANS.: The sale by C in favor of E is valid and enforce-
able because C was specifically granted authority to sell. B,
who only had a general power of attorney had NO right to
sell, since selling ordinarily is not a mere act of administra-
tion. Moreover, under Art. 1878, a special power of attorney
is needed to effectuate a sale. If anyone is liable for damages,
it is certainly B who performed an unauthorized thing.

Diosdado Sta. Romana v. Carlos Imperio, et al.

L-17280, Dec. 29, 1965
FACTS: A principal authorized his brother as agent to
sell certain parcels of land. The sale was made, with both the
deed of sale and the authority of the agent being registered
in the Registry of Property. Subsequently, the principal sold
the same parcels of land to another buyer who managed to
have the title given to him. Which buyer must prevail.
HELD: The buyer from the agent, in view of the regis-
tration in good faith in his name of the sale. Here, Art. 1544
regarding the double sale of property can be applied. Hence
also, if said buyer sues for annulment of the transaction and
seeks to recover its value, he will prevail in view of the breach
of warranty against eviction. The value of the land must be
returned, even if said value be greater or less than the price
of the sale.

858
CIVIL CODE OF THE PHILIPPINES Arts. 1917-1918

Art. 1917. In the case referred to in the preceding arti-

cle, if the agent has acted in good faith, the principal shall
be liable in damages to the third person whose contract
must be rejected. If the agent acted in bad faith, he alone
shall be responsible.

COMMENT:
Liability of Principal if Agent Acted in Good Faith or
in Bad Faith
Note the liability of the principal for damages.

Art. 1918. The principal is not liable for the expenses

incurred by the agent in the following cases:
(1) If the agent acted in contravention of the principal’s
instructions, unless the latter should wish to avail himself
of the benefits derived from the contract;
(2) When the expenses were due to the fault of the
agent;
(3) When the agent incurred them with knowledge
that an unfavorable result would ensue, if the principal
was not aware thereof;
(4) When it was stipulated that the expenses would
be borne by the agent, or that the latter would be allowed
only a certain sum.

COMMENT:
When Principal Is Not Liable for Agent’s Expenses
(a) Reason for Par. 1 –– to punish the agent. Reason for
the exception — this is implied ratification.
(b) Reason for Par. 2 — this is self-evident.
(c) Reason for Par. 3 — this is tantamount to bad faith and
lack of due diligence.
(d) Reason for Par. 4 — this stipulation would not contravene
good morals or public policy, etc.

859
 CIVIL CODE OF THE PHILIPPINES

Chapter 4

MODES OF EXTINGUISHMENT OF AGENCY

Art. 1919. Agency is extinguished:

(1) By its revocation;
(2) By the withdrawal of the agent;
(3) By the death, civil interdiction, insanity or insol-
vency of the principal or of the agent;
(4) By the dissolution of the firm or corporation which
entrusted or accepted the agency;
(5) By the accomplishment of the object or purpose
of the agency;
(6) By the expiration of the period for which the
agency was constituted.

COMMENT:
(1) Keyword for Extinguishment of the agency — ED-
WARD
E — Expiration
D — Death, etc.
W — Withdrawal
A — Accomplishment
R — Revocation
D — Dissolution
[OTHER CAUSES: Termination by mutual consent,
novation, loss of subject matter of the agency (11 Manresa
570-571), outbreak of war if inconsistent with the agency. (2
Am. Jur. 61).]

860
CIVIL CODE OF THE PHILIPPINES Art. 1919

(2) Death
Ordinarily, the death of the principal terminates the
agency, even if a period had been stipulated and such period
has not yet ended. (See Gabin, et al. v. Villanueva, C.A., 5
O.G. 5749). However, under Art. 1931, “anything done by the
agent, without knowledge of the death of the principal or of
any other cause which extinguishes the agency, is VALID and
shall be fully effective with respect to third persons who may
have contracted with him in good faith.” (See Manuel Buason,
et al. v. Mariano Panuyas, 105 Phil. 795).

Manuel Buason, et al. v. Mariano Panuyas

105 Phil. 795
FACTS: Dayao authorized in 1930 his agent Bayuga to sell
a particular parcel of land. This authority to sell was annotated
on the original certificate of title of the registered land. Dayao
died in 1934, and in 1939, his children sold the land to Buason.
This sale was never registered. In 1944, Bayuga, who did not
know of the death of Dayao, sold the same land to Panuyas, an
innocent purchaser for value. This 1944 sale was duly registered.
Buason now seeks to cancel the sale to Panuyas.
HELD: The sale will not be cancelled as Panuyas has
a better right to the land. In case of double sale of land, he
who first recorded the sale in good faith has a better right.
While it is true that the death of Dayao in 1934 terminated
the agent’s authority to sell the land, still under Art. 1738
of the old Civil Code, “anything done by the agent, without
knowledge of the death of the principal or of any other cause
which extinguishes the agency, is valid and shall be fully ef-
fective with respect to third persons who may have contracted
with him in good faith.”

Hermosa v. Longara
L-5267, Oct. 27, 1953
FACTS: P authorized A to support the former’s grandson.
P subsequently died. Is A still required to give support?
HELD: No, for two reasons. P’s death terminated A’s
authority. Also, P’s obligation to give support, being a personal
one, was extinguished on his death.

861
Art. 1920 CIVIL CODE OF THE PHILIPPINES

Natividad Herrera, et al. v. Luy Kim Guan, et al.

L-17043, Jan. 31, 1961
If an agent sells the lands of his principal after the lat-
ter’s death, the sale will still be valid, if the agent did NOT
know at the time of the sale that the principal was already
dead.

(3) Dissolution
Note that the dissolution of the firm or corporation
(whether it be the principal or the agent) ends the agency.

Art. 1920. The principal may revoke the agency at will,

and compel the agent to return the document evidencing
the agency. Such revocation may be express or implied.

COMMENT:
(1) Revocation by Principal or Agency
(a) Reason — Agency is generally revocable at the will of the
principal because the trust and confidence may have been
lost. (See Barretto v. Santa Marina, 26 Phil. 440).
(b) Revocation at will is proper:
1) even if the agency is onerous;
2) even if the period fixed has not yet expired. (See
Barretto v. Santa Marina, 26 Phil. 440).

(2) When Agency Cannot Be Revoked at the Principal’s

Will
The agency cannot be revoked at will in the following
instances:
(a) When it is “coupled with an interest” (interest possessed
by the agent not in the proceeds arising from the exer-
cise of the power, but interest in the subject matter of
the power). (2 Am. Jur. 61-63 and Eulogio del Rosario,
et al. v. Abad & Abad, 104 Phil. 648).
(b) In the cases mentioned under Art. 1927 ––
1) when a bilateral contract depends on the agency;

862
CIVIL CODE OF THE PHILIPPINES Art. 1920

2) when the agency is the means of fulfilling an obli-

gation already contracted;
3) in the case of a partner appointed manager in the
contract of partnership and his removal from the
management is unjustifiable.
(c) When there has been a WAIVER by the principal (how-
ever, the irrevocability of a power of attorney cannot affect
one who is not a party thereto, it being obligatory only
on the principal who created the agency.) (New Manila
Lumber Co. v. Republic, 107 Phil. 824).
(d) When the principal is obliged not to revoke. (Here, the
principal can still revoke, but he can be held liable for
damages, for breach of contract.)
(e) When the revocation is done in bad faith. [Here, the
principal can still revoke, but innocent third parties
should not be prejudiced; moreover, the innocent agent
can be entitled to damages from him. (See Infante v.
Cunanan, 93 Phil. 691; Danon v. Antonio Brimo & Co.,
42 Phil. 133; Reyes v. Mosqueda, 53 O.G. 2158).]

(3) Agent Cannot Generally Recover Damages

Under the general rule, when revocation is proper, the
agent cannot get damages because the principal is merely
exercising a right.

(4) Kinds of Revocation

(a) Express
(b) Implied — as in the following:
1) appointment of a new agent for the same business
or transaction (Art. 1923) provided there is INCOM-
PATIBILITY. (See Dy Buncio & Co. v. Ong Guan
Can, 60 Phil. 696).
2) If the principal directly manages the business en-
trusted to the agent, dealing directly with third per-
sons, in a way INCOMPATIBLE with the agency.

863
Arts. 1921-1923 CIVIL CODE OF THE PHILIPPINES

Art. 1921. If the agency has been entrusted for the

purpose of contracting with specified persons, its revoca-
tion shall not prejudice the latter if they were not given
notice thereof.

COMMENT:
Agency for Contracting With Specified Persons
(a) So that innocent third parties may not be prejudiced, the
principal who fails to give the notification can be held
liable for damages. (Rallos v. Yangco, 20 Phil. 269).
(b) No notice is required for persons who already know of
the revocation for then the purpose of the notification
shall have already been served.

Art. 1922. If the agent had general powers, revocation

of the agency does not prejudice third person who acted in
good faith and without knowledge of the revocation. Notice
of the revocation in a newspaper of general circulation is
a sufficient warning to third persons.

COMMENT:

Agency When Third Parties Are Not Specified

(a) In this Article, as distinguished from the preceding one,
the third persons have not been SPECIFIED.
(b) Note the effect of a revocation in a newspaper of general
circulation.

Art. 1923. The appointment of a new agent for the same

business or transaction revokes the previous agency from
the day on which notice thereof was given to the former
agent, without prejudice to the provisions of the two pre-
ceding articles.

COMMENT:
Effect of Appointment of a New Agent
(a) Appointment of a new agent revokes the first agency

864
CIVIL CODE OF THE PHILIPPINES Art. 1924

only in case of incompatibility. (See Dy Buncio & Co. v.

Ong Guan Can, 60 Phil. 696).
(b) A special power revokes a general one. (Art. 1926).
(c) If the first agent is not notified of the appointment of
the second agent, it is understood that the first agency
still exists. (Garcia v. De Manzano, 39 Phil. 577).

Art. 1924. The agency is revoked if the principal di-

rectly manages the business entrusted to the agent, dealing
directly with third persons.

COMMENT:
(1) Effect if the Principal Directly Manages the Business
The rule applies only in case of incompatibility, because
it may be that the only desire of the principal is for him and
the agent to manage the business together. In case of true
inconsistency, the agency is revoked, for there would no longer
be any basis therefor. (11 Manresa 574).

(2) Case

CMS Logging, Inc. v. CA & D.R. Aguinaldo Corp.

GR L-41420, Jul. 10, 1992

The principal may revoke a contract of agency at will,

and such revocation may be express or implied, and may be
availed of even if the period fixed in the contract of agency
has not yet expired. As the principal has this absolute right
to revoke the agency, the agent cannot object thereto; neither
may he claim damages arising from such revocation, unless it
is shown that such was done in order to evade the payment
of agent’s commission.
In the case at bar, CMS appointed DRACOR as its agent
for the sale of its logs to Japanese firms. Yet, during the
existence of the contract of agency, DRACOR admitted that
CMS sold its logs directly to several Japanese firms. This act
constituted an implied revocation of the contract of agency

865
Arts. 1925-1926 CIVIL CODE OF THE PHILIPPINES

under Art. 1924 of the Civil Code. And since the contract of
agency was revoked by CMS when it sold its logs to Japa-
nese firms without the intervention of DRACOR, the latter
is no longer entitled to its commission from the proceeds of
such sale and is not entitled to retain whatever moneys it
may have received as its commission for said transactions.
Neither would DRACOR be entitled to collect damages from
CMS, since damages are generally not awarded to the agent
for the revocation of the agency, and the case at bar is not
one falling under the exception mentioned, which is to evade
the payment of the agent’s commission.
Be it noted that the act of a contractor who, after execut-
ing powers of attorney in favor of another empowering the
latter to collect whatever amounts may be due to him from
the Government, and, thereafter, demanded and collected
from the government the money the collection of which he
entrusted to his attorney-in-fact, constituted revocation of the
agency in favor of the attorney-in-fact.

Art. 1925. When two or more principals have granted a

power of attorney for a common transaction, any one of them
may revoke the same without the consent of the others.

COMMENT:
Revocation by One of Two or More Principals
The power to revoke here is a consequence of the solidary
liability of co-principals.

Art. 1926. A general power of attorney is revoked by a

special one granted to another agent, as regards the special
matter involved in the latter.

COMMENT:
Rule When Special Power Is Granted to Another
Agent
(a) In this Article, two agents are involved.
(b) A specific right naturally prevails over a general one.

866
CIVIL CODE OF THE PHILIPPINES Art. 1927

Art. 1927. An agency cannot be revoked if a bilateral

contract depends upon it, or if it is the means of fulfilling
an obligation already contracted, or if a partner is appointed
manager of a partnership in the contract of partnership and
his removal from the management is unjustifiable.

COMMENT:
(1) When an Agency Cannot Be Revoked
This enumerates three instances of irrevocability:
(a) If a bilateral contract depends upon the agency.
Example 1: P wanted to make A his surety so P
made A his agent as a sort of inducement to safeguard
him from eventual loss. Under American Law, this is
referred to as an agency or authority necessary to ef-
fectuate a security; it is also an agency or authority
coupled with an interest. (2 C.J. 530-531).
Example 2: A power to sell, where the property is
delivered to the agent to dispose of it for the protection
of himself and other creditors is an authority coupled
with an interest, and therefore irrevocable, provided
the interest is indicated in the power of attorney. (Del
Rosario v. Abad, 104 Phil. 648).
Example 3: If the agency is only a clause or a part
of a reciprocal contract. Reasons: The contract itself and,
therefore, also the clause on the agency, cannot gener-
ally be revoked except thru mutual consent. (11 Manresa
572).
(b) If the agency is the means of fulfilling an obligation
already contracted.
Example: Sonia is indebted to Concepcion for the
purchase of a diamond headband. But Sonia in the mean-
time has no money. So she appoints Concepcion as her
agent to collect from Maria some money which Maria
owes her (Sonia), which money in turn will be applied
to the purchase price of the headband. It is clear that
Sonia cannot revoke the agency here, unless she first
pays Concepcion.

867
Art. 1928 CIVIL CODE OF THE PHILIPPINES

Bisaya Land Transportation Co., Inc. v. Sanchez

GR 74623, Aug. 31, 1987

FACTS: S and B entered into a shipping agency

contract whereby S has been appointed as a shipping
agent for B. Later, B opened its own branch office which,
in effect, revoked the contract of agency.
HELD: The revocation of the contract of agency is
not sanctioned by law because the agency is the means
by which S could fulfill his obligation.
(c) If a partner is appointed manager of a partnership in
the contract of partnership, and his removal from the
management is unjustifiable.

(2) Effect When “Interest” Terminates

An agency coupled with an interest cannot be terminated
unilaterally by the principal, but revocation can be made AF-
TER the interest terminates. So if the Government allows the
De la Rama Steamship Co. to manage the former’s vessel for
2 years in order to pay the company for its help in acquiring
the vessels, at the end of said two years, the Government
may end the agency. (De la Rama Steamship Co. v. Tan, et
al., 99 Phil. 1034).

Art. 1928. The agent may withdraw from the agency by

giving due notice to the principal. If the latter should suffer
any damage by reason of the withdrawal, the agent must
indemnify him therefor, unless the agent should base his
withdrawal upon the impossibility of continuing the perform-
ance of the agency without grave detriment to himself.

COMMENT:
(1) Withdrawal by Agent
(a) Just as a principal may revoke generally under Art.
1920, so also may an agent withdraw under Art. 1928.
(b) Reasons of health can justify withdrawal by the agent.
(De la Rama v. Hidalgo, 16 Phil. 450).

868
CIVIL CODE OF THE PHILIPPINES Arts. 1929-1930

(2) Effect When Agent Sues Principal

When an agent files a complaint against the principal for
a monetary claim in the former’s favor, dignity and decorum
will not ordinarily permit the continuation of the agency. Such
a complaint is therefore equivalent to withdrawal of the agent
from the agency. (Valera v. Velasco, 51 Phil. 695).

Art. 1929. The agent, even if he should withdraw from

the agency for a valid reason, must continue to act until
the principal has had reasonable opportunity to take the
necessary steps to meet the situation.

COMMENT:
When a Withdrawn Agent Must Still Act
Reason for the Article — to prevent damage to the prin-
cipal.

Art. 1930. The agency shall remain in full force and

effect even after the death of the principal, if it has been
constituted in the common interest of the latter and of the
agent, or in the interest of a third person who has accepted
the stipulation in his favor.

COMMENT:
(1) When Agency Continues Even After Death of Princi-
pal
This Article speaks of an agency:
(a) coupled with a common interest;
(b) coupled with the interest of a third person who has ac-
cepted the stipulation in his favor.

Example of COMMON interest:

Zenaida borrows from Jose, and as security entrusts to
Jose a ring, which Jose can sell in case Zenaida fails to pay
the debt at the time of maturity. Even if Zenaida dies, the
agency of Jose would still remain. (See Pasno v. Ravina, et
al., 54 Phil. 378).

869
Art. 1930 CIVIL CODE OF THE PHILIPPINES

Example of Interest of a THIRD PERSON:

Melady sells his land to Bravo and appoints Bravo his
agent in paying with the purchase price what Melady owes
Arellano, a third person. Here even when Melady dies, the
agency of Bravo continues to exist.
(2) Agency Coupled With an Interest
It is a well-settled general rule that if the authority of
an agent is coupled with an interest, it is not revocable by
the death, act, or condition of the principal, unless there is
some agreement to the contrary between the parties. This
is a well-recognized exception to the rule that the death of
the principal revokes the authority of an agent appointed by
him. (2 Am. Jur. 61-63). However, it must be noted that an
agent whose agency is coupled with an interest cannot stand
on a better ground than a partner appointed as manager in
the articles of partnership insofar as revocability of authority
or power is concerned. Inasmuch as a partner appointed as
manager in the articles of partnership can be divested of his
power if there is a just or lawful cause, it follows that an
agent whose agency is coupled with an interest can also be
stripped of his power of attorney, if there is a JUST CAUSE.
(Coleongco v. Claparols, L-18616, Mar. 31, 1964).

(3) Nature of the Agent’s Interest

In order that a power may be irrevocable because it is
coupled with an interest, it is necessary that the interest shall
be in the subject matter of the power and not in the proceeds
which will arise from the exercise of the power. The person
clothed with the power must derive under the instrument
creating it, or from the nature of the relation, a present or
future interest in the thing or subject itself on which the power
is to be exercised, and not merely that which is produced by
the exercise of the power. (2 Am. Jur. 61-63).

(4) Interest is Not the Share in the Profits or the Commis-

sion
(a) A power has been held NOT to be coupled with an interest
where the interest arises out of commission or out of the

870
CIVIL CODE OF THE PHILIPPINES Art. 1930

proceeds of a transaction as where the agent’s interest

is merely his right to receive, by way of compensation,
a certain percentage of the proceeds. (2 C.J. 532-533).
(b) But a power to make a collection or sale out of the
proceeds to pay an existing debt due to the agent from
the principal is a power coupled with an interest, as is
also an interest, as is also an authority to the agent to
reimburse himself from such proceeds for advances made
to the principal. It has also been held that authority to
loan money and to collect the same and account for all
over a given percent, which the agent is to retain as his
compensation is authority coupled with an interest. (2
C.J. 532-533).

(5) The Entire Agreement to Be Construed

Whether an interest which will make the agency or power
irrevocable exists in a particular case is to be determined
from the entire agreement between the parties, and from
the facts and circumstances attending the relation existing
between the parties. The terminology used by the parties is
not controlling; even though an agency or power is made in
terms irrevocable, that fact will not prevent its revocation
by the principal where the agency or power is not in fact,
coupled with an interest. Nor will the fact of a stipulation in
the instrument that the intention of the grantor of the power
is that it shall be construed as a power of attorney coupled
with an interest in the subject matter thereof prevent its
revocation. (2 Am. Jur. 61-63).

Eulogio del Rosario, et al. v. Abad and Abad

104 Phil. 648

FACTS: In 1937, Tiburcio del Rosario borrowed from

Primitivo Abad P2,000, with 12% interest payable in 1941.
Tiburcio mortgaged the improvements of a parcel of land in
favor of his creditor. On the same day that he obtained the
loan, Tiburcio executed an “irrevocable special power of attor-
ney coupled with an interest” in favor of Abad, the mortgagee,
authorizing him among other things, to sell and convey the
parcel of land, without however indicating in the document

871
Art. 1931 CIVIL CODE OF THE PHILIPPINES

the purpose of the agency to sell. In 1945, the mortgagor died,

with the debt still unpaid. In 1947, Primitivo, acting as at-
torney-in-fact of Tiburcio, sold the land to his (Primitivo’s) son
in consideration of P1 and the extinguishment of the mortgage
debt. The heirs of Tiburcio claim that the sale is not valid
for it was made after Tiburcio’s death, and they now desire
to recover the possession and ownership of the land. Abad,
however, counters that death did not extinguish the agency
because by express provision of the power of attorney it was
irrevocable and coupled with an interest.
HELD: The sale is not valid because the principal had
already died when it was made. The agency was certainly
not one coupled with an interest. The mere mention of the
interest in the power of attorney is not enough. The power of
attorney should have stated what precisely the interest con-
sisted of. The mere fact that the improvements on the land
had been mortgaged in favor of Abad, which fact, incidentally,
was not even mentioned in the power of attorney, is immate-
rial. The mortgage of the improvements had nothing to do
with the power of attorney. The proper remedy of Abad is to
foreclose the mortgage, and not to avail himself of the power
of attorney. As the agency was not coupled with an interest,
it ended on Tiburcio’s death, and the subsequent sale of the
land cannot be considered valid.

Art. 1931. Anything done by the agent, without knowl-

edge of the death of the principal or of any other cause
which extinguishes the agency, is valid and shall be fully
effective with respect to third persons who may have con-
tracted with him in good faith.

COMMENT:

(1) Effect of Agent’s Act Without Knowledge of the Termi-

nation of the Agency
Note that the law here requires the third persons to be
in good faith. If in bad faith, they cannot be protected. (See
Buason v. Panuyas, 105 Phil. 795, cited under Art. 1919).

872
CIVIL CODE OF THE PHILIPPINES Art. 1932

(2) Rule in Case Business Was Already Begun

Under the second paragraph of Art. 1884, the agent
“must also finish the business already begun on the death of
the principal should delay entail any danger.”

Art. 1932. If the agent dies, his heirs must notify the
principal thereof, and in the meantime adopt such meas-
ures as the circumstances may demand in the interest of
the latter.

COMMENT:
(1) Death of the Agent
If the heirs of the dead agent are unable to give notice,
one good measure for them to do is to consign the object or
property of the agency in court. In this way, they can still
protect the interests of the principal, who trusted their pred-
ecessor in interest. The heir’s duty arises from what may be
termed as a presumed agency or tacit agency or an agency
by operation of law. (See 11 Manresa 588).

(2) Effect of Agent’s Death in Case of Agency Coupled with

an Interest
In an agency coupled with an interest, does the death
of the agent terminate the agency?
ANS.: Generally, the agent’s death ends the agency for it
should not be continued by one upon whom the principal has
reposed no confidence (See 11 Manresa 586-587), but under
American Law, when the agency is coupled with an interest,
it has been held that the agent’s death does not terminate
the agency; such a power may be subsequently exercised by
his personal representative, at least insofar as may be es-
sential to protect the interests of the estate of the agent. (2
C.J. 551).

873
 CIVIL CODE OF THE PHILIPPINES

TITLE XI
LOAN
(1) Introductory Comment
Title XI of the Civil Code begins the subject known in
law courses as “credit transactions.” “Credit” in this connec-
tion refers to belief or trust by a person in another’s ability to
comply with an obligation; and “credit transactions” refers to
the contracts or agreements based on said trust or credit.

(2) Scope of Credit Transactions

The subject involves:
(a) The PRINCIPAL contracts of loan (both commodatum
and mutuum) and deposit (these are of course founded
on “belief or “faith” or “trust”).
(b) The ACCESSORY contracts [which generally depend on
the existence of the aforementioned contracts and which
tends to strengthen said “belief” or “trust” because of the
security given:
1) personal guaranty (a person’s personal credit is
involved as in guaranty proper and suretyship)
2) real guaranty (here the “belief” is strengthened with
the use of property — if real property, the contracts
of real mortgage and antichresis; if personal property,
the contracts of pledge and chattel mortgage).
(c) Preference and concurrence of credits.

GENERAL PROVISIONS

Art. 1933. By the contract of loan, one of the parties

delivers to another, either something not consumable so that
the latter may use the same for a certain time and return

874
CIVIL CODE OF THE PHILIPPINES Art. 1933

it, in which case the contract is called a commodatum; or

money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or
mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation
to pay interest.
In commodatum the bailor retains the ownership of
the thing loaned, while in simple loan, ownership passes
to the borrower.

COMMENT:
(1) The Two Kinds of Loans
There are two kinds of loans:
(a) mutuum or simple loan, and
(b) commodatum.

(2) Loans Under the Old Law

Prior to the new Civil Code, there were two kinds of
loans:
(a) civil loans — governed by the old Civil Code; and
(b) commercial loans — governed by the Code of Commerce.
Under the new Civil Code this distinction has been
abolished. (Art. 2270).

MUTUUM COMMODATUM

a) equivalent amount to be a) same thing to be returned

returned (subject matter (subject matter is non-
is fungible) fungible)
b) may be gratuitous or b) essentially gratuitous (If
onerous (with interest) there is compensation it

875
Art. 1933 CIVIL CODE OF THE PHILIPPINES

ceases to be commoda-
tum.)
c) ownership goes to bor- c) ownership retained by
rower or bailee lender or bailor
d) refers to personal prop- d) may involve real and per-
erty only sonal property
e) referred to as loan for e) referred to as loan for use
consumption or temporary possession
f) borrower, because of his f) lender, because of his own-
ownership, bears risks of ership, bears risk of loss
loss
g) can be generally obliged g) while generally obliged
to pay only at end of to return object at end
period of period, still in some
cases the return can be
demanded even before the
end of the period
h) not personal in character h) personal in character

(3) Distinctions Between Mutuum and Commodatum

(4) ‘Consumable’ and ‘Non-consumable’ Distinguished
(a) Consumable — a movable which cannot be used in a
manner appropriate to its nature without its being con-
sumed. (Art. 418). Example: gasoline.
(b) Non-consumable — a movable which can be used in
a manner appropriate to its nature without its being
consumed. (Art. 418). Example: a book.

(5) ‘Fungible’ and ‘Non-Fungible’ Distinguished

(a) Fungible — if the intention is to allow a substitution of
the thing given. (3 Manresa 58).
(b) Non-fungible — if the intention is to compel a return of
the identical thing given. (3 Manresa 58).
[NOTE: Whether a thing is consumable or not de-
pends on the nature of the thing; whether it is fungible

876
CIVIL CODE OF THE PHILIPPINES Art. 1933

or not depends on the intention. (3 Manresa 58). Hence,

sugar is consumable and ordinarily fungible, but if the
intention is merely to display the sugar for exhibition
(ad ostentationem), then it is still consumable (nature)
but non-fungible (intention).]

(6) Meaning of ‘Bailment’

Etymological — It is derived from the French word
bailler, meaning to deliver.
Real definition — The delivery of property by one person
to another in trust for a specific purpose, with a contract, ex-
press or implied, that the first shall be faithfully executed and
the property returned or duly accounted for when the special
purpose is accomplished or kept until the bailor reclaims it.
(3 Ruling Case Law 73).

(7) Parties in a Bailment

(a) Bailor — the giver; and
(b) Bailee — the recipient of the thing bailed.

(8) Consideration or Cause in a Bailment of Loan

Insofar as the borrower is concerned, the cause is the
acquisition of the thing; insofar as the lender is concerned,
it is the right to require the return of the same thing or its
equivalent. If despite the issuance of a check to the prospec-
tive borrower, the money is not given, there is NO contract of
loan. (Monte de Piedad v. Javier, et al., C.A. 36 O.G. 2176).

(9) Definition of ‘Credit’ as Applied to ‘LOANS’

The ability to borrow money or thing by virtue of the
confidence or trust reposed by a lender that the borrower will
pay what he may promise (People v. Concepcion, 44 Phil. 126)
is called “CREDIT” derived from the Latin “credere,” meaning
“to trust.”

877
Art. 1933 CIVIL CODE OF THE PHILIPPINES

(10) ‘Loan’ Distinguished from ‘Rent’ or ‘Lease’ (Tolentino

v. Gonzales, 50 Phil. 558)

LOAN (Simple) RENT OR LEASE

(a) Lender loses his property (a) Owner of property does
for the borrower becomes not lose his ownership; he
the owner thereof. merely loses control there-
of in a limited way for the
duration of the rent or
lease.
(b) The relationship is one (b) The relationship is one of
of lender and borrower lessor and lessee.
(creditor and debtor).

In Re Guardianship of Tamboco, et al.

36 Phil. 939

FACTS: Under the Code of Civil Procedure, the failure

to return a thing deposited rendered the depositary liable to
imprisonment, but this would not be the case if the contract is
one of loan and not of deposit. Now then, one Plaza deposited
with Chuatongco a sum of money, to be repaid with interest.
The Court ordered the latter to deposit in the Postal Savings
Bank in the name of the giver of the money. Chuatongco failed
to comply with this and he was therefore ordered jailed. Was
the arrest and imprisonment proper?
HELD: No, because this was a loan and not a deposit.
Although it was not expressly agreed that Chuatongco could
use the money, this can nevertheless be inferred from the
fact that Chuatongco was obliged to pay interest.

Government v. Phil. Sugar Estate Dev. Co.

38 Phil. 15
FACTS: Under the Corporation Law, a sugar corpora-
tion cannot invest in a corporation dealing with real estate,
but can grant a loan to the latter. If a corporation should do
this, its franchise can be revoked. Now then, the Philippine
Sugar Estate Dev. Co. delivered to the Tayabas Land Com-

878
CIVIL CODE OF THE PHILIPPINES Art. 1933

pany about P300,000.00 which the government contended to

be contribution of the sugar company to the land company,
but which the sugar company alleged to be a mere loan. In
the contract, no date was fixed for the return of the money;
furthermore, there would be no interest or profit till after the
principal had been paid.
HELD: The money was given as an investment and not
as a loan. It is difficult to see how this contract can be con-
sidered a loan. There was no date fixed for the return to be
made for the money. Furthermore, the sugar company was
not to receive anything for the use of said sum until after the
capital had been fully repaid, which is not consistent with the
general idea of loan. It is not impossible to provide that the
capital be repaid, but the usual method is to pay the interest
first.

(11) ‘Loan’ Distinguished from ‘Discounting of a Paper’

To discount a paper is a mode of loaning money, with
these distinctions:
(a) In a discount, interest is deducted in advance, while in
a loan, interest is taken at the expiration of a credit;
(b) A discount is always on double-name paper; a loan is
generally on single-name paper. (People v. Concepcion,
44 Phil. 126).

Herrera v. Petrophil Corp.

GR 48349, Dec. 29, 1986

The difference between a discount and a loan or forbear-

ance is that the former does not have to be repaid.

(12) Loan Distinguished from Deposit

LOAN DEPOSIT

(a) purpose — to grant its (a) purpose — SAFEKEEP-

USE to borrower ING by depositary (who
generally cannot use)

879
Art. 1933 CIVIL CODE OF THE PHILIPPINES

(b) generally, the borrower (b) the return of deposited

pays only at end of pe- things can be demanded
riod by the depositor at any
time
(c) relationship is that of (c) relationship is that of de-
lender (creditor) and bor- positor and depositary
rower (debtor)
(d) there can be compensa- (d) NO compensation of things
tion of credits deposited with each other
(except by mutual agree-
ment).

[NOTE: An agent who uses for his own ends money or

property of the principal is a depositary or trustee of said funds
and would be liable in case of failure to return. He cannot
claim that only a “loan” was involved for this would require
the principal’s consent. (U.S. v. Igpuara, 27 Phil. 619).]

(13) ‘Loan’ Distinguished from ‘Irregular Deposit’

LOAN IRREGULAR DEPOSIT

(a) borrower can use and (a) depository can also use
will return only at end (as distinguished from a
of period generally case of a regular deposit
where depositary cannot
generally use)
(b) lender has no preference (b) irregular depositor has
over other creditors preference
(c) essential cause is NE- (c) essential use is the special
CESSITY of borrower benefit for depositor (as
his money is being safe-
guarded)

(11 Manresa 664; Rogers v. Smith, Bell and Co., 10 Phil.

319 and Compania Agricola de Ultramar v. Nepomuceno, 55
Phil. 283).

880
CIVIL CODE OF THE PHILIPPINES Art. 1933

(14) ‘Loan’ Distinguished from ‘Sale’

LOAN SALE

(a) real contract (a) consensual contract

(b) Generally unilateral be- (b) bilateral and reciprocal
cause only borrower has
obligations

[NOTE: If property is “sold” but the real intent is only

to give the object as security for a debt — as when the “price”
is comparatively small — there really is a contract of LOAN,
with an “equitable mortgage.” (See Jayme v. Salvador, 55
Phil. 540).]

(15) Form of Interest

Herrera v. Petrophil Corp.

GR 48349, Dec. 29, 1986

A loan must be in the form of money or something cir-

culating as money. It must be repayable absolutely and in
all events.

(16) Escalation Clause

Insular Bank of Asia and America v. Salazar

GR 82082, Mar. 25, 1988

Escalation clauses are valid stipulations in commercial

contracts to maintain fiscal stability and to retain the value
of money in long-term contracts. However, the enforceability
of such stipulations are subject to certain conditions.
The escalation clause is a valid provision in a loan
agreement provided that (1) the increased rate imposed by
the lender does not exceed the ceiling fixed by law or the
monetary board; (2) the increase is made effective not earlier

881
Art. 1934 CIVIL CODE OF THE PHILIPPINES

than the effectivity of the law or regulation authorizing such

increase; and (3) the remaining maturities of the loans are
more than 730 days as of the effectivity of the law or regula-
tion authorizing such an increase.

Almeda v. CA
70 SCAD 248, 256 SCRA 292
1996

Central Bank (Bangko Sentral) Circ. 905 (lifting the

ceiling on interest rates) could not be properly invoked to
justify the escalation clauses requiring that the increase be
“within the limits allowed by law,” such circular not being a
grant of specific authority.

Art. 1934. An accepted promise to deliver something by

way of commodatum or simple loan is binding upon the par-
ties, but the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract.

COMMENT:
(1) Nature of the Contract of Loan
Commodatum and loan are real contracts. They are
perfected by the delivery of the object loaned. On the other
hand, consensual contracts are perfected by mere consent.
(Art. 1316, Civil Code).

(2) Need for Delivery

To effect either a commodatum or a mutuum, a delivery,
either real or constructive, is essential. This is so because
unless there is delivery, the borrower in commodatum (for
example) cannot exercise due diligence over the thing loaned.
(11 Manresa 507-508).

(3) Consent of the Parties

The borrower and the lender must of course consent
either personally or through an authorized agent, as in every
obligation founded upon a contract. However, the necessary

882
CIVIL CODE OF THE PHILIPPINES Art. 1934

acceptance need not be actual but may be implied from cir-

cumstances. (3 RCL 81).

(4) Consensual Contract of Future Loans

Aside from the real contracts of commodatum and loan,
there can also be a consensual contract created by an ac-
cepted promise to deliver something by way of commodatum
or simple loan.
Example: A promised to lend P1,000,000 to B. The promise
was accepted by B. This contract (consensual) is already bind-
ing upon the parties so that if A does not fulfill his promise,
B has the right to demand compliance thereof. But note here
that the real contract of loan does not yet exist.

883
 CIVIL CODE OF THE PHILIPPINES

Chapter 1

COMMODATUM

Section 1
NATURE OF COMMODATUM

Art. 1935. The bailee in commodatum acquires the use

of the thing loaned but not its fruits; if any compensation
is to be paid by him who acquires the use, the contract
ceases to be a commodatum.

COMMENT
(1) ‘Commodatum’ Defined
Commodatum is a real, principal, essentially gratuitous,
and personal contract where one of the parties (called the
bailor or lender) delivers to another (called the bailee or bor-
rower) a non-consumable object, so that the latter may USE
the same for a certain period and later return it. (See Arts.
1933 and 1935).
The term is derived from the Latin “commodum” (use-
fulness) or “commodo” (particular usefulness to a borrower).
(See 11 Manresa 514).

(2) Features or Characteristics of Commodatum as a Con-

tract
(a) real (because perfected by delivery)
(b) principal (because it can stand alone by itself)
(c) gratuitous (otherwise, the contract is one of lease)
(d) personal in nature (because of the trust). (See Art.
1939).

884
CIVIL CODE OF THE PHILIPPINES Arts. 1936-1937

(3) What Bailee (Borrower) in Commodatum Acquires

Commodatum gives the right to the use (jus utendi)
and not the right to the fruits (jus fruendi); otherwise, the
contract may be one of usufruct. But of course a stipulation
that the bailee may make use of the fruits of the thing loaned
is valid. (Art. 1940). In such a case, however, the right to get
the fruits is merely incidental and not the main cause of the
contract.

(4) Spanish Terms

Bailor in commodatum (lender) is called comodatario in
Spanish, bailee in commodatum (borrower) is termed como-
dante.

Art. 1936. Consumable goods may be the subject of com-

modatum if the purpose of the contract is not the consump-
tion of the object, as when it is merely for exhibition.

COMMENT:

(1) Subject Matter of Commodatum

Usually, only non-consumable goods may be the object
of a commodatum for the thing itself should not be consumed
and must be returned, but when a jar of vinegar is given
merely for exhibition, the thing itself is not consumed. It is
only used ad ostentationem. Note that the vinegar in this case
is non-fungible, for the same vinegar must be returned.

(2) Counterpart in the Contract of Lease

Note that this provision has a counterpart in the con-
tract of lease, except when they are merely to be exhibited
or when they are accessory to an industrial establishment.
(Art. 1645).

Art. 1937. Movable or immovable property may be the

object of commodatum.

885
Art. 1938 CIVIL CODE OF THE PHILIPPINES

COMMENT:

(1) Properties That May Be the Object of Commodatum

(a) immovable property
(b) movable property

(2) Example of Commodatum Involving Land

A borrowed B’s land so that he can erect thereon a small
barong-barong to be used for the time that A works in B’s
province. If there is no rental this is a case of commodatum,
but if rental is paid, this would be a lease.
NOTE: In one case a person asked his brother’s permis-
sion to erect on the latter’s land a house. The Supreme Court
said that this was not a commodatum since no time for the
use of land was specified. And this was so, even if the parties
had denominated the contract as commodatum, for contracts
must be interpreted by their constitutive elements as defined
and denominated by law, and not by the name given by the
parties. (Mina v. Pascual, 25 Phil. 540). However, under the
Civil Code the contract may be regarded as a particular kind
of commodatum — namely a PRECARIUM. (See Art. 1947,
Code).

Art. 1938. The bailor in commodatum need not be the

owner of the thing loaned.

COMMENT:
Bailor (Lender) Need Not Be the Owner
Reason for the law: The contract of commodatum does
not transfer ownership. All that is required is that the bailor
has the right to the use of the property which he is lending,
and that he be allowed to alienate this right to use. Hence,
in lease for example, a lessee may become a sub-lessor, unless
he has been expressly prohibited to do so in the contract of
lease. (Art. 1650, Civil Code).

886
CIVIL CODE OF THE PHILIPPINES Art. 1939

Mercado and Ebora v. Aguilar

(C.A.) 45 O.G. 5th S. 118, Jun. 30, 1947

FACTS: Mercado, the occupant of a stall in the Batangas

market, allowed Aguilar to occupy the same gratuitously with
the promise of Aguilar to return it upon demand. Aguilar
claims that Mercado as no right to demand because Mercado,
being a mere lessee of the Batangas municipality had no right
to cede its occupancy in commodatum.
HELD: Mercado had the right to give it in commodatum.
If a lessee, by a contract of a sub-lease, may transfer to another
the enjoyment of the thing leased for a consideration, there
is no reason why he should be unable to cede gratuitously
its use to the commodatory. Aguilar should return the stall.

Art. 1939. Commodatum is purely personal in character.

Consequently:
(1) The death of either the bailor or the bailee extin-
guishes the contract;
(2) The bailee can neither lend nor lease the object
of the contract to a third person. However, the members of
the bailee’s household may make use of the thing loaned,
unless there is a stipulation to the contrary, or unless the
nature of the thing forbids such use.

COMMENT:
(1) Personal Nature of Commodatum
Under the old Civil Code, the obligations and rights
arising from the commodatum descended to the heirs of both
contracting parties unless the loan was made in consideration
of the person of the borrower. (Art. 1742, old Civil Code). The
new Civil Code changes this rule by considering commodatum
as purely personal. (Art. 1939, new Civil Code). This is so even
if commodatum is a real contract (Arts. 1316 and 1934) and
constitutes an exception to the rule that all rights acquired
by virtue of an obligation are transmissible. (Art. 1178, Civil
Code).

887
Art. 1940 CIVIL CODE OF THE PHILIPPINES

(2) Example of the First Paragraph

A loaned to B the former’s car by way of commodatum.
If either A or B dies, the contract is extinguished.
(NOTE: If there are two or more borrowers, the death
of one does not extinguish the commodatum as to the other,
unless there is stipulation to the contrary.)

(3) Example of the Second Paragraph

A loaned to B a home theatre component by way of com-
modatum. B cannot lend or lease this to a friend. But the
children of B in his household may use the same unless there
is a stipulation to the contrary. But said component cannot
be used as a chair, because the nature of the thing forbids
such use.

Art. 1940. A stipulation that the bailee may make use

of the fruits of the thing loaned is valid.

COMMENT:
(1) Does Bailee Have Right to Use the Fruits?
(a) As a rule, the bailee is not entitled to the fruits, otherwise
the contract may be one of usufruct. It should be noted
that the right to use is distinct from the right to enjoy
the fruits, since under the law fruits should as a rule
pertain to the owner of the thing producing the fruits.
(Art. 441, Civil Code).
(b) However, to stipulate that the bailee makes use of the
fruits would not destroy the essence of a commodatum,
for liberality is still the actual cause or consideration of
the contract.

(2) Example
A is the bailee in commodatum of B’s land. Incidentally,
they may stipulate that A can get some lanzones from a lan-
zones tree on the land. Unless there is such a stipulation, A
would not be entitled to the lanzones.

888
CIVIL CODE OF THE PHILIPPINES Arts. 1941-1942

Section 2
OBLIGATIONS OF THE BAILEE

Art. 1941. The bailee is obliged to pay for the ordi-

nary expenses for the use and preservation of the thing
loaned.

COMMENT:
(1) Duty of Borrower to Pay Ordinary Expenses
Reason for the law: The bailee is supposed to return
the identical thing (Art. 1933), so he is obliged to take care
of the thing with, as a rule, the diligence of a good father
of a family. (Art. 1163). It follows necessarily that ordinary
expenses for the use and preservation of the thing loaned
must be borne the bailee.

(2) Examples
(a) A borrowed an automatic Rolls Royce automobile. He re-
pay for the gasoline, motor oil, and expenses of greasing
and spraying. He cannot ask reimbursement for these.
(Art. 1941).
(b) A borrowed a horse for a journey. If the horse is ex-
hausted, rest must be given to the horse; otherwise, if
A continues the journey with a tired horse, he should be
responsible for the consequences of his folly. (3 R.C.L.
111 and Higman Camody, 112 Ala. 267).
[NOTE: The rule is different in the case of extraor-
dinary expenses. (See Art. 1949).]

Art. 1942. The bailee is liable for the loss of the thing,
even if it should be through a fortuitous event:
(1) If he devotes the thing to any purpose different
from that for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or
after the accomplishment of the use for which commodatum
has been constituted;

889
Art. 1942 CIVIL CODE OF THE PHILIPPINES

(3) If the thing loaned has been delivered with ap-

praisal of its value, unless there is a stipulation exempt-
ing the bailee from responsibility in case of a fortuitous
event;
(4) If he lends or leases the thing to a third person,
who is not a member of his household;
(5) If, being able to save either the thing borrowed or
his own thing, he chose to save the latter.

COMMENT:

(1) Liability for Loss Due to a Fortuitous Event

As a rule, a debtor of a thing is not responsible for its
loss thru a fortuitous event. This Article gives the exceptions
in a case of commodatum.

(2) Reason for the Law

(a) Paragraph 1 — This amounts to bad faith or abuse of
generosity considering the fact that commodatum is
gratuitous.
(b) Paragraph 2 — He is guilty of a certain kind of default
(mora).
(c) Paragraph 3 — Evidently, the giving of the value was
made to hold the bailee liable for after all this is not a
sale, and neither is ownership transferred in commoda-
tum.
(Exception — when there is a stipulation to the
contrary. It may in a sense be said that the appraisal
converts the commodatum into a mutuum.)
(d) Paragraph 4 — This is prohibited by the law for it
amounts to a violation of the personal character of a
commodatum.
(e) Paragraph 5 — This amounts to an act of ingratitude
and to a failure to exercise due diligence, considering
the fact that commodatum is gratuitous.

890
CIVIL CODE OF THE PHILIPPINES Arts. 1943-1945

(3) Misuse or Abuse

A misuse or abuse of the property is ordinarily a conver-
sion for which the bailee is generally held responsible, to the
full extent of the loss. (Fros v. Plumb, 16 Am. Rep. 18).

Art. 1943. The bailee does not answer for the deterio-
ration of the thing loaned due only to the use thereof and
without his fault.

COMMENT:

Non-liability for Deterioration Without Fault

The reason for the Article is obvious.

Art. 1944. The bailee cannot retain the thing loaned on

the ground that the bailor owes him something, even though
it may be by reason of expenses. However, the bailee has a
right of retention for damages mentioned in Article 1951.

COMMENT:

(1) Generally, Borrower Cannot Retain

Example:
A is indebted to B for P500,000. B later borrowed A’s
car but refused to return it on the ground that A owed him
some money. B has no right to do this. This is so even if A
had borrowed after B had borrowed the car.

(2) Reason for the Law

Bailment implies a trust that as soon as the time has
expired, or the purpose accomplished, the bailed property must
be restored to the bailor. (Cobb v. Wallace, 5 Cold [Tenn.]
539.)

Art. 1945. When there are two or more bailees to whom

a thing is loaned in the same contract, they are liable soli-
darily.

891
Art. 1946 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Solidary Liability of Bailees
This is one more instance when solidary liability is im-
posed by law.

Section 3
OBLIGATIONS OF THE BAILOR

Art. 1946. The bailor cannot demand the return of the

thing loaned till after the expiration of the period stipu-
lated, or after the accomplishment of the use for which
the commodatum has been constituted. However, if in the
meantime, he should have urgent need of the thing, he may
demand its return or temporary use.
In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the pos-
session of the bailor.

COMMENT:
(1) Generally, Bailor Cannot Demand Immediate Return
A commodatum is for a certain time. (Art. 1933). This is
the reason for the first sentence, first paragraph of Art. 1946.
This is based on equitable grounds for otherwise, the bailee
may not be able to make proper use of the thing borrowed.

(2) Reason for Second Sentence, First Paragraph (Urgent

Necessity)
A bailor usually lends his property because he does not
need it. Hence, the reason for the exception. NOTE that the
return may be only temporary, but it can also be permanent.
This is so because the law uses “its return (meaning perma-
nent) or temporary use.” “Or temporary use” was a phrase
added by the Code Commission. The gratuitous use by the
borrower must yield the necessity of the lender. This follows
naturally from the gratuitous nature of a commodatum. (Art.
1948).

892
CIVIL CODE OF THE PHILIPPINES Arts. 1947-1948

(3) Suspension of the Contract

Note that the contract is suspended when the lender has
temporary use and possession of the object.

Art. 1947. The bailor may demand the thing at will,

and the contractual relation is called a precarium, in the
following cases:
(1) If neither the duration of the contract nor the
use to which the thing loaned should be devoted, has been
stipulated; or
(2) If the use of the thing is merely tolerated by the
owner.

COMMENT:
Precarium
(a) Precarium is a special form of commodatum. In a true
commodatum, the possession of the borrower is more
secure.
(b) The possession of the borrower in precarium is precari-
ous, that is, dependent on the lender’s will, hence the
name precarium.
(c) The two kinds of precarium are given in the Article.

Art. 1948. The bailor may demand the immediate return

of the thing if the bailee commits any act of ingratitude
specified in Article 765.

COMMENT:
(1) Effect of Commission of Act of Ingratitude
The bailor can demand IMMEDIATE RETURN.

(2) Grounds of Ingratitude

Article 765 provides:
“The donation may also be revoked at the instance of
the donor, by reason of ingratitude in the following cases:

893
Art. 1949 CIVIL CODE OF THE PHILIPPINES

“(1) If the donee should commit some offense against

the person, the honor or the property of the donor, or of his
wife or children under his parental authority;
“(2) If the donee imputes to the donor any criminal of-
fense, or any act involving moral turpitude, even though he
should prove it, unless the crime or the act has been com-
mitted against the donee himself, his wife or children under
his authority;
“(3) If he unduly refuses him support when the donee
is legally or morally bound to give support to the donor.”

Art. 1949. The bailor shall refund the extraordinary

expenses during the contract for the preservation of the
thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except when
they are so urgent that the reply to the notification cannot
be awaited without danger.
If the extraordinary expenses arise on the occasion of
the actual use of the thing by the bailee, even though he
acted without fault, they shall be borne equally by both
the bailor and the bailee, unless there is a stipulation to
the contrary.

COMMENT:
(1) Extraordinary Expenses
(a) As a rule, the extraordinary expenses should be paid by
the bailor because it is he who profits by said expenses;
otherwise, the thing borrowed would be destroyed.
(b) Generally, notice is required because the bailor should
be given discretion as to what he wants to do with his
own property.

(2) Reason for the Second Paragraph (Actual Use by

Bailee)
This is an equitable solution. The bailee pays one half
because of the benefit derived from the use of the thing loaned
to him, and the bailor pays the other half because he is the

894
CIVIL CODE OF THE PHILIPPINES Arts. 1950-1951

owner and the thing will be returned to him. (Report of the

Code Commission, p. 151).

(3) Example
A borrowed a motorbike from B. While A was riding
on it, he met an accident which greatly damaged the bike.
A was not at fault for he was driving carefully. Both A and
B should share equally in the extraordinary expenses unless
there is a stipulation to the contrary.

Art. 1950. If, for the purpose of making use of the thing,
the bailee incurs expenses other than those referred to in
Articles 1941 and 1949, he is not entitled to reimbursement.
(n)

COMMENT:
Other Expenses
Example: The borrower of a car buys an extra jack to
be used as a reserve on a trip. Here, he is not entitled to
reimbursement.

Art. 1951. The bailor who, knowing the flaws of the

thing loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may suffer
by reason thereof.

COMMENT:
(1) When Bailor Knows Flaws
Example:
A lent B a Fisher & Paykel, the electric connections of
which were defective. If although he knows said defect, A does
not inform B thereof, A will be liable in case B is injured by
reason thereof.

(2) Reason for the Law

When a person lends, he ought to confer a benefit, and
not to do a mischief. If he does not reveal the flaws, he is
liable for his bad faith. (Gagnon v. Dana, 39 Atl. 982).

895
Art. 1952 CIVIL CODE OF THE PHILIPPINES

[NOTE: But the obligation of a gratuitous lender goes

no further than this, and he cannot therefore be made liable
for not communicating anything which he did not know,
whether he ought to have known it or not. (Gagnon v. Dana,
supra).]

(3) Right of Retention

For the damages spoken of in this Article, the bailee has
the right of retention until paid of said damages. (Art. 1944,
Civil Code).

(4) Nature of the Flaws

It is evident that the flaws referred to in this Article
are hidden defects, not obvious ones.

Art. 1952. The bailor cannot exempt himself from the

payment of expenses or damages by abandoning the thing
to the bailee.

COMMENT:
(1) Effect of Bailor’s Abandonment or Giving of the Ob-
ject
Example:
For extraordinary expenses on A’s car, B the borrower
spent P125,000. A cannot exempt himself from payment thereof
by just giving B the thing borrowed.

(2) Reason for the Law

The value of the thing borrowed might be less than the
value of the expenses or damages.

896
CIVIL CODE OF THE PHILIPPINES

Chapter 2

SIMPLE LOAN OR MUTUUM

Art. 1953. A person who receives a loan of money or

any other fungible thing acquires the ownership thereof,
and is bound to pay to the creditor an equal amount of the
same kind and quality.

COMMENT:
(1) Ownership Passes in Mutuum
Ownership passes to the borrower, but, of course, he
must pay later.

Republic v. Jose Grijaldo

L-20240, Dec. 31, 1965
FACTS: In 1943, Jose Grijaldo borrowed money from a
bank, evidenced by five promissory notes, and secured by a
chattel mortgage on the standing crops on his land. During
the war, the crops were destroyed as a result of enemy action.
Issue: Must the borrower still pay?
HELD: Yes, for his obligation was to pay a generic thing
— money representing the loan with interest. The chattel
mortgage on the crops simply stood as security for the fulfill-
ment of his obligations, and therefore, the loss of the crops did
NOT extinguish his obligation to pay, because the account can
still be paid from sources other than said mortgaged crops.

Carlos Gelano, et al. v. Court of Appeals

and Insular Sawmill, Inc.
L-39060, Feb. 24, 1981

If a husband incurs debts which redound to the benefit

of the conjugal partnership, who is liable?

897
Art. 1953 CIVIL CODE OF THE PHILIPPINES

HELD: The conjugal partnership is liable under Art.

161, par. 1, of the Civil Code [now Art. 121, last par., Fam-
ily Code]. It is wrong to say that the conjugal partnership is
liable jointly and severally, for the conjugal partnership is a
single entity.

Bonnevie v. Court of Appeals

GR 49101, Oct. 24, 1983
(1) A contract of loan is consensual (author believes
it to be a real contract — a borrower of money who has not
yet been given the money is not yet a borrower; he is only a
would-be borrower).
(2) If a loan (money is given only some time after the
execution of a mortgage, the mortgage is still valid. After
all, the promissory note is only evidentiary of the debt. The
late execution of the promissory note does not mean that the
mortgage had no consideration.

(2) Similarity to Abnormal Usufruct

Mutuum is similar to an abnormal usufruct.

(3) Bank Accounts

Fixed, savings, and current deposits of money in banks
and similar institutions shall be governed by the provisions
concerning simple loans. (Art. 1980 and Gullas v. Phil. Na-
tional Bank, 62 Phil. 519).

(4) Effect of Mutual Error

Rural Bank of Caloocan v. Court of Appeals

L-32116, Apr. 21, 1981
Thru fraud committed by a third party (the Valencia
Spouses), Maxima Castro found herself indebted to a Rural
Bank for a total debt of P6,000 (P3,000 was what she intended
to borrow; the Valencias added another P3,000 for themselves,
with Castro signing the promissory note as co-maker). For
how much is Castro liable?

898
CIVIL CODE OF THE PHILIPPINES Art. 1954

HELD: Only for P3,000 plus interest. The extra P3,000

can be annulled insofar as Castro is concerned, not because of
fraud (neither party — the Bank nor Castro — had commit-
ted fraud), but because of mutual error caused by the fraud
attributable to the Valencias. The mortgage over Castro’s lot
is reduced insofar as it exceeds Castro’s personal loan.

(5) ‘Behest’ Loans

Presidential Ad Hoc Fact-Finding Commit-

tee on Behest Loans v. Hon. Aniano A. Desierto
(Recovery of Ill-Gotten Wealth)
GR 130340, 114 SCRA 707
Oct. 25, 1999

The “behest” nature of the loans could not be reason-

ably known by a mere eye examination of the mortgage
contracts.
Behest loans are part of the ill-gotten wealth which former
President Ferdinand E. Marcos and his cronies accumulated
and which the Government thru the Presidential Commission
on Good Government (PCGG) seeks to recover.

Art. 1954. A contract whereby one person transfers the

ownership of non-fungible things to another with the obli-
gation on the part of the latter to give things of the same
kind, quantity, and quality be considered a barter.

COMMENT:
(1) Barter of Non-Consumable Things
Here, the word non-fungible does not really mean non-
fungible but non-consumable. Reason: If the thing were really
non-fungible, the identical thing must be returned. Here, an
equivalent thing is returned.

(2) Example
A got a fountain pen from B and he (A) became the
owner thereof, with the obligation of giving another pen of

899
Art. 1955 CIVIL CODE OF THE PHILIPPINES

the same kind and quality. This shall be considered a barter.

It is not a commodatum nor a mutuum.

Art. 1955. The obligation of a person who borrows

money shall be governed by the provisions of Articles 1249
and 1250 of this Code.
If what was loaned is a fungible thing other than money,
the debtor owes another thing of the same kind, quantity
and quality, even if it should change in value. In case it is
impossible to deliver the same kind, its value at the time
of the perfection of the loan shall be paid.

COMMENT:
(1) Liability of Borrower of Money
(a) Liability is governed by Arts. 1249 and 1250.
(b) Art. 1249. The payment of debts in money shall be made
in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they
have been impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.
(c) Art. 1250. In case an extraordinary inflation or deflation
of the currency stipulated should supervene, the value
of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is
an agreement to the contrary.

(2) Example of Second Paragraph (Loan of Things Other

Than Money)
A borrowed from B five sacks of rice. At the time the
loan was perfected, each sack cost P1,800. Even if at the

900
CIVIL CODE OF THE PHILIPPINES Art. 1956

time of payment the price would change, five sacks of the

same kind and quality of rice should be returned. However,
if it is impossible to deliver the same kind, P1,800 should be
paid. Note that the value at the time of PERFECTION (not
payment) applies.

Art. 1956. No interest shall be due unless it has been

expressly stipulated in writing.

COMMENT:
(1) Formality for Interest (for Use of the Money)
The interest must be stipulated in WRITING.

(2) Example
A borrowed P1,000,000 from B. No mention was made
of interest. No interest can be charged. But if interest had
been stipulated upon, but no rate was mentioned, then it is
12% per annum provided of course that the agreement as to
interest was made in writing.

(3) Kinds of Interest

Interest may be paid either as compensation for the use of
the money (monetary interests) or as damages (compensatory
interest). Art. 1956 refers to interest for use of the money.

(4) How Interest Arises

The right to interest arises only by virtue of a contract
or by virtue of damages for delay or failure to pay principal
on which interest is demanded. (Barretto v. Santa Marina,
37 Phil. 568).

(5) When Interest Earns Interest

Interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent
upon this point. (Art. 2212, Civil Code).

901
Art. 1956 CIVIL CODE OF THE PHILIPPINES

(6) Interest by Way of Damages

(a) Part of a contract said: “The first installment (payable
in 3 months) shall have no interest.” But debtor was in
default. Should he pay interest for damages?
HELD: Yes, not interest for compensation but inter-
est for damages. “The trial court appears to have con-
sidered that this stipulation deprived the plaintiff of the
right to interest after default, and no interest whatever
was allowed by him upon this installment. This was er-
ror. The stipulation that this installment should draw no
interest was made in the expectation that the obligation
would be paid upon the date stipulated. After default
occurred the defendant became liable for interest as
damages regardless of the statement that his installment
should draw no interest. This statement in the contract
was evidently intended merely to govern the rights of
the parties with respect to interest for the three-month
period between the making of the contract and the date
when the installment was to become due. With respect
to the plaintiff’s right to interest after default, the situ-
ation is to be treated precisely as if nothing had been
said about interest at all.” (Zobel v. City of Manila, 47
Phil. 169).
(b) In contracts for the payment of a sum of money, the
measure of damages for delay is limited to the interest
provided for by law. The deprivation of an opportunity
for making money, which might have proved beneficial or
might have been ruinous is of too uncertain a character
to be weighed in the even balances of the law. (Lopez v.
Del Rosario, 44 Phil. 98).
(c) Art. 2209 — If the obligation consists in the payment
of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal inter-
est, which is six per cent per annum. (The rate NOW
is 12% per annum.)

902
CIVIL CODE OF THE PHILIPPINES Art. 1956

(7) Consolidation
Part of the contract reads: “The five latter installments
shall draw interest at the rate of five per cent per annum,
payable to the creditors upon the date when they shall re-
spectively fall due.” Debtor was in default. How will interest
be computed?
HELD: Interest must be allowed thereon at the contract
rate of 5% per annum from the date of the contract; and the
interest that had accrued up to the date of the filing of the
complaint must be consolidated as to that date with the capi-
tal, after which the whole shall bear interest at the contract
rate of five per cent per annum until paid. Where interest is
contracted for at a given rate, the contract of obligation to
pay interest is not merged in the judgment but remains in
full force until the debt is paid. The circumstances that the
rate stipulated was less than the lawful rate does not alter
the case. (Zobel v. City of Manila, supra).

(8) Municipal Corporations Are Liable for Interest

A municipal corporation does not enjoy immunity from
liability for interest when assessed as damages for the non-
payment of a debt, to the same extent as the national govern-
ment. (Zobel v. City of Manila, supra).

(9) Interest During the Moratorium Laws

Interest ran during the moratorium laws. If debtors had
wanted to avoid liability for all the interest falling due during
the time that the moratorium laws were in effect, they could
have renounced the benefits of the said laws and paid the
debts, or in the very least paid the interest as they accrued.
(Warner, Barnes & Co. v. Yasay, et al., L-12984, Jul. 26, 1960).
What the moratorium laws suspended was the running of the
period of prescription of actions. (Republic v. Grijaldo, L-20240,
Dec. 31, 1965). Interest during the war years however can be
eliminated if the creditors were enemies of the Japanese, for
their payment to them could not have been made. (Ibid.)

903
Art. 1956 CIVIL CODE OF THE PHILIPPINES

(10) Computations for Compensatory Damages

As already stated, this is interest not imposed for the
use of the money, but to serve as penalty or damages for the
breach of contractual obligations. This kind of interest need
not be stipulated in writing, for the law gives the rate (6% per
annum) in the absence of agreement as to the penalty. (Art.
2209, Civil Code). In the following examples, legal interest
was computed at 6% per annum. Note however that today the
legal rate is 12% per annum. The examples must, therefore,
be amended correspondingly.
Examples:
(a) B borrowed from C P1,000,000 for one year. No interest
was agreed upon in writing. At the end of one year, C
demanded payment, but B was unable or refused to pay.
After two more years, B was ready to pay. In addition
to the principal sum of P1,000,000, how much interest,
if any, must B pay?
ANS.: B is not liable for interest for the use of the
money (since this was not stipulated in writing) BUT he
is liable for interest in view of his default, as a punish-
ment or penalty by way of damages for his breach of the
contract. Please note that there is default after a demand
is made (either judicially or extra-judicially). (Art. 1169,
Civil Code). The interest here given as penalty is 6%
per annum — since there was no stipulation as to the
penalty. (Art. 2209, Civil Code). B has been in default
for two years (counted from the demand). Hence, he is
liable for interest (6%) for two years: 6% of P1,000,000
= P60,000 per year, P60,000 times 2 (years) = P120,000.
This is the interest that he must pay. (Ibid.)
(b) B borrowed from C P1,000,000 for two (2) years. It was
agreed in writing that interest would be 6% per annum.
At the end of two years, C made an extrajudicial demand,
but B was unable or refused to pay. At the end of three
(3) MORE years, B was ready to pay. How much all in
all must B pay?

904
CIVIL CODE OF THE PHILIPPINES Art. 1956

ANS.: Here B must pay:

1) the principal (P1,000,000)
2) interest for the use of the money (6% per year –– for
a total of 5 years, since from the time he borrowed
up to the time of payment, 5 years have elapsed).
3) interest as penalty for the default (6% per year for
a period of three [3] years — since he has been in
default for 3 years).
Computation:
1) Principal — P1,000,000
2) Moratory interest — P300,000 (P60,000 a
year times 5
years)
3) Compensatory — P 180,000 (P60,000 a
year times 3
years
P1,480,000 (Total sum
to be paid.)

[NOTE: In the problem given, no interest is charged

on the accrued interest — interest that has accumulated
up to the time demand is made because here the demand
was only extrajudicial. If the demand had been judicial,
there would have been an additional interest on the ac-
crued interest. The law says that “interest due shall earn
legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point.”
(Art. 2212, Civil Code).]
Example:
B borrowed from C P1,000,000 for two (2) years.
It was agreed in writing that interest would be 6% per
annum. At the end of two years, C made a JUDICIAL
demand (a court action was instituted). At the end of
three (3) MORE years, B was ready to pay. How much
all must B pay?

905
Art. 1956 CIVIL CODE OF THE PHILIPPINES

ANS.: B must pay:

1) the principal — P1,000,000 (P60,000 a year
2) moratory for 6 years use
interest — P 300,000 of the money)
(P60,000 a year
3) compensatory — P 180,000 of default) (at
4) additional — P 21,600 the time judicial
compensatory demand, inter-
interest on the est for two years
interest due or was already due
accrued P20,000. The ac-
crued interest it-
self earns interest
from judicial de-
mand to payment.
Total Sum P1,501,600 P120,000 x 6% =
P7,200 a year.
P7,200 times 3
years = P21,600).

(11) Some Cases

Nakpil and Sons, et al. v. CA

GR 47861, Resolution on Motion
for Reconsideration

FACTS: In a decision of the Supreme Court, finding the

architect and the contractor liable for gross negligenoe (equiva-
lent to bad faith) in effecting the plans and construction of
a building, imposed upon defendants a solidary indemnity in
favor of the plaintiff. The court added that “upon failure to
pay on such finality, twelve percent (12%) interest per annum
shall be imposed upon aforementioned amounts from finality
until paid.” On motion for reconsideration, the defendants
alleged that the interest of 12% per annum imposed on the
total amount of the monetary award contravenes the law, since
there is neither loan nor forbearance. Denying the motion for
reconsideration, the Supreme Court —

906
CIVIL CODE OF THE PHILIPPINES Art. 1957

HELD: It is true that in the instant case, there is nei-

ther a loan or a forbearance, but then no interest is actually
being imposed provided the sums referred to in the judgment
are paid upon the finality of the judgment. It is delay in the
payment of such final judgment that will cause the imposition
of interest. The rate of interest is imposed on the total sum,
from the filing of the complaint until paid; in other words,
as part of the judgment for damages.

Monzon, et al. v. IAC and Theo H. Davies

& Co., Far East Ltd.
GR 72828, Jan. 31, 1989
Eliminating the interest on the various damages from
the date of the filing of the suit is clearly an unwarranted
act. It must be borne in mind that interest begins to accrue
upon demand, extrajudicial or judicial. A complaint is a ju-
dicial demand.

Antonio Tan v. CA & Cultural Center

of the Phils.
GR 116285, Oct. 19, 2001
The stipulated 14% p.a. interest change until full pay-
ment of the loan constitutes the monetary interest on the
note and is allowed under Art. 1956.
In the case at bar, the stipulated 2% per month penalty is
in the form of a penalty charge which is separate and distinct
from the monetary interest on the principal of the loan.

Art. 1957. Contracts and stipulations, under any cloak

or device whatever, intended to circumvent the laws against
usury shall be void. The borrower may recover in accord-
ance with the laws on usury.

COMMENT:
(1) Usury Law Should Not Be Circumvented
The Article is self-explanatory.

907
Art. 1958 CIVIL CODE OF THE PHILIPPINES

(2) What Constitutes Usury

Herrera v. Petrophi1 Corp.

GR 48349, Dec. 29, 1986

To constitute usury, there must be a loan or forbear-

ance. And something must be exacted for the use of money
in excess of and in addition to interest allowed by law.
Thus, the elements of usury are: (1) a loan express or
implied; (2) understanding between the parties that the money
lent shall or may be returned; (3) for such loan a greater rate
of interest that is allowed by law shall be paid or agreed to
be paid as the case may be; and (4) corrupt intent to take
more than the legal rate for the use of money. Unless these
four things concur in every transaction, no case of usury can
be declared.

(3) Repeal of Usury Law

Central Bank (Bangko Sentral) Circular 905 has repealed
the Usury Law. Today, there is no more maximum rate of
interest. The rate will just depend on the mutual agreement
of the parties.

Liam Law v. Olympic Sawmill Co.

and Elino Lee Chi
L-30771, May 28, 1984

For sometime now, usury has been legally non-existent.

Interest can now be charged as lender and borrower may
agree upon.

Art. 1958. In the determination of the interest, if it is

payable in kind, its value shall be appraised at the cur-
rent price of the products or goods at the time and place
of payment.

908
CIVIL CODE OF THE PHILIPPINES Art. 1959

COMMENT:
Determination of Interest if in Kind
Value should be at time and place of PAYMENT.

Art. 1959. Without prejudice to the provisions of Article

2212, interest due and unpaid shall not earn interest. How-
ever, the contracting parties may by stipulation capitalize
the interest due and unpaid, which as added principal, shall
earn new interest.

COMMENT:
(1) When Accrued Interest Earns Interest
The general rule is that accrued interest (interest due
and unpaid) will not bear interest, BUT
(a) if there is agreement to this effect (Art. 1959), or
(b) if there is judicial demand. (Art. 2212).
THEN such accrued interest will bear interest
at the legal rate (Art. 2212) unless, a different rate is
stipulated. (Hodges v. Regalado, 69 Phil. 588).

(2) Compound Interest

Compound interest is interest on accrued interest. It
is valid to charge compound interest, but there must be a
written agreement to this effect; otherwise said compound
interest should not be charged (Nolan v. Majinay, 12 Phil.
560) unless it be the interest charged upon judicial demand.
(Art. 2212).

(3) Usury Law Not Violated

The interest on accrued or capitalized interest is not
considered interest on the original principal, and should not
be considered usurious, if, when added to the original inter-
est, the sum should exceed the rates allowed by the Usury
Law. (Villareal v. Alvayda, 46 Phil. 277). In that case, the

909
Art. 1959 CIVIL CODE OF THE PHILIPPINES

original principal was P30,000 which had earned P3,600 at

12% interest for one year. The parties added the P3,600 to
the original P30,000, and thus constituted thereon a new
principal debt. The debtor did not want to pay on the ground
that the contract was usurious.
HELD: There is nothing illegal here. As a matter of
fact, the Supreme Court in a subsequent case held: “It is
well settled in this jurisdiction that when there is an express
agreement to charge interest on interest, such fact should
not be taken into consideration in determining whether or
not the stipulated interest exceeds the limit prescribed by
the Usury Law.” (Gov’t. v. Conde, 61 Phil. 714 and Gov’t. v.
Vaca & Calderon, 64 Phil. 6).

(4) When Compound Interest Cannot Be Demanded

Notice, however, that the agreement on compound inter-
est must be expressly made. In one case the following words
were used: “Interest, to be computed upon the still unpaid
capital of the loan, shall be paid monthly, at the end of each
month.” Does this allow compound interest?
HELD: No. The language which we have quoted above
does not justify the charging of interest upon interest, so far
as interest on the capital is concerned. The provision quoted
merely requires the debtor to pay interest monthly at the end
of each month, such interest be computed upon the capital of
the load not yet paid. Clearly this provision does not justify
the charging of compound interest upon the interest accruing
upon the capital monthly. (Co Unjieng v. Mabalacat Sugar
Co., 54 Phil. 976).

(5) Reason Why Compound Interests Are Not Allowed Ex-

cept in the Cases Provided for by Law
Debts would accumulate with a rapidity beyond all ordi-
nary calculation and endurance. It would tend also to inflame
the avarice and harden the heart of the creditor. Some allow-
ance must be made for the indolence of mankind. (15 RCL
36).

910
CIVIL CODE OF THE PHILIPPINES Art. 1960

(6) Case

Antonio Tan v. CA & Cultural

Center of the Phils.
GR 116285, Oct. 19, 2001
FACTS: Petitioner avers that there is no legal basis for
the imposition of interest on the penalty charge for the reason
that the law only allows imposition of interest on monetary
interest but not the charging of interest on penalty. He claims
that since there is no law that allows imposition of interest
on penalties, the penalties should not ear interest. Issue: May
interest on penalties be validly imposed?
HELD: Penalty clauses can be in the form of penalty
or compensatory interest. The compounding of the penalty or
compensatory interest is sanctioned by and allowed pursuant
to the abovequoted provision of Art. 1959 of the new Civil
Code considering that:
1. There is an express stipulation in the promissory
note permitting the compounding of interest; and
2. Art. 2212 of the new Civil Code provides that
“[i]nterest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent
upon this point.”

Art. 1960. If the borrower pays interest when there has

been no stipulation therefor, the provisions of this Code
concerning solutio indebiti, or natural obligations, shall be
applied as the case may be.

COMMENT:
Payment of Interest When There is No Stipulation
(a) A borrower borrowed money. No interest was stipulated.
If by mistake he pays, then this will be a question of
undue payment or solutio indebiti. We should then apply
the rules on the subject.
(b) If a borrower borrows money and orally agrees to pay
legal interest at 10% per annum, there is really no ob-

911
Art. 1961 CIVIL CODE OF THE PHILIPPINES

ligation to pay since the interest was not agreed upon

in writing. If he nevertheless pays because he considers
it his moral obligation to pay said interest, he cannot
recover the interest that he has given voluntarily. This
will now be a natural obligation, and the provisions on
said subject should apply.

Art. 1961. Usurious contracts shall be governed by the

Usury Law and other special laws, so far as they are not
inconsistent with this Code.

COMMENT:
(1) Usury Law
Act 2655 as amended is our Usury Law, and was en-
acted on Feb. 24, 1916. The law was passed to curb usury,
since the taking of excessive interest for the loan of money
has been regarded with abhorrence from the earliest times.
(U.S. v. Constantino, 39 Phil. 552).

(2) Rules on Construction

Since the Usury Law is penal in nature, it should be
construed strictly. (Dickerman v. Pay, 7 Am. Rep. 156). Like
other laws, prospective effect should be given to it, where
such construction may be permitted. Laws adopted after the
execution of a contract, changing or altering the rate of in-
terest, cannot apply to such a contract without violating the
provision of the Constitution which prohibits the adoption of
a law impairing the obligations of a contract. (U.S. v. Conde,
42 Phil. 766).

(3) Criminal Liability

A lender and a borrower agreed that the rate of interest
on an unsecured loan would be higher than 14% per annum.
But actually, the lender only received the lawful rate. Is the
lender guilty of usury by the mere fact that he agreed to
charge a usurious rate?
HELD: Yes. Under Sec. 3 of the Usury Law, the prohibi-
tion is deemed to comprehend not only the taking or receiv-

912
CIVIL CODE OF THE PHILIPPINES Art. 1961

ing of a higher rate of interest than 14% per annum if such

loan is not secured in the manner provided in said section,
but also the act of agreeing on such rate of interest. To this
extent it differs from Sec. 2, under which a mere agreement
to pay usurious interest is not criminal. (People v. Bernarte,
C.A. 36 O.G. 2720).

(4) When Usury Law Does Not Apply

(a) A contract for the lease of property is not a loan; hence,
the rental paid is not governed by the Usury Law. (To-
lentino v. Gonzales, 50 Phil. 58).
(b) The increase of the price of a thing sold on credit over
its cash sale price is not interest within the purview of
the Usury Law, if the sale is made in good faith and
not as a mere pretext to cover a usurious loan. (Manila
Trading v. Tamaraw, 47 Phil. 513). Such price is the
selling price for a sale made on the installment plan.

(5) Compound Interest

In one case, it was held that an express agreement to
charge compound interest is not to be taken into consideration
in determining whether or not the stipulated interest exceed
the limit prescribed by the Usury Law. (Gov’t. v. Conde, 61
Phil. 714). This was changed by a subsequent case which
held that charging compound interest violates the Usury
Law when the sums charged as such added to the stipulated
interest exceeds the average rate of interest that may legally
be charged for a loan. (Hodges v. Salas, 63 Phil. 567). In a
still later case, the Supreme Court reverted to the ruling in
the Conde Case. (Gov’t v. Vaca and Calderon, 64 Phil. 6).

(6) Advance Interest

Charging interest in advance is permissible provided
said interest does not correspond to interest for more than
one year. (Hodges v. Salas, 63 Phil. 567).

(7) How Much Interest Can Debtor Recover

If a debtor has paid usurious interest, how much can he
get back from his creditor?

913
Art. 1961 CIVIL CODE OF THE PHILIPPINES

ANS.:
(a) Under Art. 1961, in case of conflict between the new Civil
Code and the Usury Law, the new Civil Code applies, and
therefore, the interest in excess of 12% or 14% may be
recovered, with interest. (Art. 1413). However, in the case
of Angel Jose Warehousing v. Chelda Enterprises & David
Syjuico, L-25704, Apr. 24, 1968, the Supreme Court, ruled
that the ENTIRE interest can be recovered by the debtor,
for such a stipulation is VOID (thus, it is as if there is
NO STIPULATION as to interest). On the other hand, the
principal contract of loan by itself is valid, hence this may
be recovered by the creditor. In case of demand, and if
the debtor is in default, said principal debt earns interest
from the date of the demand. This interest is not by way
of compensation but by way of damages.

Sanchez v. Buenviaje
GR 57314, Nov. 29, 1983

Under the Usury Law (now repealed), the lender

at usurious rates can still recover the principal (not the
interest). Justice Ramon Aquino (later to become Chief
Justice) consents because there should be no unjust enrich-
ment by the borrower. Justice Makasiar (later to become
Chief Justice) dissents on the theory that the usurer has
committed a crime and must therefore be penalized by
barring him from the recovery of his capital.
(b) Under Arts. 1175 and 1957, the Usury Law prevails; and
under Sec. 6 of said Usury Law (Act 2655), the person
paying the usurious interest “may recover the whole
interest, commission, premiums, penalties, surcharges
paid and delivered” as long as the action for recovery is
instituted within two years after such payment and the
delivery (that is, all interest paid within the last two
years prior to litigation may be recovered).
(NOTE: It should be noted that under both theories,
legal interest on the interest may also be recovered.)
(NOTE: As has already been said, as of today, the
Usury Law no longer exists.)

914
CIVIL CODE OF THE PHILIPPINES Art. 1961

(8) Lawful Interest Rates

Interest rates are now fixed from time to time by the
Monetary Board.

(9) Central Bank Circular 416

Pilipinas Bank v. CA
43 SCAD 990
1993

Circular No. 416, fixing the rate of interest at 12% p.a.,

deals with:
(1) loans;
(2) forbearance of any money, goods or credit; and
(3) judgments.

(10) Cases

Almeda v. CA
70 SCAD 248
1996

While the Usury Law ceiling on interest rates was lifted

by Central Bank (Bangko Sentral) Circular 905, nothing in
the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rate to levels
which would either enslave their borrowers or lead to a hem-
orrhaging of their assets. At any rate, galloping increases in
interest rate unilaterally imposed by a bank on a customer’s
loan, over the latter’s vehement protests, are arbitrary. An
increase in interest rates from 18% to 68% is excessive and
unconscionable.
Where the escalation clause of the credit agreement in
the instant case required that the same be made “within the
limits allowed by law,” it obviously referred specifically to
legislative enactments not administrative circulars. Escalation
clauses are not basically wrong or legally objectionable so long
as they are not solely potestative but based on reasonable
and valid grounds.

915
Art. 1961 CIVIL CODE OF THE PHILIPPINES

[NOTE: Any increase in the rate of interest made pursu-

ant to an escalation clause must be the result of an agreement
between the parties. (PNB v. CA, 72 SCAD 366, 258 SCRA
549).] Escalation clauses are valid stipulations in commercial
contracts to maintain fiscal stability and to retain the value
of money in long-term contracts. (Florendo v. CA, 77 SCAD
429, 265 SCRA 678 [1996]).]
[NOTE:
Sec. 1 of Central Bank (Bangko Sentral) Circ. 905, Series
of 1982, expressly removed the interest ceilings prescribed by
the Usury Law. Interest can now be charged as lender and
borrower may agree upon. (People v. Dizon, 73 SCAD 532,
260 SCRA 851 [1996]). The unilateral determination and
imposition of increased interest rates by respondent bank is
obviously violative of the principle of mutuality of contracts.
(Ibid.)]

Spouses Puerto v. Court of Appeals

GR 138210, Jun. 13, 2002

Contracts and stipulations, under any cloak or device

whatever, intended to circumvent the laws against usury
shall be void. The parties then must restore what each had
received from the other.
[NOTE: The maximum rate of interest on a loan are
forbearance of money secured by a mortgage upon real estate
the title to which is duly registered, shall be 12% per annum.
(Sec. 2, The Usury Law [PD 116, amending Act 2655]). All
covenants and stipulations contained in conveyances, mort-
gages, and other contracts or evidences of debts, whereupon
or whereby there shall be stipulated, charged, demanded,
reserved, secured, taken or received, directly or indirectly,
secured, taken or received, directly or indirectly, a higher rate
or greater sum or value for the loan than is hereinbefore al-
lowed, shall be void. (Sec. 7, Id., cited in Sps. Puerto vs. CA,
supra).]

916
CIVIL CODE OF THE PHILIPPINES

TITLE XII
DEPOSIT
Chapter 1

DEPOSIT IN GENERAL AND ITS

DIFFERENT KINDS

Art. 1962. A deposit is constituted from the moment

a person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same.
If the safekeeping of the thing delivered is not the princi-
pal purpose of the contract, there is no deposit but some
other contract.

COMMENT:
(1) Provisions in the Code of Commerce
The provisions on commercial deposits found in the
Code of Commerce have been repealed. (Art. 2270, [2], Civil
Code).

(2) When Contract of Deposit is Perfected

A deposit, being a real contract, is perfected by delivery
(Art. 1316, Civil Code), but an agreement to constitute a
deposit is merely consensual, and is therefore binding upon
mere consent. (Art. 1963, Civil Code).

(3) Purposes of the Contract

The principal purpose of a deposit is the safekeeping of
the thing delivered (Art. 1962), but this does not mean that
the depositary can never use it. He can, in two instances:
(a) with the express permission of the depositor;

917
Art. 1962 CIVIL CODE OF THE PHILIPPINES

(b) when the preservation of the thing deposited requires

its use, it must be used but only for that purpose. (Art.
1977, Civil Code).
Of course, if safekeeping is not the principal purpose,
there is no deposit but some other contract (Art. 1962),
like one of lease or commodatum.

(4) Kinds of Deposits

(a) Judicial (sequestration) — When an attachment or sei-
zure of property in litigation is ordered. (Art. 2005, Civil
Code).
(b) Extrajudicial —
1) voluntary — made by the will of the depositor. (Art.
1968, Civil Code).
2) necessary —
a) made in compliance with a legal obligation.
(Art. 1966, Civil Code).
b) on the occasion of a calamity. (Art. 1996, Civil
Code).
c) made by travelers in hotels or inns. (Art. 1998,
Civil Code)
d) made by travelers with common carrier. (Art.
1736, Civil Code).

(5) Characteristics of the Contract of Deposit

(a) It is a real contract perfected by delivery. (Art. 1316,
Civil Code). [Nonetheless, there can be consensual con-
tract to make or to constitute a deposit. (Art. 1963, Civil
Code).
(b) The principal purpose is the safekeeping of the thing
delivered. (Art. 1962). [Thus, if the safekeeping is merely
secondary, the contract is not a deposit but some other
contract like one of lease or commodatum. (Ibid.).]
(c) The depositary cannot use the thing deposited except:
1) with the express permission of the depositor; or

918
CIVIL CODE OF THE PHILIPPINES Art. 1962

2) when the preservation of the thing deposited re-

quires its use [but then it must be used only for
that purpose. (Art. 1977, Civil Code).]
(d) Only movable things can be the object of a deposit. (Art.
1966, Civil Code).
(e) It is a gratuitous contract, except when there is an
agreement to the contrary or unless the depositary is
engaged in the business of storing goods. (Art. 1965,
Civil Code).
(f) The contract is either unilateral or bilateral, according
to whether it is gratuitous or compensated (onerous).

(6) ‘Deposit’ Distinguished from ‘Sale’ and ‘Barter’

DEPOSIT SALE AND BARTER

(a) ownership is not trans- (a) ownership is transferred
ferred upon delivery
(b) real contract (b) consensual (perfected by
mere consent)
(c) generally gratuitous (c) always onerous

(7) ‘Deposit’ and ‘Commodatum’ Distinguished

DEPOSIT COMMODATUM

(a) may be gratuitous (a) essentially and always

gratuitous
(b) principal purpose is safe- (b) principal purpose is use
keeping

(8) ‘Deposit’ Distinguished from ‘Agency’

DEPOSIT AGENCY

(a) purpose is safekeeping (a) purpose is the representa-

tion by the agent of the
principal’s affairs

919
Art. 1963 CIVIL CODE OF THE PHILIPPINES

(b) the custody of the things is (b) the custody here of the
the principal and essential things is merely an inci-
reason for deposit dental or accessory obli-
gation of the agent
(c) generally gratuitous. (Art. (c) generally onerous or for
1965, Civil Code). a compensation

(9) Balance of a Commission Account

NOTE, however, that the balance of a commission account
remaining in the possession of the agent at the principal’s
disposal acquires at once the character of a deposit which the
former must return or restore to the latter at any time it is
demanded. The agent cannot lawfully dispose of it without
incurring criminal responsibility for appropriating or divert-
ing to his own use another’s property. It could only become
his as a loan, if so expressly agreed by its owner who would
then be obligated not to demand it until the expiration of
the legal or stipulated period for the loan. (U.S. v. Igpuara,
7 Phil. 619).

(10) Advance Partial Payment in Sales

A so-called deposit of an advance payment in the case of
a sale is not the deposit contemplated under Art. 1962. It is
advance payment, and ownership is transferred to the seller
once given. (Cruz v. Aud.-Gen., L-12233, May 30, 1959).

Art. 1963. An agreement to constitute a deposit is bind-

ing, but the deposit itself is not perfected until the delivery
of the thing.

COMMENT:
(1) Consensual Contract to Constitute a Deposit
A deposit is a real contract and is not perfected until
the delivery of the object of the obligation. (Art. 1316, Civil
Code). Where there has been no delivery, there is merely an
agreement to deposit, a personal obligation to do. Hence, it
has been truly said that a contract of future deposit is merely
consensual. Such contract is, however, binding.

920
CIVIL CODE OF THE PHILIPPINES Art. 1964

(2) Necessity of an Agreement

It should be noted, however, that an offer to constitute
a deposit in the future is binding only when said offer is ac-
cepted. Note that the law uses the term agreement. Without
said agreement, there is no contract at all whether real or
consensual. This doctrine is, however, applicable merely to
voluntary deposits.

Art. 1964. A deposit may be constituted judicially or

extrajudicially.

COMMENT:
Distinctions Between ‘Judicial’ and ‘Extrajudicial’ De-
posits

EXTRAJUDICIAL JUDICIAL

(1) the will of the par- ORIGIN (1) the will of the
ties court
(2) there is a con- STATUS (2) no contract
tract
(3) custody and safe- PURPOSE (3) to guarantee the
keeping of the right of the plain-
thing for the ben- tiff in case of a
efit of the deposi- favorable judg-
tor ment
(4) gratuitous, as a CAUSE (4) onerous
rule
(5) always movable SUBJECT (5) either movable or
property MATTER immovable prop-
erty, but gener-
ally, immovable
(6) in behalf of the IN WHOSE (6) in behalf of the
depositor BEHALF IT winner
IS HELD

921
Arts. 1965-1966 CIVIL CODE OF THE PHILIPPINES

Art. 1965. A deposit is a gratuitous contract, except

when there is an agreement to the contrary, or unless the
depositary is engaged in the business of storing goods.

COMMENT:
(1) Compensation in a Deposit
Generally, deposit is GRATUITOUS.
Exceptions:
(a) when there is a contrary agreement;
(b) when the depositary is engaged in the business of stor-
ing goods.

(2) Problem
A deposited his goods with B. Compensation was agreed
upon, but the rate was not fixed. How much should be giv-
en?
ANS.: In such a case (because there was no stipulation
as to how much should be paid), the compensation should
be fixed according to the current rates in the place where
the deposit was constituted. If the goods were delivered in
one place but actually deposited in another place, the rate
of compensation shall be that of the place where the things
were delivered, because that would be the place where the
contract was perfected. (8 Echavarri 180).

(3) When Contract Is Really One of Loan

When the thing delivered can be used by the depositary
and he is obliged to pay interest for said use, it follows that the
contract cannot be considered a deposit but a loan or mutuum.
Notice here that we cannot consider this an onerous deposit
for in the problem presented, it is the depositary who pays
interest or remuneration. (Aquino v. Deala, 63 Phil. 582).

Art. 1966. Only movable things may be the object of a

deposit.

922
CIVIL CODE OF THE PHILIPPINES Art. 1967

COMMENT:
(1) Why Only Movable Things May Be the Object of a De-
posit
The object of a deposit is the safekeeping of a thing, for
without such safekeeping it may be lost or it may disappear
or be stolen. This will not happen in real property (unless
of course what is meant by loss is destruction). Hence, only
movable things may be the object of a deposit.

(2) Services of a Watchman

A watchman’s services may, of course, be leased to guard
real estates.

(3) Sequestration or Attachment of Real Properties

Real properties, particularly those involved in court
cases, may be attached or sequestered. An annotation of lis
pendens pending litigation) may be made in the Register of
Property.

Art. 1967. An extrajudicial deposit is either voluntary

or necessary.

COMMENT:
Kinds of Extrajudicial Deposit
(a) Voluntary — as when there is mutual consent.
(b) Necessary — when there is a deposit because of a calam-
ity (depositum miserable).

923
 CIVIL CODE OF THE PHILIPPINES

Chapter 2

VOLUNTARY DEPOSIT

Section 1
GENERAL PROVISIONS

Art. 1968. A voluntary deposit is that wherein the de-

livery is made by the will of the depositor. A deposit may
also be made by two or more persons each of whom believes
himself entitled to the thing deposited with a third person,
who shall deliver it in a proper case to the one to whom
it belongs.

COMMENT:
(1) ‘Voluntary Deposit’ Defined
A voluntary deposit is that wherein the delivery of the
object is made by the will of the depositor.

(2) Reason for the First Sentence

To emphasize the difference of a voluntary deposit from
the necessary deposit, it is obvious that this complete freedom
of action is absent in the latter.

(3) Depositor Need Not Be the Owner

Generally, the depositor must be the owner. The second
sentence admits the validity of a deposit which has not been
made by the true owner. As a matter of fact, the law provides
that the “depositary cannot demand that the depositor prove
his ownership of the thing deposited.” (Art. 1984, 1st par.,
Civil Code). After all, a depositor does not transfer ownership
over the subject matter.

924
CIVIL CODE OF THE PHILIPPINES Arts. 1969-1970

(4) ‘Interpleader’ Defined

Whenever conflicting claims upon the same subject matter
are or may be made against a person who claims no interest
whatever in the subject matter, or an interest which in whole
or in part is not disputed by the claimants, he may bring an
action to compel them to interplead and litigate their several
claims among themselves. (Sec. 1, Rule 63, Revised Rules of
Court).

(5) Example of Interpleader

A and B each claiming to be the sole owner of a bicycle,
deposited the same with C. C should later on deliver it to the
one to whom it belongs. The action which would settle the con-
flicting claims would be in the nature of an interpleader.

Art. 1969. A contract of deposit may be entered into

orally or in writing.

COMMENT:
Form of the Contract of Deposit
(a) oral
(b) written
NOTE: In either case, however, there must be a
DELIVERY.

Art. 1970. If a person having capacity to contract ac-

cepts a deposit made by one who is incapacitated, the former
shall be subject to all the obligations of a depositary, and
may be compelled to return the thing by the guardian, or
administrator, of the person who made the deposit, or by
the latter himself if he could acquire capacity.

COMMENT:
(1) Rule When Depositor Is Incapacitated
Example:
A accepted a deposit from B, an insane individual. As
long as B is insane, he cannot by himself compel the return

925
Art. 1971 CIVIL CODE OF THE PHILIPPINES

of the thing. He must act through his guardian or adminis-

trator. Should B be of sound mind again, he can by himself
compel the return of what has been deposited.

(2) Capacity of Depositary

The depositary himself must be sui juris capacitated to
enter into binding contracts. He is subject to all the obliga-
tions of a depositary. The law says that “persons who are
capable cannot allege the incapacity of those with whom they
contracted.” (Art. 1379, Civil Code).

(3) Validity of the Contract Entered Into

The contract entered into under Art. 1970 is a voidable
one.

Art. 1971. If the deposit has been made by a capaci-

tate person with another who is not, the depositor shall
only have an action to recover the thing deposited while
it is still in the possession of the depositary, or to compel
the latter to pay him the amount by which he may have
enriched or benefited himself with the thing or its price.
However, if a third person who acquired the thing acted in
bad faith, the depositor may bring an action against him
for its recovery.

COMMENT:

(1) Rule if Depositary Is Incapacitated

Example:
A deposited something with B, who is insane. B in turn
disposed of it in favor of C. Can A go against C?
ANS.: Yes, if C acted in bad faith. But if C acted in good
faith, A’s only recourse would be to compel B to give him (A)
the amount by which he (B) might be enriched or benefited
himself.

926
CIVIL CODE OF THE PHILIPPINES Art. 1972

(2) Remedy of Depositor

What is the nature of the action of a depositor who
has deposited something still in the possession of an insane
depositary?
ANS.: His is an owner’s action to recover or vindicate
a thing. The insane depositary, because of the insanity, does
not incur the obligations of a depositary.

(3) Validity of the Contract Entered Into

The contract entered into under Art. 1971 is a voidable one,
in view of the incapacity of one of the contracting parties.

Section 2
OBLIGATIONS OF THE DEPOSITARY

Art. 1972. The depositary is obliged to keep the thing

safely and to return it, when required, to the depositor, or
to his heirs and successor or to the person who may have
been designated in the contract. His responsibility, with
regard to the safekeeping and the loss of the thing, shall
be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken
into account in determining the degree of care that the
depositary must observe.

COMMENT:
(1) Principal Obligations of the Depositary
The safekeeping and the return of the thing, when re-
quired, are the two principal obligations of the depositary.

NOTE: Title I of Book IV refers to obligations and contracts.

(Arts. 1156-1304).

(2) Duty of Safekeeping

(a) If the contract does not state the diligence which is to
be observed in the performance, that of a good father of
a family shall be required. (Art. 1175, par. 2).

927
Art. 1972 CIVIL CODE OF THE PHILIPPINES

(b) The depositary is responsible if the loss occurs through

his fault (Art. 1172), but as a rule, not if the loss is
through a fortuitous event. (Art. 1174).

(3) Effect if Deposit Is Gratuitous or Onerous

Paragraph 2 — More care is required if the deposit is
for a compensation than if it is gratuitous. But even if gra-
tuitous, care must still be exercised. (11 Manresa 666).
Examples:
A fire destroyed something deposited. It was proved that
the fire was neither intentional nor caused by the fault of the
depositary, who as a matter of fact had even attempted to
save the goods.
HELD: Depositary is not liable. (La Sociedad Dalisay v.
De los Reyes, 55 Phil. 452).
The depositary who was in charge of some cattle failed
to prove that the loss occurred either without fault on his
part or by reason of caso fortuito.
HELD: He is liable. (Palacio v. Sudario, 7 Phil. 275).

(4) Owner Bears Loss

In case of non-fault on the part of the depositary, the
depositor-owner bears the loss because of the maxim “res perit
domino.” (Rizares v. Hernaez, 40 Phil. 981).

(5) Duty of Owner of Rice Mill

The owner of a rice mill who, in accordance with customs
prevailing in the trade, receives palay and converts the same
into rice, and sells the products for his own benefit has the
obligation to account for said palay to the owner, at the price
prevailing at the time demand is made. (Baron v. David, 51
Phil. 1).

(6) Guardian as Such, is Not Depositary

A guardian is not the depositary of the ward’s properties.
(Phil. Trust Co. v. Ballesteros, L-8261, April 20, 1956).

928
CIVIL CODE OF THE PHILIPPINES Arts. 1973-1974

Art. 1973. Unless there is a stipulation to the contrary,

the depositary cannot deposit the thing with a third person.
If deposit with a third person is allowed, the depositary is
liable for the loss if he deposited the thing with a person
who is manifestly careless or unfit. The depositary is re-
sponsible for the negligence of his employees.

COMMENT:
(1) Deposit With a Third Person
(a) Examples:
A deposited a car with B. B then deposited the same
car with C. Is this allowed? ANS.: No, unless there is a
stipulation that such deposit can be done.
(b) Another example:
A deposited a car with B. A allowed B to deposit
the car with a third person. B then deposited the car
with C. If thru C’s carelessness, the car is destroyed,
would B be liable to A?
ANS.: Yes, provided that C is a person manifestly
careless or unfit; otherwise, no. However, had C been
an employee of B, B is no doubt liable, whether C was
manifestly careless or not, for under the law the deposi-
tary is responsible for the negligence of his employees.

(2) Reason of the First Sentence of the Article

The depositary is, as a rule, not allowed to deposit the
thing with a third person because a deposit is founded on the
fact that the depositor has precisely chosen a particular de-
positary by virtue of the latter’s qualifications, and because of
the trust and confidence reposed on him by the depositor.
[NOTE: This is similar to the agent’s liability for the
acts of a substitute. (Art. 1898, Civil Code).]

Art. 1974. The depositary may change the way of the

deposit if under the circumstances he may reasonably
presume that the depositor would consent to the change

929
Art. 1975 CIVIL CODE OF THE PHILIPPINES

if he knew of the facts of the situation. However, before

the depositary may make such change, he shall notify the
depositor thereof and wait for his decision, unless delay
would cause danger.

COMMENT:
(1) When Depositary may Change the Way of the Deposit
Example:
A deposited a car with B in garage No. 1. If B builds
garage No. 2, which is better than the first, B may put the
car in garage No. 2. However, B should first notify A and wait
for the latter’s decision, unless delay would cause danger.

(2) Reason for the Law

This is in accordance with the rule that generally, the
depositary must take care of the thing with the diligence of
a good father of a family.

Art. 1975. The depositary holding certificates, bonds,

securities or instruments which earn interest shall be bound
to collect the latter when it becomes due, and to take such
steps as may be necessary in order that the securities may
preserve their value and the rights corresponding to them
according to law.
The above provision shall not apply to contracts for
the rent of safety deposit boxes.

COMMENT:
(1) Duty of Depositary to Collect Interest on Intangible
Properties
Example:
A deposits with B a negotiable promissory note bearing
interest, which interest is due every six months. When that
day comes, B should collect the interest. This is logically es-
sential in the exercise of due diligence by the depositary in
taking good care of the thing deposited.

930
CIVIL CODE OF THE PHILIPPINES Art. 1976

(2) Duty to Collect the Capital Also

Under this Article, the depositary is obliged to collect,
when due, not only the interest, but also the capital itself,
and to return whatever may have been received or collected,
to the depositor. (Espeo de Hinojosa, 480-481). Naturally, this
would not be the case should there be a contrary agreement.
(3 Malagarriaga 315).

(3) Reason for the Second Paragraph

Here, the renter of the box is supposed to have control
over the box and the contents thereof, and the real owner of
said boxes should therefore not have the duty imposed in the
first paragraph. As a matter of fact, this is really a lease of
a thing (the box) and not a contract of deposit.

Art. 1976. Unless there is a stipulation to the contrary,

the depositary may commingle grain or other articles of the
same kind and quality, in which case the various depositors
shall own or have a proportionate interest in the mass.

COMMENT:
(1) Right of Depositary to Commingle
(a) A received from B a deposit of 4 cavans of rice; and
from C, a deposit of 7 cavans of the same kind of rice.
A can commingle the 11 cavans and B and C would be
the Co-owners of the mixture in the proportion of 4 to
7. This can be done unless there is a stipulation to the
contrary.
(b) This provision is particularly applicable to a warehouse-
man, who may commingle goods if authorized by agree-
ment or by custom. (Sec. 25, Warehouse Receipts Law).

(2) Reason for the Proportional Co-ownership

This is so from the necessity of the case because as soon
as the goods are intermingled, each person’s portion loses its
identity and can no longer be distinguished or separated from
the common mass. He becomes a tenant in common (co-own-

931
Arts. 1977-1978 CIVIL CODE OF THE PHILIPPINES

ers), not only while his (actual) grain is in the common store,
but as long as any grain is so stored, and if the owner of the
warehouse puts his own grain into the mass, he becomes, as
to such grain a tenant, in common of the entire body of grain
with other owners. (Drudge v. Loiter, 18 Ind. App. 694).
(NOTE: The rule stated in Art. 1976 is similar to the
provision on commixtion.)

Art. 1977. The depositary cannot make use of the thing

deposited without the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited
requires its use, it must be used but only for that purpose.

COMMENT:
Generally, Depositary Cannot Use
(a) Generally, the use of the thing is not allowed the de-
positary.
(b) Example of paragraph 3: A radio-phonograph set must
occasionally be used so that it may function properly.
This use for preservation is implicitly granted, in view
of the nature of the thing deposited.

Art. 1978. When the depositary has permission to use

the thing deposited, the contract loses the concept of a
deposit and becomes a loan or commodatum, except where
safekeeping is still the principal purpose of the contract.
The permission shall not be presumed, and its exist-
ence must be proved.

COMMENT:
(1) When Depositary Has Permission to Use
A deposited a sum of money with B who later was au-
thorized to use the same. The contract becomes one of loan.
(Gavierez v. Tavera, 1 Phil. 71).

932
CIVIL CODE OF THE PHILIPPINES Art. 1978

(2) Irregular Deposit

A deposited 5 kilos of sugar with B. B was authorized to
use the sugar, but safekeeping was still the principal purpose
of the contract. This is still a deposit but an irregular one,
hence it is called an irregular deposit.
[NOTE: The deposit irregular was in the Spanish laws
before the old Civil Code, but was abolished in the old Civil
Code. This abolition was criticized by Manresa. (11 Manresa
696-697). The new Civil Code restores it. Like mutuum, an
irregular deposit is concerned with consumable things which
are given by weight, number, or measure, but unlike mutuum,
it is demandable at the will of the depositor, for whose benefit
the deposit has been constituted.]

(3) Presumption
The law creates the presumption that in a deposit, the per-
mission to use is not presumed, except when such use is needed
for preservation. Therefore, a person who alleges that permis-
sion or authority to use the thing deposited has been given, has
the burden of proving his allegation. (Par. 3, Art. 1978).

Baron v. David
51 Phil. 1
FACTS: Pablo David was the owner of a rice mill in
Pampanga. Silvestra and Guillermo Baron delivered around
2,000 cavans of palay to him, with the understanding that
he (David) was free to convert them into rice, and dispose of
them at his pleasure. After sometime, the rice mill was burned,
including its contents of around 360 cavans of palay. This
action was brought to recover the value of said cavans.
HELD: The owner of the rice mill who in conformity with
customs prevailing in the trade receives palay and converts
it into rice, selling the product for his own benefit, must ac-
count for the palay to the owner at the price prevailing at
the time demand is made. The destruction of the rice mill
with its contents by fire after the palay thus deposited had
been milled and marketed, does not affect the liability of the
millers. Even supposing that the palay had been delivered in

933
Art. 1978 CIVIL CODE OF THE PHILIPPINES

the character of a deposit, subject to future sale or withdrawal

at the plaintiff’s election, nevertheless, if it was understood
that the defendant might mill the palay and he has in fact
appropriated it to his own use, he is, of course, bound to ac-
count for its value, because under the law such a deposit loses
the concept of deposit and becomes a loan. By appropriating
the thing, the bailee becomes responsible for its value. The
defendant should be liable for the whole quantity delivered,
without deducting the 360 that were burned.

(4) Deposit of Palay

Delgado v. Bonnevie and Arandez

23 Phil. 308

FACTS: Palay was deposited so that it would be threshed

into rice. Is this a deposit or a hire of services?
HELD: While the deposit of palay was converted into a
hire of services, yet, after the object of the hiring (conversion
into rice) has been fulfilled, the rice continued to be a deposit
in the possession of the thresher for them to return to the
plaintiff-owner upon demand.

(5) When Deposit of Money Is Really a Loan

(a) Where money, consisting of coins of legal tender, is
deposited with a person, and the latter is authorized
by the depositor to use and dispose of the same, the
agreement thus entered into between the depositor and
the depositary is not a contract of deposit but a loan.
(Javellana v. Lion, et al., 11 Phil. 141).
(b) Evidence showing that interest had been offered as com-
pensation for the use of money deposited leads one to the
conclusion that the contracts, although denominated by
the parties as deposit is really one of loan. (Co Agricola
v. Nepomuceno, 55 Phil. 283).

(6) No Prescription of Demand for Return

Can the right to demand the return of the thing deposited
prescribe?

934
CIVIL CODE OF THE PHILIPPINES Arts. 1979-1980

ANS.: Things received on deposit do not prescribe, for the

depositary cannot claim that ownership of the thing depos-
ited was transferred to him, but simply the custody thereof.
The possession of the depositary, as such, is not adverse to
that of the depositor. (Delgado v. Bonnevie, supra). The Civil
Code states that possession, in order to ripen into prescrip-
tion, must among other things be in the concept of an owner,
public, peaceful, and uninterrupted. (Art. 1118, Civil Code).
Adverse possession can, of course, give rise to prescription.

Art. 1979. The depositary is liable for the loss of the

thing through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor’s permis-
sion;
(3) If he delays its return;
(4) If he allows others to use it, even though he him-
self may have been authorized to use the same.

COMMENT:
Liability for Fortuitous Event
Generally, the depositary is not liable for fortuitous
events. The Article gives the four (4) exceptions.

Art. 1980. Fixed, savings, and current deposits of money

in banks and similar institutions shall be governed by the
provisions concerning simple loan.

COMMENT:
(1) Bank Deposits
(a) A bank can compensate a debtor’s debt with a debtor’s
deposit because insofar as the deposit is concerned, the
relationship between them is that of debtor and credi-
tor, not depositary and depositor. (Gullas v. Phil. Nat’l.
Bank, 62 Phil. 619).

935
Art. 1980 CIVIL CODE OF THE PHILIPPINES

(NOTE: In a true deposit, Art. 1287 prohibits com-

pensation.)

Philippine Deposit Insurance Corp. v.

CA, Abad, et al.
GR 126911, Apr. 20, 2003
FACTS: The Monetary Board (MB) of the Central
Bank (now Bangko Sentral) closed the Manila Banking
Corp. (MBC) on May 22, 1987 (a Friday) under MB Resolu-
tion 505. Said Resolution prohibited MBC to do business
and placed its assets and affairs under receivership. On
May 25, 1987 (a Monday), respondent was at MBC at 9
am for the purpose of preterminating 71 of his “Golden
Time Deposits” (GTD) certificates with an aggregate value
of P1,115,889.96. He redeposited the same into new GTDs
in denominations of P40,000 or less.
The Philippine Deposit Insurance Corp. (PDIC)
refused to pay deposits because it said transactions
were not made “in the usual course of business,” as un-
derstood in its Charter. It said that respondent might
have learned of the MB Resolution, hence, he acted in
bad faith. PDIC theorizes that after MBC had exhausted
its cash and could no longer sustain further withdrawal
transactions, it instead issue new GTDs as “payment”
for respondent’s preterminated GTDs.
HELD: The PDIC Charter provides that the term
“deposit” means the unpaid balance of money or its
equivalent received by a bank in the usual course of
business and for which it has given or is obliged to give
credit to a commercial, checking, savings time, and thrift
account or which is evidenced by its certificate of deposit.
(Sec. 3, RA 3591).
The Supreme Court, in the instant case, rejected
PDIC’s argument, opining respondent should be given the
benefit of doubt that he was not aware the MB Resolution
had been passed, given the necessity of confidentiality
of placing a banking institution under receivership. Ap-
pointment of a receiver may be made by the MB without
notice and hearing, but its action is subject to judicial

936
CIVIL CODE OF THE PHILIPPINES Art. 1980

review to ensure protection of the banking institution.

One can just imagine the dire consequences of prior hear-
ing: Bank runs would be the order of the day, resulting
in panic and hysteria. In the process, fortunes may be
wiped out and disillusionment will run the gamut of the
entire banking community.
(b) A depositor is disputably presumed to be the owner of the
funds standing in his name in a bank deposit. (Fulton Iron
Works v. China Banking Corporation, 55 Phil. 208).
(c) If a depositor incurs an overdraft, the same cannot be
charged against an account placed under his name, that
has a notation that it is held in trust for another. (Ful-
ton Iron Works v. China Banking Corporation, 55 Phil.
208).
(d) If a trustee of some funds in a bank withdraws them
and misappropriates the same, the bank cannot be liable
if it acted in good faith. (7 C.J. 644).
(e) Current and savings deposits are loans to a bank be-
cause it can use the same. (Tian Tiong Tick v. American
Apothecaries, 38 O.G. 889).

Rural Bank of Caloocan v. Court of Appeals

L-32116, Apr. 21, 1981

A bank must exercise the highest order of care and

prudence in dealing with would-be borrowers since it
is engaged in a business affected with public interest.
The consent of alleged co-makers or guarantors must
be strictly ascertained to prevent adverse effects on our
banking system.

Ong Sip v. Prudential Bank and Trust Co.

GR 27328, May 30, 1983

A postdated check cannot at all be regarded as a

check. A bank cannot therefore deduct from a client’s
checking (current) account postdated checks which have
been issued by the depositor (at least not until the date
indicated on the check).

937
Art. 1980 CIVIL CODE OF THE PHILIPPINES

Gonzales v. Philippine National Bank

GR 33320, May 30, 1983
Because the Philippine National Bank has a char-
ter all its own, it is not an ordinary corporation, and is
not therefore governed by the Corporation Law. Thus, a
stockholder cannot inspect its books, otherwise its char-
ter would be violated. Only the Central Bank (Bangko
Sentral) can inspect.

(2) Distressed Banks

Serrano v. Central Bank

L-30511, Feb. 14, 1980

The recovery of time deposits from a distressed bank

as well as damages should be in the Court of First Instance
(now Regional Trial Court) in an ordinary action, not a
petition for mandamus and prohibition. Bank deposits are
really loans, and failure to return the same is failure to pay
an obligation as a debtor, not a breach of trust (for there is
no trust, constructive or otherwise). Incidentally the Central
Bank (Bangko Sentral) has no obligation to pay the deposits
in an insolvent bank.
Concurring (J. Ramon Aquino): The depositor’s remedy is
to file his claim in the liquidation proceeding of the Bank.

(3) Exemption from Payment of Interest

The Overseas Bank of Manila v. Court of Ap-

peals
L-49353, Jun. 11, 1981

Banks are not required to pay interest on deposits for

the period during which they are not allowed to operate by
the Central Bank (Bangko Sentral). This is demanded by
fairness. However, interests that had accrued prior to the
suspension should be paid by the bank, for after all, it had
made use them of the money deposited.

938
CIVIL CODE OF THE PHILIPPINES Art. 1980

(4) The Bouncing Checks Law

BATAS PAMBANSA BLG. 22

AN ACT PENALIZING THE MAKING OR DRAWING AND

ISSUANCE OF A CHECK WITHOUT SUFFICIENT FUNDS
OR CREDIT AND FOR OTHER PURPOSES.

Be it enacted by the Batasang Pambansa in session assembled:

SECTION 1. Checks without sufficient funds. — Any person

who makes or draws and issues any check to apply on account
or for value, knowing at the time of issue that he does not have
sufficient funds in or credit with the drawee bank for the pay-
ment of such check in full upon its presentment, which check is
subsequently dishonored by the drawee bank for insufficiency of
funds or credit or would have been dishonored for the same reason
had not the drawer, without any valid reason, ordered the bank
to stop payment, shall be punished by imprisonment of not less
than thirty days but not more than one (1) year or by a fine of not
less than but not more than double the amount of the check which
fine shall in no case exceed Two Hundred Thousand Pesos, or both
such fine and imprisonment at the discretion of the court.
The same penalty shall be imposed upon any person who,
having sufficient funds in or credit with the drawee bank when
he makes or draws and issues a check, shall fail to keep sufficient
funds or to maintain a credit to cover the full amount of the check
if presented within a period of ninety (90) days from the date ap-
pearing thereon, for which reason it is dishonored by the drawee
bank.
Where the check is drawn by a corporation, company or entity,
the person or persons who actually signed the check in behalf of
such drawer shall be liable under this Act.
SEC. 2. Evidence of knowledge of insufficient funds. — The
making, drawing and issuance of a check payment of which is re-
fused by the drawee because of insufficient funds in or credit with
such bank, when presented within ninety (90) days from the date
of the check, shall be prima facie evidence of knowledge of such

939
Art. 1980 CIVIL CODE OF THE PHILIPPINES

insufficiency of funds or credit unless such maker or drawer pays

the holder thereof the amount due thereon, or makes arrangements
for payment in full by the drawee of such check within five (5)
banking days after receiving notice that such check has not been
paid by the drawee.
SEC. 3. Duty of drawee; rules of evidence. — It shall be the
duty of the drawee of any check, when refusing to pay the same to
the holder thereof upon presentment, to cause to be written, printed,
or stamped in plain language thereon, or attached thereto, the reason
for drawee’s dishonor or refusal to pay the same: Provided, That where
there are no sufficient funds in or credit with such drawee bank,
such fact shall always be explicitly stated in the notice of dishonor
or refusal. In all prosecutions under this Act, the introduction in
evidence of any unpaid and dishonored check, having the drawee’s
refusal to pay stamped or written thereon, or attached thereto, with
the reason therefor as aforesaid, shall be prima facie evidence of the
making or issuance of said check, and the due presentment to the
drawee for payment and the dishonor thereof, and that the same
was properly dishonored for the reason written, stamped or attached
by the drawee on such dishonored check.
Notwithstanding receipt of an order to stop payment, the
drawee shall state in the notice that there were no sufficient funds
in or credit with such bank for the payment in full of such check,
if such be the fact.
SEC. 4. Credit construed. — The word “credit” as used herein
shall be construed to mean an arrangement or understanding with
the bank for the payment of such check.
SEC. 5. Liability under the Revised Penal Code. — Prosecu-
tion under this Act shall be without prejudice to any liability for
violation of any provision of the Revised Penal Code.
SEC. 6. Separability clause. — If any separable provision of
this Act be declared unconstitutional, the remaining provisions
shall continue to be in force.
SEC. 7. Effectivity. — This Act shall take effect fifteen days
after publication in the Official Gazette.
Approved, April 3, 1979.

940
CIVIL CODE OF THE PHILIPPINES Art. 1980

A.M. 00-11-01-SC

RE: AMENDMENT TO THE RULE ON SUMMARY

PROCEDURE OF CRIMINAL CASES TO INCLUDE WITHIN
ITS COVERAGE VIOLATIONS OF B.P. BLG. 22, OTHER-
WISE KNOWN AS THE BOUNCING CHECKS LAW
Section 1 of the Revised Rules on Summary Procedure
(Resolution of the Court En Banc dated October 15, 1991), is
amended as follows:
“Section 1. Scope. This rule shall govern the sum-
mary procedure in the Metropolitan Trial Courts, the
Municipal Trial Courts in Cities, and Municipal Circuit
Trial Courts in the following cases falling within their
jurisdiction:
A. Civil Cases:
x x x
B. Criminal Cases:
x x x
4. Violations of Bata Pambansa Bilang 22 (Bounc-
ing Checks Law):
5. All other criminal cases where the penalty
prescribed by law for the offense charged is imprisonment
not exceeding six months, or a fine not exceeding one
thousand pesos (P1,000.00), or both irrespective of other
imposable penalties, accessory or otherwise, or of the civil
liability arising therefrom: Provided, however, That in
offenses involving damage to property through criminal
negligence, this Rule shall govern where the imposable
fine does not exceed ten thousand pesos (P10,000.00).
This Rule shall not apply to a civil case where the plain-
tiff’s cause of action is pleaded in the same complaint with an-
other cause of action subject to the ordinary procedure; nor to a
criminal case where the offense charged is necessarily related
to another criminal case subject to the ordinary procedure.”
The amendment shall take effect on April 15, 2003 fol-
lowing its publication in a newspaper of general circulation
not later than March 30, 2003.

941
Art. 1981 CIVIL CODE OF THE PHILIPPINES

Elvira Yu Oh v. CA & People of the Phils.

GR 125297, Jun. 6, 2003
FACTS: As understood by the trial court itself, Joaquin
Novales III, General Manager of complainant Solid Gold
International Traders, Inc., a company engaged in jewelry
trading, knew of the non-availability of sufficient funds when
appellant issued the subject checks to him.
HELD: There is no violation of BP 22 if complainant
was told by the drawer that he has no sufficient funds in the
bank. (Eastern Assurance & Surety Corp. v. CA, 322 SCRA 73
[2000]).
[NOTE: The term “closed accounts” is within the mean-
ing of the phrase “does not have sufficient fund in or credit
with the drawee bank.” (Oh v. CA, supra).]
[NOTE: RA 7691, which took effect on Jun. 15, 1994,
amended BP 129 (“the Judiciary Reorganization Act”), and
vested on the Metropolitan, Municipal and Municipal Circuit
Trial Courts jurisdiction to try cases punishable by imprison-
ment of not more than 6 years. (Sec. 2, RA 7691). (Oh v. CA,
supra.).]

Art. 1981. When the thing deposited is delivered closed

and sealed, the depositary must return it in the same con-
dition, and he shall be liable for damages should the seal
or lock be broken through his fault.
Fault on the part of the depositary is presumed, unless
there is proof to the contrary.
As regards the value of the thing deposited, the statement
of the depositor shall be accepted, when the forcible opening
is imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility
of the depositor with respect to the value claimed by him.
When the seal or lock is broken, with or without the de-
positary’s fault, he shall keep the secret of the deposit.

COMMENT:
The Depositary Must Keep the Secret of the Deposit
When the thing deposited is delivered closed and sealed,

942
CIVIL CODE OF THE PHILIPPINES Art. 1982

the depositary must return it in the same condition, and he

shall be liable for damages should the seal or lock be broken
through his fault. When the seal or lock is broken, with or
without the depositary’s fault, he shall keep the secret of the
deposit. (Art. 1981, pars. 1 and 4). If the seal or lock is broken
through the depositary’s fault, the presumption is that the
fault is on the part of the depositary, unless there is proof
to the contrary. (Art. 1981, par. 2).
As regards the value of the thing deposited, the statement
of the depositor shall be accepted, when the forcible opening is
imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility
of the depositor with respect to the value claimed by him.
(Art. 1981, par. 3).
When it becomes necessary to open a locked box or re-
ceptacle, the depositary is presumed authorized to do so, if
the key has been delivered to him; or when the instructions
of the depositor as regards the deposit cannot be executed
without opening the box or receptacle. (Art. 1982).

Example:
A instructed B to take insurance on the thing deposited.
C, the agent of the Insurance Company, insurer, asks B to
give him opportunity to examine the thing deposited to ap-
praise its insurable value, and also to estimate the risks the
Company would assume, so that he may decide the rate of
premium to be imposed. Since the thing deposited is in a box,
may B open the box?
ANS.: Yes, B may open the box or receptacle for this is
the only possible way by means of which B may follow the
instruction of A. (Ibid.)

Art. 1982. When it becomes necessary to open a locked

box or receptacle, the depositary is presumed authorized
to do so, if the key has been delivered to him; or when the
instructions of the depositor as regards the deposit cannot
be executed without opening the box or receptacle.

943
Arts. 1983-1984 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Necessity of Opening Locked Box
(See Comments under the preceding Article.)

Art. 1983. The thing deposited shall be returned with

all its products, accessories and accessions.
Should the deposit consists of money, the provisions
relative to agents in Article 1896 shall be applied to the
depositary.

COMMENT:
Return of the Thing Deposited
(a) The Article is self-explanatory.
(b) If a property owner whose property has been judicially
attached sells the same but fails to deliver the money
to the attorney of the creditors, and instead deposits
the sum in court, he is guilty neither of estafa nor of
malversation. (U.S. v. Rastrollo, 1 Phil. 22).
(c) If a sale fails to materialize because of circumstances
beyond control, any earnest money given by way of de-
posit or advance payment must be returned. (Litton, et
al. v. Luzon Surety Co., Inc., et al., 90 Phil. 783).
(d) Art. 1896 provides: “The agent owes interest on the sums
he has applied to his own use from the day on which
he did so, and on those which he still owes after the
extinguishment of the agency.”

Art. 1984. The depositary cannot demand that the de-

positor prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has
been stolen and who its true owner is, he must advise the
latter of the deposit.
If the owner, in spite of such information, does not
claim it within the period of one month the depositary
shall be relieved of all responsibility by returning the thing
deposited to the depositor.

944
CIVIL CODE OF THE PHILIPPINES Arts. 1985-1986

If the depositary has reasonable grounds to believe that

the thing has not been lawfully acquired by the depositor;
the former may return the same.

COMMENT:
Depositary Cannot Demand Proof of Ownership
(a) Difference between paragraphs 2 and 4:
In paragraph 2, the depositary knows who the owner
of the stolen property is; in paragraph 4, he does not.
(b) Note that the law uses the word stolen; hence, if lost, the
provisions appertaining to stolen property should not apply.
The law must be construed strictly. (11 Manresa 689).

Art. 1985. When there are two or more depositors, if

they are not solidary, and the thing admits of division, each
one cannot demand more than his share.
When there is solidarity or the thing does not admit
of division, the provisions of Articles 1212 and 1214 shall
govern. However, if there is a stipulation that the thing
should be returned to one of the depositors, the depositary
shall return it only to the person designated.

COMMENT:
Two or More Depositors
(a) Example of Paragraph 1:
If A and B deposit 1,000 sacks of rice, A can demand
only 500 sacks.
(b) If A and B deposited a car, the depositary can return
to either, in the absence of a contrary stipulation. (See
Arts. 1212 and 1214, Civil Code).

Art. 1986. If the depositor should lose his capacity to

contract after having made the deposit, the thing cannot
be returned except to the persons who may have the ad-
ministration of his property and rights.

945
Arts. 1987-1988 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Rule if Depositor Becomes Insane
If the depositary returns to a depositor who is NOW
insane, the depositary is discharged from his obligation only
if the insane depositor has kept the thing delivered or insofar
as delivery has been beneficial to such insane depositor. (See
Art. 1241, Civil Code).

Art. 1987. If at the time the deposit was made a place

was designated for the return of the thing, the depositary
must take the thing deposited to such place; but the expenses
for transportation shall be borne by the depositor.
If no place has been designated for the return, it shall
be made where the thing deposited may be, even if it should
not be the same place where the deposit was made, provided
that there was no malice on the part of the depositary.

COMMENT:
(1) Example of Paragraph 1
Liwayway deposits in Manila a car but stipulates that
delivery must be in Daet. The depositary must take the car
to Daet, but expenses will be charged to Liwayway.

(2) Example of Paragraph 2

Liwayway deposits a car with Bella in Manila. Bella later
on resided in Cavite, bringing the car along with her. In the
absence of stipulation, the car must be returned in Cavite,
provided there was no malice on the part of Bella.

Art. 1988. The thing deposited must be returned to the

depositor upon demand, even though a specified period or
time for such return may have been fixed.
This provision shall not apply when the thing is ju-
dicially attached while in the depositary’s possession, or
should he have been notified of the opposition of a third
person to the return or the removal of the thing deposited.
In these cases the depositary must immediately inform the
depositor of the attachment or opposition.

946
CIVIL CODE OF THE PHILIPPINES Art. 1988

COMMENT:

(1) When Deposit Must Be Returned

As a rule, the thing deposited should be returned at the
will of the depositor. This is true whether a period has been
stipulated or not.
Reason: The term is for the sole benefit of the deposi-
tor and he may therefore demand that the thing be returned
notwithstanding the non-expiration of the term. It is submit-
ted, however, that when a time has been stipulated, and the
deposit is for a compensation, the term in this case would be
for the benefit of both depositor and depositary. In this case,
while the depositor may still demand the thing at will, he
should pay the depositary the corresponding indemnity, unless
of course a breach of confidence on the part of the depositary
makes it imperative for the depositor to immediately demand
the return of the thing.
[NOTE: It has been held that when there is no fixed
period for the return, withdrawal can be made at any time
without necessity of a judicial order. (Aboitiz v. Oquinena, 39
Phil. 926).]

(2) Exceptions to the General Rule

(a) When the thing is judicially attached while in the deposi-
tary’s possession. Reason: The property will be subject
to judicial orders.
(b) Should the depositary have been notified of the opposi-
tion of a third person to the return or the removal of
the thing deposited. Reason: The oppositor may claim to
be the owner.

(3) Liability for Damages

Should the depositary return the thing despite the at-
tachment or the opposition, he should respond for damages. He
should therefore not return in these two cases. The law clearly
gives him his course of action, namely, to inform the depositor
of the opposition or of the attachment. Of course, should the op-
position or the attachment be later withdrawn or discharged, the

947
Art. 1989 CIVIL CODE OF THE PHILIPPINES

depositary should now return the subject matter of the deposit

upon demand therefor by the depositor.

Art. 1989. Unless the deposit is for a valuable consid-

eration, the depositary who may have justifiable reasons
for not keeping the thing deposited may, even before the
time designated, return it to the depositor; and if the latter
should refuse to receive it, the depositary may secure its
consignation from the court.

COMMENT:
(1) Justifiable Reason for Returning
(a) Example:
A gratuitously deposited with B a car. B is later on
appointed minister to a foreign city. It is clear in this
case that B may return the car to A, even before the
time designated. The depositary B in the problem has
justifiable reason for not keeping the thing deposited.
[NOTE: Other just causes include serious danger to
the property, or an unbearably long time of deposit. The
cause must be real, not imaginary. (11 Manresa 699).]
(b) In (a), suppose A refuses to receive the car, what should
B do?
ANS.: B may secure its consignation from the
court.
[Consignation is the act of depositing the things due
at the disposal of judicial authority. (Art. 1258, par. 1,
Civil Code).]

(2) Problem
A deposited with B a car. B is to be paid for the de-
posit. If B has to leave the Philippines for medical treatment
abroad, is he allowed to return the car to A even before the
expiration of the term specified?
ANS.: Although apparently, the depositary is not granted
that right inasmuch as the deposit has been made for a com-

948
CIVIL CODE OF THE PHILIPPINES Arts. 1990-1991

pensation, it is believed that the depositary in a case like this

will be allowed to return the car provided that a proportional
reduction in the compensation is made; for otherwise, if it is
really imperative for B to go abroad, who will take care of the
car? The law must not be construed to effect an absurdity.

Art. 1990. If the depositary by force majeure or govern-

ment order loses the thing and receives money or another
thing in its place, he shall deliver the sum or other thing
to the depositor.

COMMENT:
Loss Thru Force Majeure or Government Order
A deposited with B a car. Because of an emergency need
for cars, the government took the car away from B giving
him P200,000 therefor. This P200,000 must be given by B in
turn to A. B shall not be held responsible for the non-return
of the car, but it is also clear that he should not unjustly
enrich himself at A’s expense, hence the duty to return the
P200,000.
[NOTE: A is entitled not only to P200,000, but also to
any other right of action given to B. (11 Manresa 700-701).]

Art. 1991. The depositor’s heir who in good faith may

have sold the thing which he did not know was deposited,
shall only be bound to return the price he may have re-
ceived or to assign his right of action against the buyer in
case the price has not been paid him.

COMMENT:
Sale by Heir
(a) “Depositor’s” should read “Depositary’s”. This is a typo-
graphical error. Proofs:
1) The old Civil Code, in Spanish, reads as follows:
“El heredero del depositario…”
2) The provision is under Section 2 which deals with
“obligations of the depositary.”

949
Arts. 1992-1993 CIVIL CODE OF THE PHILIPPINES

(b) Example:
A deposited a car with B. Later B died. C, the son
of B, not knowing that the car had been merely deposited
with his father, sold the car to D, in the belief that he
(C) had inherited the same from his (C’s) father. What
will be C’s liability?
ANS.: It depends:
1) If C has already been paid by D, then C should
return to A the price received.
2) If D still owes the purchase price, then C should
assign his right to be paid to A.
Notice that in (b) the heir was in good faith. Had he
been in bad faith, he would have been liable for damages.

Section 3
OBLIGATIONS OF THE DEPOSITOR
Art. 1992. If the deposit is gratuitous, the depositor is
obliged to reimburse the depositary for the expenses he may
have incurred for the preservation of the thing deposited.

COMMENT:
Duty of Depositor to Reimburse
(a) Art. 1992 does not apply when the deposit is onerous,
for in such a case, the depositary is obliged to spend,
without the right of reimbursement, for the necessary
expenses for preservation. He has no right to seek reim-
bursement because said expenses are deemed included
in the compensation. There can, however, be a contrary
stipulation.
(b) Note that in Art. 1992, the law talks merely of neces-
sary expenses and not the useful ones or those for mere
luxury or pleasure or ostentation.

Art. 1993. The depositor shall reimburse the depositary

for any loss arising from the character of the thing depos-
ited, unless at the time of the constitution of the deposit

950
CIVIL CODE OF THE PHILIPPINES Art. 1994

the former was not aware of, or was not expected to know
the dangerous character of the thing, or unless he notified
the depositary of the same, or the latter was aware of it
without advice from the depositor.

COMMENT:
(1) Reimbursement Because of Loss
As a rule, if the depositary suffers because of the charac-
ter of the thing deposited, the depositor should be responsible
for the loss sustained by the depositary.
Example:
A car containing a small bomb inside the machine was
deposited with a depositary. Should an explosion occur and
he suffers loss therefrom, the depositor must reimburse him
for said loss.

(2) Exceptions
(a) If at the time the deposit was made, the depositor was
not aware of, or was not expected to know the dangerous
character of the thing.
Example:
In the example in No. (1), the bomb may have
been placed by an assassin while the car was still in
the depositor’s possession.
(b) If at the time the deposit was made, the depositor knew
of the danger BUT he notified the depository of the
same. Reason: Here, the depository may be said to have
assumed the risk.
(c) If at the time the deposit was made, the depositary was
aware of the danger, even though he had not been notified
by the depositor. Reason: There is also an assumption
of risk here.

Art. 1994. The depositary may retain the thing in pledge

until the full payment of what may be due him by reason
of the deposit.

951
Art. 1995 CIVIL CODE OF THE PHILIPPINES

COMMENT:

(1) Right of Retention by Depositary

Example:
A deposited with B a car. If the deposit is gratuitous, B
may nevertheless retain the car in pledge until, for example, he
has been reimbursed the necessary expenses he had incurred
for its preservation. If the deposit is for a compensation, and
the compensation has not yet been paid, he may nevertheless
still retain the car in pledge.

(2) Pledge by Operation of Law

Art. 1994 gives an example of a pledge created by op-
eration of law. As a matter of fact, the thing deposited but
now pledged may even be sold after the requirements and
formalities in the case of sales of things pledged have been
complied with. If, for example, the thing is sold for P1,000,
although the debt is only P200, the balance of P800 must be
returned to the depositor. (See Art. 2121, Civil Code).

(3) Query
Under Art. 1994, suppose the depositary voluntarily re-
turns the thing deposited to the depositor even if the latter
has not yet fully paid him (depositary) what may be due him
(depositary), may the depositary still bring an action to recover
said fees, compensation, or expenses from the depositor?
ANS.: Yes. In this case, the depositary has only lost the
right of retention by way of pledge, but surely not the right
to recover what may be due him.

Art. 1995. A deposit is extinguished:

(1) Upon the loss or destruction of the thing depos-
ited;
(2) In case of a gratuitous deposit, upon the death of
either the depositor or the depositary.

952
CIVIL CODE OF THE PHILIPPINES Art. 1995

COMMENT:
(1) Extinguishment of Deposit
Example:
A deposited a car with B. If the car is destroyed by a
fortuitous event, the deposit is extinguished.

(2) Effect of Death

The death of either the depositor or the depositary extin-
guishes the deposit if it is gratuitous, but the thing deposited
must of course be returned. When the law says “extinguished”
it really means that the depositary need not be a depositary
any longer.

(3) Query
Suppose the deposit is for a compensation, does the
death of either the depositor or the depositary extinguish the
deposit?
ANS.: No, unless the deposit is terminated by the heirs
of the depositor. This is different from the rule in gratuitous
deposits which are personal in nature.

(4) Other Grounds

Art. 1995 is not exclusive. There are other grounds for
extinguishment of a deposit — like the expiration of the term,
or demand at the will of the depositor, or termination of the
purpose of the deposit or fulfillment of the resolutory condi-
tion, or mutual withdrawal from the contract.

953
 CIVIL CODE OF THE PHILIPPINES

Chapter 3

NECESSARY DEPOSIT

Art. 1996. A deposit is necessary:

(1) When it is made in compliance with a legal obliga-
tion;
(2) When it takes place on the occasion of any calam-
ity, such as fire, storm, flood, pillage, shipwreck, or other
similar events.

COMMENT:
(1) Example of Necessary Deposit Made in Compliance
With a Legal Obligation
A borrowed P100,000 from B, and as security thereof,
pledged his diamond ring. If B uses the ring without the
authority of A, A may ask that the ring be judicially or ex-
trajudicially deposited. (Art. 2104, Civil Code).
[NOTE: Art. 2104 — “The creditor cannot use the thing
pledged, without the authority of the owner, and if he should
do so, or should misuse the thing in any other way, the owner
may ask that it be judicially or extrajudicially deposited.
When the preservation of the thing pledged requires its use,
it must be used by the creditor but only for that purpose.”]
[NOTE: Other examples of necessary deposits in compli-
ance with a legal obligation:
(a) cash deposits to be made by certain officers or officials;
(b) deposits to be made by those who desire to use fire
arms.]

(2) Example of a Necessary Deposit Made on the Occasion

of a Calamity
In a fire, Jose saves Pedro’s car. Jose is in possession of
the car; Jose is supposed to be its depositary. Deposits made

954
CIVIL CODE OF THE PHILIPPINES Art. 1997

on the occasion of a calamity have been fittingly termed de-

positos miserables.

(3) Two Other Kinds of Necessary Deposits

(a) That made by travellers in hotels or inns. (See Art. 1998,
Civil Code).
(b) That made with common carriers.

Art. 1997. The deposit referred to in No. 1 of the preced-

ing article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules
on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article
shall be regulated by the provisions concerning voluntary
deposit and by Article 2168.

COMMENT:

(1) Governing Rules for Deposits Made in Compliance with

a Legal Obligation
(a) Firstly, the law creating said deposits.
(b) Suppletorily, the rule on voluntary deposits.

(2) Rules Governing Deposits Made Because of a Calamity

(a) Firstly, the rules on Voluntary Deposits.
(b) Also, Art. 2168 of the Civil Code.

(3) Art. 2168

“When during a fire, flood, storm, or other calamity,
property is saved from destruction by another person without
the knowledge of the owner, the latter is bound to pay the
former just compensation.”
(NOTE: Art. 2168 establishes a quasi-contract.)

955
Art. 1998 CIVIL CODE OF THE PHILIPPINES

Art. 1998. The deposit of effects made by travellers

in hotels or inns shall also be regarded as necessary. The
keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or to
their employees, of the effects brought by the guests and
that, on the part of the latter, they take the precautions
which said hotel-keepers or their substitutes advised rela-
tive to the care and vigilance of their effects.

COMMENT:
(1) Example of Liability of Hotel or Inn-keepers
A traveller spent a night in a Makati hotel. A hotel serv-
ant maliciously destroyed the cellular phone of the traveller.
Is the hotel-keeper liable?
ANS.: Yes, provided that he had previously been informed
about the cellular phone, and provided furthermore that the
traveller followed any precaution that may have been given
by the hotel-keeper or his substitutes regarding the care and
vigilance of said property.

(2) ‘Innkeeper’ Defined

The keeper of an inn for the lodging of travellers and
passengers for a reasonable compensation. He is distinguished
from the proprietor of other public houses of entertainment
in that he publicly holds out his place as one where all tran-
sient persons who choose to come will be received as guests.
(Holstein v. Phillips, 146 N.C. 366).

(3) ‘Occasional Entertainment’ Defined

The occasional entertainment of travellers does not of
itself make one an innkeeper. (Holstein v. Phillips, supra).

(4) ‘Travellers’ Defined

The word travellers refers to transient and was certainly
not meant to include ordinary or regular boarders in any apart-
ment, house, inn, or hotel. Distance travelled is immaterial.

956
CIVIL CODE OF THE PHILIPPINES Art. 1998

Notice furthermore that the law sometimes uses the term

guests instead of travellers. For purposes of the provisions on
this kind of necessary deposit, the two terms are synonymous.
(Holstein v. Phillips, supra).

(5) Reasons for the Liability of the Hotels or Inns

(a) It is a good policy to encourage travel;
(b) Travellers and strangers must of necessity trust in the
honesty and vigilance of the innkeeper and those in his
employ;
(c) The opportunity and temptation to connive with evil-
disposed persons and to afford facilities in stealing the
goods of those in his house;
(d) The innkeeper is as a rule better able to protect himself
against loss than the guest who is practically helpless
to enforce his rights. (Holstein v. Phillips, supra).

(6) When Liability Begins

Liability or responsibility by the hotel or innkeeper com-
mences as soon as there is an evident intention on the part
of the travellers to avail himself of the accommodations of the
hotel or inn. It does not matter whether compensation has
already been paid or not, or whether the guest has already
partaken of food and drink or not.

(7) Meaning of Effects

All kinds of personal property, like jewelry, fountain
pens, cash.

(8) Nature of Precautions to Be Given to the Guests

They may be given directly or orally to the guests, or
they may be typed, mimeographed or printed on posters which
are usually set up and posted both in the lobby as well as
in the individual rooms. Note however that “the hotel-keeper
cannot free himself from responsibility by posting notices to
the effect that he is not liable for the articles brought by the
guest.” (Art. 2003, 1st sentence, Civil Code).

957
Arts. 1999-2000 CIVIL CODE OF THE PHILIPPINES

Art. 1999. The hotel-keeper is liable for the vehicles,

animals and articles which have been introduced or placed
in the annexes of the hotel.

COMMENT:
Liability Extends to Objects in Annexes
The Article is self-explanatory.

Art. 2000. The responsibility referred to in the two preced-

ing articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees of
the keepers of hotels or inns as well as by strangers; but not
that which may proceed from any force majeure. The fact that
the travellers are constrained to rely on the vigilance of the
keeper of the hotels or inns shall be considered in determin-
ing the degree of care required of him.

COMMENT:
(1) Rules for Liability
(a) As a rule, the master is responsible for the acts of servants
or employees of the hotel provided of course that notice
has been given and the proper precautions taken.
(b) The master is also liable for the acts of strangers, like
malicious mischief or theft.

(2) Non-Liability for Force Majeure

The master should be exempted in case:
(a) there has, for example, been robbery by intimidation of
persons, or
(b) a fortuitous event, like flood.

(3) Problem
A was guest in B’s hotel. C, a drunkard, entered the
hotel and destroyed A’s personal belongings despite the fact
that A had given proper notice and had followed all precau-
tions. Will B be liable?

958
CIVIL CODE OF THE PHILIPPINES Art. 2001

ANS.: Yes. This is an act of a stranger, not considered

a force majeure under this provision of the law. The manage-
ment should have taken the necessary steps to prevent the
occurrence of things like this.

Art. 2001. The act of a thief or robber, who has entered

the hotel is not deemed force majeure, unless it is done with
the use of arms or through an irresistible force.

COMMENT:
(1) Robbery Through Force Upon Things
Example:
In the middle of the night, A went up the fire escape,
slowly raised a guest’s window, went inside the room, and
stole the guest’s shoes. Is the hotel-keeper liable?
ANS.: Yes. He should have seen to it that no thief could
enter the building without being noticed, for example, by a
watchman. This is a case of robbery with force upon things.

(2) Query
The bell boy of a hotel, at the point of a gun, asked the
watchman of a hotel’s safe to open it for him. The bell boy
then run away taking with him some jewelries deposited in
said safe by the guests. Will the hotel-keeper be liable?
ANS.: Yes. It is true that here the robbery was commit-
ted with use of arms, but then the bell boy was the servant
of the hotel-keeper. The latter will be liable, not because of
Art. 2001 which evidently refers to a stranger, but because
of Art. 2000.

(3) Reason for Art. 2001

The innkeeper is bound to keep his house safe from the
intrusion of thieves, day and night, and if they are allowed
to gain access to the house, and specially without the use of
such force as will show its marks upon the house, it is fairly
presumable that the innkeeper is at fault.

959
Arts. 2002-2003 CIVIL CODE OF THE PHILIPPINES

Art. 2002. The hotel-keeper is not liable for compensa-

tion if the loss is due to the acts of the guest, his family,
servants or visitors, or if the loss arises from the character
of the things brought into the hotel.

COMMENT:
(1) Instances When Hotel-Keeper Is Not Liable
Since the law does not distinguish what kind of acts are
referred to, it may be inferred that the acts mentioned in the
Article be either the result of a voluntary malicious act or
simply of negligence.

(2) Examples
(a) Act of the guest himself — when turning on his radio,
he may have forgotten to attach the transformer.
(b) Acts of visitors of the guest — A while entertaining B in
his room suddenly noticed that B was hurling his (A’s)
radio into the street, or that C, another visitor had just
departed taking away with him A’s shoes.
(c) Acts of the guest’s own servant — the servant may have
appropriated the thing for himself. (Do not confuse this
with the acts of the hotel-keeper’s servant.)

Art. 2003. The hotel-keeper cannot free himself from

responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipula-
tion between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in Articles 1998 to
2001 is suppressed or diminished shall be void.

COMMENT:
Effect of Notices Negating Liability
Example:
A is a guest in B’s hotel. In the lobby, there was a no-
tice that B would not be liable in any way for the loss of A’s
effects. Subsequently, a bell boy stole A’s watch. B will still
be liable.

960
CIVIL CODE OF THE PHILIPPINES Art. 2004

Art. 2004. The hotel-keeper has a right to retain the

things brought into the hotel by the guest, as a security for
credits on account of lodging, and supplies usually furnish
to the guests.

COMMENT:
(1) Right of Retention Given to Hotel-Keeper
Example:
A was a transient in B’s hotel. A left without settling
his account but forgot one valise in the hotel. B can retain
said valise as security for the payment of A’s account.

(2) Right to Sell

Has the hotel owner the right to sell the valise? In other
words, is there a right of retention here by way of pledge?
According to a member of the Code Commission, this
right of retention is in the nature of a pledge created by
operation of law, and thus the hotel-keeper is allowed the
power of sale under Arts. 2121 and 2122 of the new Civil
Code. (VI Capistrano, Civil Code of the Phil., p. 402).

(3) Why the Right to Retain Is Given

This is given to compensate the innkeeper for the ex-
traordinary liabilities imposed upon him by the law. (Singer
Manufacturing Co. v. Millar, 52 Minn. 516).

(4) When Lien or Retention Does Not Exist

It does not exist when the debtor is not a guest of the
hotel, as understood by the term traveller. (Elliot v. Martin,
105 Mich. 506).

961
 CIVIL CODE OF THE PHILIPPINES

Chapter 4

SEQUESTRATION OR JUDICIAL DEPOSIT

Art. 2005. A judicial deposit or sequestration takes

place when an attachment or seizure of property in litiga-
tion is ordered.

COMMENT:
Nature of Garnishment or Judicial Deposit
The garnishment of property to satisfy a writ of execution
“operates as an attachment and fastens upon the property a
lien which the property is brought under the jurisdiction of the
court issuing the writ. It is brought into custodia legis, under
the sole control of such court. Property is in the custody of
the court when it has been seized by an officer either under
a writ of attachment on mesne process or under a writ of ex-
ecution. A court which has control of such property, exercises
exclusive jurisdiction over same. No court, except one having
supervisory control or superior jurisdiction in the premises
has a right to interfere with and change that possession.
(National Power Corporation v. De Veyra, et al., L-16763).

Art. 2006. Movable as well as immovable property may

be the object of sequestration.

COMMENT:
Object of Judicial Sequestration
(a) movables
(b) immovables

962
CIVIL CODE OF THE PHILIPPINES Arts. 2007-2009

Art. 2007. The depositary of property or objects se-

questrated cannot be relieved of his responsibility until the
controversy which gave rise thereto has come to an end,
unless the court so orders.

COMMENT:
(1) When Depositary Can Be Relieved of Liability
Only when the controversy ends, unless the Court orders
otherwise.

(2) When Properties Cease to Be in Custodia Legis

When the insolvency proceedings of a partnership ter-
minated because the assignee in insolvency has returned the
remaining assets to the firm, said properties cease to be in
custodia legis. (Ng Cho Cio, et al. v. Ng Diong & Hodges, L-
14832, Jan. 28, 1961).

Art. 2008. The depositary of property sequestrated is

bound to comply, with respect to the same, with all the
obligations of a good father of a family.

COMMENT:
To Exercise Diligence of a Good Father
The Article is self-explanatory.

Art. 2009. As to matters not provided for in this Code,

judicial sequestration shall be governed by the Rules of
Court.

COMMENT:
Suppletory Rules in Rules of Court
The Civil Code prevails in case of conflict.

963
 CIVIL CODE OF THE PHILIPPINES

TITLE XIII
ALEATORY CONTRACTS
GENERAL PROVISIONS

Art. 2010. By an aleatory contract, one of the parties or

both reciprocally bind themselves to give or to do something
in consideration of what the other shall give or do upon
the happening of an event which is uncertain, or which is
to occur at an indeterminate time.

COMMENT:
(1) Element of Risk
In an aleatory contract, the element of risk is present.

(2) Kinds of Aleatory Contracts

(a) UNCERTAINTY OF EVENT —
Examples:
1) gambling (sale of sweepstakes ticket) (Santiago v.
Millar, 68 Phil. 39; Rubis v. Phil. Charity Sweep-
stakes, 68 Phil. 515); a bank account with 2 joint
owners and with a provision that the survivor takes
the whole or balance on the death of the other (Riv-
era v. People’s Bank and Trust Co., 73 Phil. 546);
a transaction speculating on the value of certain
currency. (Rono v. Gomez, L-1927, May 31, 1949).
2) insurance. (Arts. 2011 and 2012).

Malayan Insurance Co., Inc. v. Arnaldo

GR 67835, Oct. 12, 1987
Fire insurance is an aleatory contract. By
such insurance, the insured in effect wages that

964
CIVIL CODE OF THE PHILIPPINES Art. 2010

his house will be burned, with the insurer assuring

him against the loss, for a fee. If the house does
burn, the insured, while losing his house, wins the
wager. The price is the recompense to be given by
the insurer to make good the loss the insured has
sustained.
(b) UNCERTAINTY OF TIME OF CERTAIN EVENT —
Example: life annuity (Arts. 2021 et seq.)

(3) Distinction Between an Aleatory Contract and a Con-

tract with a Suspensive Condition

ALEATORY CONTRACT
CONTRACT WITH A SUSPENSIVE
CONDITION

Whether or not the event If condition does not happen,

happens, the contract re- the obligation never becomes
mains; only the effects and effective
extent of profit and losses
are determined

(See 12 Manresa, p. 12 and 3 Castan 311).

965
 CIVIL CODE OF THE PHILIPPINES

Chapter 1

INSURANCE

Art. 2011. The contract of insurance is governed by

special laws. Matters not expressly provided for in such
special laws shall be regulated by this Code.

COMMENT:
(1) Principal Law on Insurance
The principal law on insurance is the Insurance Code, as
amended. In case of inconsistency between the Insurance Law,
being special, prevails with the exception of special articles like
Art. 2012 of the Civil Code which is mandatory in character.

Acme Shoe Rubber and Plastic Corporation

v. Court of Appeals
L-56718, Jan. 17, 1985

(1) An insurance policy is automatically cancelled upon

failure to pay the premium before the stipulated date.
(2) Republic Act 3540 which became effective on Oct.
1963 does not have retroactive effect. Thus, the insurance
company was justified in applying the payment made by the
insured on Jan. 8, 1964 to the premium for 1963-64.

Mayer Steel Pipe Corp. & Hongkong

Government Supplies Dept. v. CA, South Sea
Surety & Insurance Co., Inc. & Charter
Insurance Corp.
GR 124050, Jun. 19, 1997
83 SCAD 881

An insurance contract is a contract whereby one party,

for a consideration known as the premium, agrees to indem-

966
CIVIL CODE OF THE PHILIPPINES Art. 2011

nify another for loss or damage which he may suffer from a

specified peril.
An “all-risks” insurance policy covers all kinds of losses
other than those due to willful and fraudulent acts of the
insured. Thus, when private respondents issued the “all-
risks” policies to petitioner Mayer, they bound themselves to
indemnify the latter in case of loss or damage to the goods
insured. Such obligation prescribes in 10 years, in accordance
with Art. 1144 of the Civil Code.

(2) Deficiency in the Insurance Law

In case of deficiency in the Insurance Code, the Civil
Code applies. (Enriquez v. Sun Life Assur. Co., 41 Phil. 269).
If even the Civil Code is deficient, the general principles on
insurance will apply. (See Grecio v. Sun Life Assur. Co., 48
Phil. 53).

Association of Baptist for World Evangelism,

Inc. v. Fieldman’s Insurance
GR 28772, Sep. 21, 1983
A car, insured against burglary or theft, was driven by a
gasoline station attendant for a joy ride without the owner’s
consent. The car was parked at the gasoline station. If during
the joyride, the car is damaged, can the owner recover on its
insurance policy?
HELD: Yes, because the unauthorized joyride was re-
ally “theft” of the car, within the meaning of the insurance
policy.

(3) Beneficiary Is Not the Donee in a Donation

The beneficiary in a contract of insurance is not the
donee spoken of in the law on donations. (Del Val v. Del Val,
29 Phil. 534).

(4) Rule if Beneficiary Is a Compulsory Heir

If a compulsory heir is a beneficiary, the indemnity
which he may have received is not collationable. (Del Val v.
Del Val, supra).

967
Art. 2011 CIVIL CODE OF THE PHILIPPINES

(5) Who Collects the Insurance Indemnity?

(a) General rule — The beneficiary, no matter what or whose
funds were used in the payment of the premiums. This
is because a beneficiary has a vested right to the indem-
nity, unless the insured reserves the right to change the
beneficiary. (Del Val v. Del Val, 29 Phil. 634 and Grecio
v. Sun Life Assur. Co. of Canada, 48 Phil. 63).
(b) Exception — When the beneficiary is also the insured
or his own estate and the premiums were paid from
conjugal funds, the indemnity will not belong to him
or to his estate. It belongs to the conjugal partnership.
(Bank of the P.I. v. Posadas, 56 Phil. 215).

(6) Problem
Z during his marriage to Y obtained a life insurance
policy for P1 million payable to his own estate. Premiums
thereon were paid from his SALARY as teacher. While the
policy was in effect, Z died survived by Y and 2 children, A
and B. How would you generally apportion the proceeds of
the policy?
ANS.: Since the premiums came from the husband’s
salary, they are conjugal (Art. 117, Family Code); therefore,
the insurance indemnity is also conjugal. (Bank of the P.I. v.
Posadas, 56 Phil. 215). Half of it must belong to the widow Y
as her share of the conjugal assets; the other half forms part
of the deceased’s estate and should now be divided among his
heirs, namely Y, A and B. If he died intestate, the division
will be equal, for under the law of intestacy, the share of
the surviving spouse is the same as the share of each of the
legitimate children. (Art. 996, Civil Code).

(7) Effect of Predecease of the Beneficiary

If the beneficiary predeceases the insured, and the in-
sured later dies, who gets the insurance indemnity?
ANS.: The heirs of the beneficiary, and not the heirs of
the insured. This is because generally, the beneficiary has a
vested right to the indemnity. (See Grecio v. Sun Life Assur.
Co. of Canada, 48 Phil. 53). The rules on testamentary suc-
cession cannot apply here, for the insurance indemnity does

968
CIVIL CODE OF THE PHILIPPINES Art. 2011

not partake of a donation. Therefore, it cannot be considered

as an advance of the inheritance. For the same reason, it is
not subject to collation. (See Del Val v. Del Val, supra).
[NOTE: The rule in the United States, however, is dif-
ferent. There, it has been held that if the beneficiary prede-
ceases the insured, the proceeds of the indemnity must go,
not to the estate of the beneficiary, but to the estate of the
insured. (McKinney v. Depoy, N.S. {2nd} 250).]

(8) Accident Insurance

Although a life insurance is, generally speaking, distinct
and different from an accident insurance, still when one of the
risks insured against in the latter is the death of the insured
by accident, such accident insurance may also be regarded as a
life insurance. (Gallardo v. Morales, L-12189, Apr. 29, 1960).

(9) Measure of the Vested Interest of Insurance Benefici-

ary
The vested interest or right of the beneficiaries in a life
insurance policy should be measured on its full face value,
and not on its cash surrender value. The reason is clear. In
case of death of the insured, said beneficiaries are paid on
the basis of its face value, and in case the insured should
discontinue paying premiums, the beneficiaries may continue
paying them, and they are entitled to automatic extended terms
or paid-up insurance options, etc. (Delfin Nario & Alejandra
Santos-Nario v. Phil. American Life Insurance Co., L-22796,
Jun. 26, 1967).

(10) Act of Surrendering an Insurance Policy is an Act of

Disposition or Alienation
If a wife insures herself for P500,000 and designates her
husband and minor child as irrevocable beneficiaries, her act
of obtaining a loan on said policy and her subsequent act of
surrendering the policy because the loan was not granted are
acts of disposition or alienation of her husband’s and her minor
child’s property rights, and are not merely acts of management
or administration. To be valid, the act of surrendering must
be with the husband’s consent (insofar as his P250,000 is
concerned), and with the court’s consent (insofar as the minor

969
Art. 2012 CIVIL CODE OF THE PHILIPPINES

child’s share of P250,000 is concerned). In the interest of the

minor child, the parent needs judicial appointment as guard-
ian and judicial approval for the act of disposition, in addition
to judicial approval for the act of alienation or encumbrance.
(Nario v. Phil-Am Life, L-22796, Jun. 26, 1967).

Art. 2012. Any person who is forbidden from receiving

any donation under Article 739 cannot be named beneficiary
of a life insurance policy by the person who cannot make
any donation to him, according to said article.

COMMENT:
(1) Disqualified Donees Cannot Be Beneficiaries
(a) If a concubine is made the beneficiary, it is believed
that the insurance contract will still remain valid, but
the indemnity must go to the legal heirs and not to the
concubine, for evidently what is prohibited under this
article is the naming of the improper beneficiary.
(b) Art. 739 provides: “The following donations shall be
void:
1) Those made between persons who were guilty of
adultery or concubinage at the time of the dona-
tion;
2) Those made between persons found guilty of the
same criminal offense, in consideration thereof;
3) Those made to a public officer or his wife, descend-
ants and ascendants, by reason of his office.
In the case referred to in No. 1, the action for declara-
tion of nullity may be brought by the spouse of the donor or
donee, and the guilt of the donor and donee may be proved
by preponderance of evidence in the same action.”

(2) No Retroactive Effect of the Article

This Article does not have any retroactive effect, and will
not therefore apply to contracts perfected before the effectiv-
ity date of the new Civil Code. (Southern Luzon Employees
Association v. Gulpeo, L-6114, Oct. 30, 1954).

970
CIVIL CODE OF THE PHILIPPINES Art. 2011

Chapter 2

GAMBLING

Art. 2013. A game of chance is that which depends

more on chance or hazard than on skill or ability. For the
purposes of the following articles, in case of doubt a game
is deemed to be one of chance.

COMMENT:
(1) Game of Chance Defined
The first sentence defines a game of chance.

(2) Rule in Case of Doubt

Note that in case of doubt, the presumption is that the
game is one of CHANCE.

(3) Examples of Games of Chance

(a) In a lottery, there is the element of chance. (Valhalta
Hotel v. Larmona, 44 Phil. 233). Generally, a guessing
contest partakes of the nature of a lottery. (El Debate
v. Topacio, 44 Phil. 294).
Under the Revised Penal Code, some forms of gam-
bling include monte, jueteng or any other form of lottery,
policy, banking or percentage. (Art. 195, No. [1], Revised
Penal Code). Note that the law makes gambling a crime
because “the social scourge of gambling must be stamped
out.” (People v. Gorostiza, 43 O.G. No. 6, p. 2007). Even
betting on the results of a sports game is prohibited.

(4) Some Forms of Legal Gambling

The Jai Alai, horse-racing on certain days, the sweep-
stakes and lotteries (lotto) held by the government, cockfighting
on certain days, mahjong at certain hours.

971
Art. 2014 CIVIL CODE OF THE PHILIPPINES

Art. 2014. No action can be maintained by the winner

for the collection of what he has won in a game of chance.
But any loser in a game of chance may recover his loss
from the winner with legal interest on the time he paid the
amount lost, and subsidiarily from the operator or manager
of the gambling house.

COMMENT:
(1) No Court Action by Winner
The law discourages gambling, hence the provisions of
Art. 2014.

(2) Promissory Note Issued Because of Gambling

A promissory note issued because of a gambling debt
will not produce any effect in the hands of the winner, but if
indorsed in favor of an innocent third party, recovery can be
had from the indorser who will be in estoppel. (Rodriguez v.
Martinez, 5 Phil. 67; see Palma v. Canizares, 1 Phil. 602).

(3) Money Lent to a Gambler

If I lend money to a person, and he later gambles and
loses it, I can still recover from him the amount of the loan
even if the gambling took place at my home. This is because
the loan is NOT the result of gambling. (Vasquez v. Florence,
5 Phil. 183). Similarly, if a gambler borrows from me to pay
a winner, I can still recover from him, for I did not win the
money by gambling.

(4) Instance Where Article is Not Applicable

Ban v. IAC
GR 66272, Oct. 17, 1986

FACTS: A organized mahjong sessions for recreation

in which B was a constant participant. On several occasions
B borrowed from A various amounts to pay off his mahjong
losses, promising to pay the same on demand. A sued B to
recover the amounts borrowed. B alleged that the alleged

972
CIVIL CODE OF THE PHILIPPINES Arts. 2015-2016

indebtedness was a gambling debt, and therefore A cannot

legally collect it.
HELD: Art. 2014 does not apply to a case where the
maintainer of a gambling house sues a gambler to recover
money which the latter had borrowed from the former to
pay off gambling debts incurred in favor of others. Even if
plaintiff is admittedly the operator of the gambling joint, his
alleged subsidiary liability cannot arise absent a direct suit
against those primarily liable for defendant’s losses, namely,
the mahjong winners, and absent furthermore said winners’
proven liability to pay.

Art. 2015. If cheating or deceit is committed by the win-

ner, he, and subsidiarily the operator or manager of the game
bring house, shall pay by way of exemplary damages, not less
than the equivalent of the sum lost, in addition to the latter
amount. If both the winner and the loser have perpetrated
fraud, no action for recovery can be brought by either.

COMMENT:

Effect of Cheating

According to the Code Commission, “it is provided that

exemplary damages should be paid in the above case in
order that cheating in a game of chance may be properly
dis- couraged and punished.” (Report of the Code Commission,
p. 153).

Art. 2016. If the loser refuses or neglects to bring an

action to recover what has been lost, his or her creditors,
spouse, descendants or other persons entitled to be sup-
ported by the loser may institute the action. The sum thereby
obtained shall be applied to the creditors’ claims, or to the
support of the spouse or relatives, as the case may be.

COMMENT:
Rule if Loser Does Not Bring the Action to Recover
Note the persons who may subsidiarily bring the action.

973
Arts. 2017-2018 CIVIL CODE OF THE PHILIPPINES

With respect to creditors, recovery is only to the extent of the

credit.

Art. 2017. The provisions of Articles 2014 and 2016

apply when two or more persons bet in a game of chance,
although they take no active part in the game itself.

COMMENT:
Bets Made by Game Watchers
This Article may refer to “side-bets” among the specta-
tors in a gambling game.

Art. 2018. If a contract which purports to be for the

delivery of goods, securities or shares of stock is entered
into with the intention that the difference between the
price stipulated and the exchange or market price at the
time of the pretended delivery shall be paid by the loser
to the winner, the transaction is null and void. The loser
may recover what he has paid.

COMMENT:
Where the Transactions Partake of Gambling and Thus
Void
If a certain share of stock is sold today in the Philippine
Stock Exchange for P19 per share and it is agreed between
X and Y that X will deliver to Y 10 days from now (or on
Feb. 14) 1,000 shares of said stock at the price prevailing on
said date, i.e., on Feb. 14, and on that the date the price is
already P23 per share (or a gain of P4 per share or P4,000
for the 1,000 shares), it is understood that X has gained
P4,000 and this amount should be given by Y to X. If, upon
the other hand, instead of a gain, the price decreases, e.g.,
by P3 on Feb. 14, it is understood that X has lost P3 a share
or a total of P3,000, which amount X must give to Y. Both
transactions partake of gambling and are regarded as null
and void. (Dr. Edgardo C. Paras, Economics for Lawyers, Rex
Book Store, 1993, pp. 203-204).

974
CIVIL CODE OF THE PHILIPPINES Arts. 2019-2020

Art. 2019. Betting on the result of sports, athletic com-

petitions, or games of skills may be prohibited by local
ordinances.

COMMENT:
(1) Prohibition on Betting
Note that local ordinances may prohibit BETTING on
the result of:
(a) sports
(b) athletic competitions
(c) games of skill

(2) Beauty Contest, Oratorical Contest

It would seem that in these contests, there can be prohibi-
tion on betting. What the law does not include, it excludes.

(3) Revised Penal Code

The Revised Penal Code (Art. 195) expressly prohibits
betting on the results of sports contest. (See PD 1602).

Art. 2020. The loser in any game which is not one of

chance, when there is no local ordinance which prohibits
betting therein, is under obligation to pay his loss, unless
the amount thereof is excessive under the circumstances.
In the latter case, the court shall reduce the loss to the
proper sum.

COMMENT:
Chess is definitely not a game of chance.

975
 CIVIL CODE OF THE PHILIPPINES

Chapter 3

LIFE ANNUITY

Art. 2021. The aleatory contract of life annuity binds

the debtor to pay an annual pension or income during the
life of one or more determinate persons in consideration
of a capital consisting of money or other property, whose
ownership is transferred to him at once with the burden
of the income.

COMMENT:
(1) Example of Life Annuity
Jose gave Mariano a parcel of land with the condition
that the latter will give Jose an annual pension or income
as long as Jose lives. Jose is both the annuitant (giver of
the capital) and the baneficiary. Ownership of the land is
immediately transferred to Mariano with the burden of the
pension.

(2) Life Annuity Distinguished from Life Insurance

Life annuity differs from life insurance in that the an-
nual income is not payment of interest on the capital given,
but as the consideration for the transfer of the ownership of
the capital. (12 Manresa 62).

Art. 2022. The annuity may be constituted upon the life

of the person who gives the capital, upon that of a third
person, or upon the lives of various persons, all of whom
must be living at the time the annuity is established.
It may also be constituted in favor of the person or
persons upon whose life or lives the contract is entered
into, or in favor of another or other persons.

976
CIVIL CODE OF THE PHILIPPINES Arts. 2023-2024

COMMENT:
(1) Upon Whose Life the Annuity May Be Constituted
(a) the life of the annuitant
(b) the life of a third person
(c) the lives of various persons

(2) Who May Be the Beneficiary

(a) the person or persons upon whose life or lives the con-
tract is entered into
(b) another person or persons

Art. 2023. Life annuity shall be void if constituted upon

the life of a person who was already dead at the time the
contract was entered into, or who was at that time suffer-
ing from an illness which caused his death within twenty
days following said date.

COMMENT:
When the Contract of Life Annuity Is Void
The Article gives us two instances when the contract is
VOID.

Art. 2024. The lack of payment of the income due does

not authorize the recipient of the life annuity to demand
the reimbursement of the capital or to retake possession
of the property alienated, unless there is a stipulation to
the contrary. He shall have only a right judicially to claim
the payment of the income on arrears and to require a se-
curity for the future income, unless there is a stipulation
to the contrary.

COMMENT:
Effect if the Income Due Is Not Paid
(a) Note that if the income is not paid, the recipient cannot
demand reimbursement of the property, unless there is
a stipulation to the contrary.

977
Arts. 2025-2027 CIVIL CODE OF THE PHILIPPINES

(b) The only rights are to judicially claim the payment of the
income in arrears AND to acquire a security of the future
income (unless there is a stipulation to the contrary).

Art. 2025. The income corresponding to the year in which

the person enjoying it dies shall be paid in proportion to the
days during which he lived; if the income should be paid by
installments in advance, the whole amount of the installment
which began to run during his life shall be paid.

COMMENT:
Effect if Beneficiary Dies
The Article is self-explanatory.

Art. 2026. He who constitutes an annuity by gratuitous

title upon his property, may provide at the time the an-
nuity is established that the same shall not be subject to
execution or attachment on account of the obligations of
the recipient of the annuity. If the annuity was constituted
in fraud of creditors, the latter may ask for the execution
or attachment of the property.

COMMENT:
Attachment of the Annuity
Note that the annuity cannot be attached by creditors
of the recipient if there be a stipulation to this effect, but the
creditors of the person who constituted the annuity may ask
for the attachment if made in fraud of their rights.

Art. 2027. No annuity shall be claimed without first

proving the existence of the person upon whose life the
annuity is constituted.

COMMENT:
Proof of Existence of Person Upon Whose Life the An-
nuity Has Been Constituted
The reason for the Article is obvious. If the person re-
ferred to does not exist, the contract is VOID.

978
CIVIL CODE OF THE PHILIPPINES

TITLE XIV
COMPROMISES OR ARBITRATIONS
Chapter 1

COMPROMISES

Art. 2028. A compromise is a contract whereby the par-

ties, by making reciprocal concessions, avoid a litigation or
put an end to one already commenced.

COMMENT:
(1) Essence of Compromise
According to the Code Commission, the element of
“reciprocal concessions” is the very heart and life of every
compromise. (Report of the Code Commission, p. 164).

(2) Definition of Compromise

The Article defines the contract of compromise.

(3) Characteristics
(a) Consensual
(b) Reciprocal
(c) Nominate
(d) Onerous
(e) Accessory (in the sense that a prior conflict is presup-
posed)
(f) Once accepted, it is binding on the parties, provided
there is no vitiated consent. (McCarthy v. Barber Steam-

979
Art. 2028 CIVIL CODE OF THE PHILIPPINES

ship Lines, 45 Phil. 488). And this is true even if the

compromise turns out to be unsatisfactory to either or
both of the parties. (Castro v. Castro, 97 Phil. 705).
(g) It is the settlement of a controversy principally, and is,
but merely incidentally, the settlement of a claim. (Mc-
Carthy v. Barber Steamship Lines, 45 Phil. 488).

Kaisahan v. Sarmiento
L-47853, Nov. 16, 1984

A compromise entered into by the officers of a labor

union must be authorized by the union members, and
must be produced in court.

(4) Kinds
(a) Judicial — (to end a pending litigation)
(b) Extrajudicial — (to prevent a litigation from arising).
(Yboleon v. Sison, 58 Phil. 290).

(5) When Agreement Is Not Really a Compromise

Merced v. Roman Catholic Archbishop

L-24614, Aug. 17, 1967

FACTS: The lessees of a parcel of land (for an indefinite

period) were occupying the premises for several years. One
day, they were given notice to vacate, whereupon they went
to court to have it fix the period of the lease and to have the
lessees’ rights determined insofar as the improvements are
concerned. A so-called “compromise agreement” was reached
whereby the court was given discretion to fix the term, but
the attorney who signed in behalf of the lessees had not been
so authorized.
ISSUE: Does the agreement bind the lessees?
HELD: Yes. It is immaterial that the attorney was un-
authorized for what he signed in their behalf was NOT really
a compromise. There were no reciprocal concessions given,

980
CIVIL CODE OF THE PHILIPPINES Art. 2028

and what was agreed upon is merely what the law provides.
Upon the other hand, a true compromise requires the grant
of reciprocal concessions.

(6) Cases

Landoil Resources Corp., et al.

v. Hon. Tensuan, et al.
GR 77733, Dec. 20, 1988

Jurisprudence in a long line of decisions has established

without question that compromise agreements reached by the
parties in a case and filed before either the Court of Appeals
or the Supreme Court, have been approved and/or sustained
by this Court. Thus, it has been held that a compromise may
supersede all agreements and proceedings that had previously
taken place and may constitute a final and definite settle-
ment of the controversies by and between the parties. From
the time a compromise is validly entered into, it becomes the
source of the rights and obligations of the parties thereto,
the purpose of a compromise being precisely to replace and
terminate controversed claims.

Reformist Union of R.B. Liner, Inc. v. NLRC

GR 120482, Jan. 27, 1997
78 SCAD 377

FACTS: An agreement was entered into by R.B. Liner,

Inc. and its union (Reformist Union) in the nature of a com-
promise agreement, i.e., “an agreement between two or more
persons, who, for preventing or putting an end to a lawsuit
adjust their difficulties by mutual consent in the manner
which they agree on, and which everyone of them prefers
to the hope of gaining, balanced by the danger of losing.” In
said agreement, each party made concessions in favor of the
other to avoid a protracted litigation.
HELD: While the Supreme Court does not abandon the
rule that “unfair labor practice acts are beyond and outside
the sphere of compromises,” the agreement herein was vol-
untarily entered into and represents a reasonable settlement,
thus, it binds the parties.

981
Arts. 2029-2030 CIVIL CODE OF THE PHILIPPINES

Art. 2029. The court shall endeavor to persuade the liti-

gants in a civil case to agree upon some fair compromise.

COMMENT:
(1) Duty of the Court to Persuade Litigants to Compro-
mise
The reason for this duty is obvious: litigation must, if
possible, be avoided or minimized.

(2) Right of Attorney to Compromise for His Client

The Rules of Court require a “special authority” before a
attorney can compromise in behalf of his client. The author-
ity may be in writing, or may be oral, but in case of an oral
authority the same must be duly established by evidence other
than the self-serving assertion of counsel himself that such
authority had been given to him orally. (Home Insurance Co.
v. United States Lines, Co., et al., L-25693, Nov. 15, 1967).

(3) The Case of Richard Gordon

Richard J. Gordon v. CA
GR 134900, Sep. 1, 1998
In open court during the hearing, a civil settlement has
been encouraged for a dignified exit of an achiever and smooth
assumption of a successor, for a settlement still accords with
Arts. 2028 and 2029 of the Civil Code.
Art. 2028 provides: “A compromise is a contract whereby
the parties, by making reciprocal concessions, avoid a litigation
or put an end to one already commenced.” Art. 2029 states:
“The court shall endeavor to persuade the litigants in a civil
case to agree upon some fair compromise.”

Art. 2030. Every civil action or proceeding shall be

suspended:
(1) If willingness to discuss a possible compromise is
expressed by one or both parties; or

982
CIVIL CODE OF THE PHILIPPINES Art. 2030

(2) If it appears that one of the parties, before the com-

mencement of the action or proceeding, offered to discuss a
possible compromise but the other party refused the offer.
The duration and terms of the suspension of the civil
action or proceeding and similar matters shall be governed
by such provisions of the rules of court as the Supreme
Court shall promulgate. Said rules of court shall likewise
provide for the appointment and duties of amicable com-
pounders.

COMMENT:
(1) Suspension of Civil Action or Proceeding
Under the Revised Rules of Court, this Article on sus-
pension is reproduced substantially.

(2) Motion to Dismiss

The Revised Rules of Court mentions as one of the
grounds to dismiss — the fact that no attempt has been made
to arrive at a compromise. (Rev. Rules of Court, Rule 16). In
cases where the law allows a compromise, the fact that an
attempt to arrive at one has been made — should be stated
in the complaint — otherwise, the complaint can be dismissed.
Of course, if no compromise is allowed by law (as in the case
of future support), the condition precedent does not apply.

(3) Postponements
While postponements must be discouraged, still they can
be allowed when the parties are trying to reach an amicable
settlement. (PNB v. De la Cruz, L-1002, Apr. 16, 1958).

(4) Offers to Arbitrate Not Included

This Article does not include offers to arbitrate. It refers
only to a compromise, upon terms that the court can ascertain
and determine if they are reasonable. A compromise could
dispense with a trial; but an arbitration would merely prolong
the case, since the arbiter’s decision would remain appealable.
(Vaswani v. P. Tarochand Bros., L-15800, Dec. 29, 1960).

983
Arts. 2031-2032 CIVIL CODE OF THE PHILIPPINES

Art. 2031. The courts may mitigate the damages to be

paid by the losing party who has shown a sincere desire
for compromise.

COMMENT:
Mitigation of Damages
The Article is self-explanatory.

Art. 2032. The court’s approval is necessary in compro-

mises entered into by guardians, parents, absentee’s repre-
sentatives, and administrators or executors of decedents’
estates.

COMMENT:
(1) When Court Approval is Essential
The Article is self-explanatory.

(2) Other Rules

(a) An agent needs a special power to compromise. (Art.
1878, Civil Code).
(b) If an attorney is not authorized by the client, he cannot
compromise his client’s claim (Monte de Piedad v. Rod-
rigo, 56 Phil. 310 and Sec. 23, Rule 138, Revised Rules
of Court), unless the client fails to repudiate promptly
the act after knowing of it, in which case the client will
be in estoppel. (Rivero v. Rivero, 59 Phil. 15).
(c) While under Art. 225 of the Family Code the widow is
the legal administratrix of the property pertaining to the
children under parental authority, said article does not
give her authority as legal administratrix to compromise
their claims for indemnity arising from their father’s death
“for a compromise has always been deemed equivalent to
an alienation (transigere est alienare), and is an act of
strict ownership that goes beyond mere administration.”
(Visaya, et al. v. Suguitan, et al., L-8300, Nov. 18, 1955
and People v. Verano, L-15805, Feb. 28, 1961).

984
CIVIL CODE OF THE PHILIPPINES Arts. 2033-2034

Art. 2033. Juridical persons may compromise only in

the form and with the requisites which may be necessary
to alienate their property.

COMMENT:
Rules for Compromise Entered Into by Juridical Per-
sons
(a) A corporation may compromise thru authority granted
by the Board of Directors. The form and the requisites
for alienation of property must be observed.
(b) The Municipal Council can also compromise provided that
the legal requirements for the alienation of property are
complied with, and provided further that the provincial
governor approves the compromise. (Municipality of San
Joaquin v. Bishop of Jaro, 36 Phil. 577).

Art. 2034. There may be a compromise upon the civil

liability arising from an offense, but such compromise shall
not extinguish the public action for the imposition of the
legal penalty.

COMMENT:
(1) Generally, No Compromise on Criminal Aspect
If a crime has been committed, there can be a compro-
mise on the civil liability but not generally on the criminal
liability, because the social and public interest demands the
punishment of the offender. (U.S. v. Leano, 6 Phil. 368 and
U.S. v. Mendozana, 2 Phil. 353 and U.S. v. Heery, 25 Phil.
600).

(2) When Compromise Is Allowed

In some crimes, there can be a sort of compromise as
in the case of crimes against chastity and violations of the
Internal Revenue Code. Thus, the Commissioner of Internal
Revenue may enter into a contract of compromise regarding
civil and criminal liability arising under the Internal Revenue
Code or any other law administered by the Bureau of Internal
Revenue. (Koppel Phil. v. Collector, L-1977, Sept. 21, 1950).

985
Art. 2034 CIVIL CODE OF THE PHILIPPINES

However, in a civil case, the compromise must be entered

into before or during litigation, never after final judgment.
(Rovero v. Amparo, 91 Phil. 228). The compromise during litiga-
tion may even be in the form of a “confession of judgment.”

Republic v. Marcelo B. Garay

L-21416, Dec. 31, 1965
FACTS: The Government sued Garay for alleged income
tax deficiency. Garay filed a pleading (which was ALSO signed
by the counsel for the Commissioner of Internal Revenue),
entitled “confession of judgment.” The Commissioner, in
turn, signified his willingness to allow the payment of the
deficiency in installments. The trial judge then rendered a
decision requiring the defendant to pay in accordance with
the “confession of judgment.” The Government filed a motion
requesting that the decision be amended to include surcharges
and interests, for which allegedly Garay had become liable in
view of his admission of tax deficiency. The court amended
the decision by requiring legal interest but refused to include
the surcharge. The Government appealed the case.
HELD: The lower court’s decision should be affirmed for
the “confession of judgment,” under the fact stated, partook
of the nature of a compromise. In consideration of Garay’s
admission of delinquency and the Commissioner’s willingness
to allow payment on installments, both parties had agreed to
put an end to the litigation, through the rendition of a judg-
ment incorporating said stipulations. The decision appealed
from is one based on a compromise agreement.

Dasalla, Sr. v. CFI

GR 51461, Apr. 26, 1991
FACTS: For the death of his son who died when the
passenger jeepney driven and owned by Sumangil featured in
an accident, Dasalla sued Sumangil for damages. Sumangil in
his answer prayed for the dismissal of the complaint, claiming
that his civil obligation to Dasalla was already settled.
The trial court dismissed the complaint on the ground
that the obligation had been fully paid as shown by the “Si-
numpaang Salaysay” executed by Dasalla.

986
CIVIL CODE OF THE PHILIPPINES Art. 2034

ISSUE: Whether the “Sinumpaang Salaysay” which was

made the basis of the dismissal of the complaint is contrary
to law, public order, public policy, morals or good customs, or
prejudicial to a third person with a right recognized by law.
HELD: There is no law which prohibits a person who
has incurred damages by reason of the act of another from
waiving whatever rights he may have against the latter. If
the act causing damage to another also constitutes a crime,
the civil liability arising from the criminal act may also be
validly waived. What is not allowed in this jurisdiction is to
compromise or waive the criminal aspect of a case. The reason
or principle underlying the difference between rights which may
be waived and rights which may not be waived are personal,
while those rights which may not be waived involve public
interest which may be affected. In a compromise or a waiver
of the civil aspect of the case, the restriction imposed by law is
that it must be entered into before or during litigation, never
after final judgment. A compromise on the civil aspect of a
case is valid even if it turns out to be unsatisfactory to either
or both of the parties. Express condonation by the offended
party has the effect of waiving civil liability with regard to
the interest of the injured party. For, civil liability arising
from an offense is extinguished in the same manner as other
obligations, in accordance with the provisions of the civil law.
It is true that the minimum amount of compensatory dam-
ages for death that may be awarded to plaintiff at the time of
the death of his son is P12,000. However, for reasons stated
in the “Sinumpaang Salaysay,” plaintiff voluntarily released
defendant from his civil obligations. Said affidavit executed
by plaintiff, releasing the defendant from additional civil li-
ability arising from the death of the former’s son, is legal.
It is not contrary to law, morals, good customs, public policy
or public order. Consequently, he can no longer institute a
complaint to recover damages arising from the same incident
subject of the affidavit. A party to the settlement cannot be
allowed to renege on his undertaking therein after receiving
the benefits thereof as long as the parties entered into the
settlement voluntarily and intelligently, the courts are bound
to respect the agreement.

987
Art. 2035 CIVIL CODE OF THE PHILIPPINES

(3) Compromise in Criminal Tax Cases

In criminal case, the compromise entered into between
the taxpayer and the Commissioner must be made PRIOR to
the filing of the information in court (payment may of course
be made later). Before the compromise reaches the office of the
Fiscal (now Prosecutor), the Fiscal’s (Prosecutor’s) consent is
not required after it reaches the office of the Fiscal (Prosecu-
tor), but PRIOR to the filing of the information in court, the
consent of Fiscal (Prosecutor) is required. AFTER the filing of
the information in court, there can be no COMPROMISE, with
or without the consent of the Fiscal (Prosecutor). (People v.
Magdaluyo, L-16236, Apr. 20, 1961). Unlike the Commissioner
of Internal Revenue, the Commissioner of Customs is today
NOT authorized to compromise. (People v. Ignacio Desiderio,
L-20805, Nov. 29, 1965).

Art. 2035. No compromise upon the following ques-

tions:
(1) The civil status of persons;
(2) The validity of a marriage or a legal separation;
(3) Any ground for legal separation;
(4) Future support;
(5) The jurisdiction of courts;
(6) Future legitime.

COMMENT:
(1) Questions on Which There Can Be No Valid Compro-
mise
The Article mentions 6 instances or questions where a
compromise is VOID.

(2) Status
Tan, et al. v. Republic
L-27713, Feb. 10, 1981
Civil status of the parents, and the filiation of the chil-
dren cannot be ordered recorded in the Civil Registry in mere
summary proceedings.

988
CIVIL CODE OF THE PHILIPPINES Art. 2035

(3) Recognition of Illegitimate Child

Recognition of an illegitimate child is not prohibited. And
if a child has already been recognized, and there is no dispute
concerning his status, his share in the inheritance proceedings
may be the subject of compromise. (Lajom v. Viola, 73 Phil.
563).

(4) Support
Future conventional (not legal) support may be the subject
of compromise, for conventional support is after all based on
a contract.

(5) Jurisdiction of Courts

The “jurisdiction” of a court refers to the power of a
court to hear and determine a case. To ascertain whether
jurisdiction is present or not, the provisions of the law and
the Constitution, not the Rules of Court, should be inquired
into. (See Auyong Hian v. Court of Tax Appeals, L-25181,
Jan. 11, 1967). Jurisdiction of courts over the subject matter
cannot be considered by the parties. (Nepomuceno v. Carlos,
9 Phil. 194). Upon the other hand, parties cannot deprive a
court of its jurisdiction. (Molina v. De la Riva, 6 Phil. 12 and
International Harvester Co. v. Hamburg American Line, 42
Phil. 845).

One Heart Sporting Club, Inc.

v. The Court of Appeals
GR 53790, Oct. 23, 1981
After voluntarily submitting a cause and encountering
an adverse decision on the merits, it is too late for the loser
to question the jurisdiction or power of the court. It is an
“undesirable practice” to accept a judgment only if it is favo-
rable and to attack it for lack of jurisdiction when adverse.

Solidum v. Sta. Maria

Administrative Case 1858, Dec. 26, 1984
Civil liability may be compromised, but not the criminal
offense.

989
Art. 2036 CIVIL CODE OF THE PHILIPPINES

Art. 2036. A compromise comprises only those objects

which are definitely stated therein, or which by necessary
implication from its terms should be deemed to have been
included in the same.
A general renunciation of rights is understood to refer
only to those that are connected with the dispute which
was the subject of the compromise.

COMMENT:
(1) What a Compromise Can Deal With
(a) those objects definitely stated therein
(b) those included implicitly — according to the terms
stated

(2) Effect of General Renunciation of Rights

Even if the renunciation is GENERAL it is understood
to refer only to rights connected with the DISPUTE involved,
and not to other rights.

(3) Strict Construction of a Compromise Agreement

A compromise must be strictly construed (Ferrer v. Ig-
nacio, 39 Phil. 446); and can include only those expressly or
impliedly included therein. (Art. 2036). Therefore, just because
a lessee renounces possession does not mean that she waives
her right of redemption granted by another agreement. (Vitug
Dimatulac v. Coronel, 40 Phil. 686). Where a compromise
agreement is onerous, the doubt should be settled in favor
of the greatest reciprocity of interest. (Rodriguez, et al. v.
Belgica, et al., L-10801, Feb. 28, 1961).

International Hotel Corp., et al. v.

Hon. Elias Asuncion
L-39669, Mar. 10, 1975
A court cannot include in a compromise judgment terms
which have not been agreed upon between the parties except
if the same are required by law or by the Rules to be included
or are necessary consequences of the stipulations. This grave
abuse of discretion can be corrected by certiorari.

990
CIVIL CODE OF THE PHILIPPINES Art. 2037

Art. 2037. A compromise has upon the parties the effect

and authority of res judicata; but there shall be no execu-
tion except in compliance with a judicial compromise.

COMMENT:
(1) Res Judicata Effect of a Compromise
A compromise, being a contract, has the effect of res
judicata only if there has been no vitiated consent. (Sajona
v. Sheriff, L-5603, Aug. 24, 1954). And, therefore, it is not
exactly the same as the res judicata referred to in the law
of procedure. Generally, however, the compromise binds the
parties even without judicial approval. (Meneses v. De la
Rosa, 77 Phil. 34). However, if there is no judicial approval,
it can be enforced only by a court litigation, not by execution.
(Art. 2037; Salazar v. Jarabe, 91 Phil. 596). Incidentally, a
compromise or amicable settlement before a court of justice,
even if reduced to writing is NOT VALID unless signed by
the parties. (Simeon O. Cruz, et al. v. Court of Agrarian Rela-
tions, et al., L-121131-32, Dec. 29, 1965).

Cruz, et al. v. IAC, et al.

GR 72806, Jan. 9, 1989
It is hornbook knowledge that a judgment on compromise
has the effect of res judicata on the parties and should not
be disturbed except for vices of consent or forgery.
To challenge the same, a party must move in the trial
court to set aside the said judgment and also to annul the
compromise agreement itself, before he can appeal from that
judgment.

(2) Judicial Compromise

If a compromise is approved by the court, a stipulation
therein is considered a court order, and if not complied with,
the non-performance may be considered contempt of court.
(Marquez v. Marquez, 73 Phil. 74). Indeed, a compromise
agreement submitted by the parties to the court for approval
with the request that judgment be rendered in accordance

991
Art. 2037 CIVIL CODE OF THE PHILIPPINES

therewith, and accordingly approved by the court and in-

corporated into its decision, is not merely a contract which
may be enforced by ordinary action for specific performance,
but is part and parcel of the judgment and may, therefore,
be enforced as such, by writ of execution. (Tria v. Lirag, L-
13994, Apr. 29, 1961). In fact, even if judicially approved,
a writ of execution is necessary for the enforcement of a
judicial compromise. (Ibid. and Adriano Amante v. Court of
Agrarian Relations & Sergio Pama, L-21283, Oct. 22, 1966).
If the compromise agreement or the court itself fails to state
when the stipulations in the compromise are supposed to be
fulfilled, the court may fix the period, thus giving full force
to the agreement. (Alano v. Cortes, L-15276, Nov. 28, 1960;
See Art. 1197 of the Civil Code).

Republic v. Court of Appeals

L-47381 and L-47420, Jan. 31, 1985
When there is a compromise agreement that is submit-
ted to a court, a decision may be rendered based on said
compromise.

Federis v. Sunga
L-34893, Jan. 17, 1985
One may consent by estoppel to a judicial compromise.
And by virtue of such consent, he cannot generally subse-
quently appeal the judicial compromise to a higher court.

(3) Judgment Generally Not Appealable

A judgment on compromise is not generally appealable
and may therefore be immediately executory, unless a motion
is filed to set aside the error on the ground of vitiated consent,
in which case an appeal may be taken from a court order de-
nying the motion to set aside the compromise. (Masters Tours
and Travel Corp. v. Court of Appeals, 219 SCRA 321 [1993]).
The reason for the rule is that when both parties enter into
an agreement to end a pending litigation and request that
a decision be rendered approving said agreement, it is only
natural to presume that such action constitutes an implicit, as

992
CIVIL CODE OF THE PHILIPPINES Art. 2037

undeniable as an express, waiver of the right to appeal against

the decision. For a party to reserve under the circumstances,
the right to appeal against said decision, is to adopt an attitude
of bad faith which courts cannot countenance. (Serrano, et al.
v. Reyes, et al., L-16163, Dec. 29, 1960). To be entitled to ap-
peal from a judgment approving a compromise, a party must
move, not only to set aside said judgment, but also to annul
or set aside, the compromise itself, on the ground of fraud,
mistake, or duress, vitiating his consent to said compromise.
(Ibid.) The claim that a judgment based on a compromise is
not a decision in contemplation of law simply because it does
not contain any finding of fact or law is untenable, for the
reason that, when a compromise agreement is approved by
a court, and the same is embodied in a decision the theory
is that the court merely adopts the statement of facts and of
law reached therein, thereby doing nothing except to impress
its approval. (Pedro Manioque, et al. v. Ceferino F. Cayco, et
al., L-17059, Nov. 29, 1965).

(4) Judgment by Wage Administration Service

A judgment rendered by the Wage Administration Service,
without an agreement to arbitrate, is not a judgment at all
that can be enforced thru a writ of execution. It is nothing
more than a finding that the claim is meritorious and justi-
fies the filing of a complaint in court. (Cebrero v. Talaman,
L-11924, May 16, 1968, applying Sec. 14 of the Services Code
of Rules and Regulations, and Sec. 9, to implement Rep. Act
602 and Gomez v. North Camarines Lumber Co., L-11945,
Aug. 18, 1958). An order of the WAS investigator dismissing
the claim “without prejudice” does not bar a subsequent ac-
tion filed in court for the same. (Winch v. Kiener Co., Ltd.,
L-11884, Oct. 27, 1958).

(5) When Judgment on Compromise Is Void

A judgment based upon a compromise entered into by
an attorney without specific authority from the client is null
and void. Such judgment may be impugned, and its execution
restrained in any proceeding by the party against whom it is
sought to be enforced. (Jacinto v. Montesa, L-23098, Feb. 28,
1967).

993
Art. 2038 CIVIL CODE OF THE PHILIPPINES

(6) Effect of a Judicial Compromise on Persons Not Origi-

nal Parties

Rodriguez v. Alikpala
L-38314, Jun. 25, 1974

FACTS: To put an end to a court action, a motion for a

judgment on compromise was filed. In the compromise agree-
ment, third parties were sureties. All the parties to the com-
promise, including the sureties (who were not original parties
to the case) asked for the approval of the compromise. Later
a judgment based on such compromise was rendered. When
the defendants failed to comply with its provisions, a motion
for execution was filed, and granted, against the defendants
and the sureties. The sureties now complain, alleging that
the writ of execution cannot be issued against their proper-
ties because they were not parties to the case. Can the writ
be issued against their properties?
HELD: Yes, because they had joined the others in asking
for a judgment on compromise, and they are therefore now
in estoppel.

Bobis v. Provincial Sheriff of Camarines Norte

GR 29838, Mar. 18, 1983

If a writ of execution is issued to enforce a judgment

based on a compromise, the writ cannot be enforced against
a person who although a party to the case, was not a party
to the compromise agreement, and who in fact had been ab-
solved from liability.

Art. 2038. A compromise in which there is mistake,

fraud, violence, intimidation, undue influence, or falsity of
documents, is subject to the provisions of Article 1330 of
this Code.
However, one of the parties cannot set up a mistake
of fact as against the other if the latter, by virtue of the
compromise has withdrawn from a litigation already com-
menced.

994
CIVIL CODE OF THE PHILIPPINES Art. 2039

COMMENT:

(1) Effect of Compromise Where There is Vitiated Con-

sent
(a) Any of the vices of consent referred to in the Article may
cause the annulment of the compromise.
(b) The alleged vitiated consent must be proved. (Rojas, et
al. v. Rumbaoa, C.A., 58 O.G. 2605).
(c) Mere inadequacy of cause is not equivalent to vitiated
consent. (Andino v. Stanvac, C.A., 54 O.G. 8251).
(d) If a party consents to a compromise because of an errone-
ous report submitted to the court, his error is ground to
set aside the compromise, even if the compromise was ap-
proved by the court. (Saminiada v. Mata, 92 Phil. 426).
(e) The presence of invalid stipulations in a compromise
agreement does not render void the whole agreement,
where such invalid stipulations are independent of the
rest of the terms of the agreement and can easily be
separated therefrom without doing violence to the mani-
fest intention of the parties. (Velayo v. Court of Appeals,
et al., 107 Phil. 587).

(2) Modification of a Judgment on Compromise

If a court renders a judgment on compromise, it generally
cannot modify the compromise unless the parties consent or
unless there is a hearing to determine the presence or absence
of vitiated consent. (Yboleon v. Sison, 59 Phil. 281).

Art. 2039. When the parties compromise generally on

all differences which they might have with each other, the
discovery of documents referring to one or more but not
to all of the questions settled shall not itself be a cause
for annulment or rescission of the compromise, unless said
documents have been concealed by one of the parties.
But the compromise may be annulled or rescinded if it
refers only to one thing to which one of the parties has no
right, as shown by the newly-discovered documents.

995
Arts. 2040-2041 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Effect of Discovery of Documents Referring to Matters
Compromised Upon
(a) The first paragraph refers to a compromise on ALL dif-
ferences; the second, to a compromise on one thing. The
effect of the discovery of the documents is set forth in
the Article.
(b) Reason for the first paragraph — This is a compromise
on the WHOLE, not on specific things.

Art. 2040. If after a litigation has been decided by a

final judgment, a compromise should be agreed upon, either
or both parties being unaware of the existence of the final
judgment, the compromise may be rescinded.
Ignorance of a judgment which may be revoked or set
aside is not a valid ground for attacking a compromise.

COMMENT:
(1) Compromise Entered Into in Ignorance of a Final Judg-
ment
A compromise in a case like this may be RESCINDED.
The ignorance of the judgment may have been on the part
of one party or on the part of both parties.

(2) Reason for Allowing a Rescission

Here, there was no more need for the compromise in
view of the existence of the final judgments. (See Rovero v.
Amparo, et al., 91 Phil. 228).

(3) Effect of Appeal

If a judgment is rendered but appealed, there can in the
meantime be a compromise. (Artayo v. Azaña, 62 Phil. 425).

Art. 2041. If one of the parties fails or refuses to abide

by the compromise, the other party may either enforce the
compromise or regard it as rescinded and insist upon his
original demand.

996
CIVIL CODE OF THE PHILIPPINES Art. 2041

COMMENT:
(1) Effect if Compromise Agreement Is Not Fulfilled
A and B had a controversy, settled eventually by a
compromise. If B fails to carry out the terms thereof, A can
have a choice:
(a) enforce the compromise;

City of Zamboanga v. Mandi

GR 86760, Apr. 30, 1991

FACTS: On Feb. 11, 1982, Zamboanga City lodged

a complaint for eminent domain against Julian over the
latter’s lot. The expropriation was intended to expand the
Pasonanca Park. The trial court gave the city authority
to take possession of the property upon payment of just
compensation fixed at P0.18 per square meter, or P10,428.
The Court of Appeals affirmed the judgment. On Feb.
12, 1987, Julian filed a notice of appeal to the Supreme
Court. On Mar. 16, 1987, Julian wrote the OIC Mayor,
stating, inter alia, that pending appeal, they were ac-
cepting the offer of the City to buy the lot at P3.00 per
square meter. The Sangguniang Panglunsod adopted a
resolution on May 13, 1987 authorizing the OIC Mayor
to enter into a compromise agreement for the acquisi-
tion of the lot for P3.00 per square meter subject to the
approval of the Supreme Court. On Jun. 4, 1987, the
Agreement was signed. On the same date, the parties
filed with the Supreme Court a motion to approve com-
promise agreement. On Jan. 6, 1988, notwithstanding the
non-approval yet of the compromise agreement by the
Supreme Court, the Sangguniang Panglunsod authorized
the OIC Mayor to sign for and on behalf of the City the
Deed of Sale covering the acquisition by the City of the
lot at P3.00 per square meter. The resolution did not
impose any condition of prior approval by the Supreme
Court. And so it was that pursuant to the authorization
granted, the Deed was signed by the parties on Jan.
11, 1988 for and in consideration of P170,595 at P3.00
per square meter. On Feb. 4, 1988, the City received a

997
Art. 2041 CIVIL CODE OF THE PHILIPPINES

copy of the Entry of Judgment of the Appellate Court

showing that it had become final and executory on Feb.
21, 1987. Significantly, the Entry of Judgment was
made only on Jan. 26, 1988. On Mar. 21, 1988, on the
ground that the City was reneging on the Compromise
Agreement, Julian instituted before the RTC a petition
for mandamus praying that the City be made to comply
with the agreement “particularly to pay Julian P170,595
for the purchases of the lot.” The Judge issued the writ,
approved the sale entered into between the parties as
a result of the Compromise Agreement, and ordered
the City to pay P170,595 for the property at P3.00 per
square meter. The judge relied on the ruling that a final
judgment may be novated by the subsequent agreement
of the parties.
HELD: The Supreme Court found the writ of man-
damus properly issued and dismissed the City’s petition
and held that it is true that in its resolution of May
13, 1987, the City had authorized the execution of the
Compromise Agreement and the Deed of Sale “subject
to the approval of the Supreme Court.’’ However, the
subsequent acts of the parties clearly show that the
City was no longer insisting on the suspensive condition.
Thus, with the Judge’s decision “immediately after the
filing of notice of appeal to the Supreme Court, the OIC
Mayor negotiated for the purchase of the subject at P3.00
per square meter “to prevent a lengthy litigation at the
Supreme Court and where respondent City also paying
the same price of P3.00 to other adjoining lot owners.”
Julian thereupon accepted the City’s offer. Further, the
subsequent Sangguniang Panglunsod resolution did away
with that condition. To cap it all, the Deed was signed
by the parties fully cognizant that such approval had
not been obtained. By virtue of the settlement thus ar-
rived at, Julian abandoned his appeal to the Supreme
Court and withdrew from a pending litigation. All these
developments transpired before the entry of the Appel-
late Court. Judgment was made on Jan. 26, 1988. To
all intents and purposes, new rights and obligations as
between the parties had been created of their own voli-
tion. There was an animus novandi and an obvious intent

998
CIVIL CODE OF THE PHILIPPINES Art. 2041

to supersede the previous agreement in the Eminent

Domain case. With this the decision must be deemed to
have been novated by the parties themselves, with the
result that the original decision had lost force and effect.
The finality of the appellate court decision which was
unknown to the parties at the time of settlement, neither
produced any legal effect since the appeal had effectively
been withdrawn. There was no longer any lower court
decision that could be the subject of an appeal. The City
maintains that it was not aware of the abandonment
of the appeal for which reason it entered into the com-
promise. This is not accurate since it was made known
that the dismissal of the appeal was being made as a
reciprocal concession for the settlement. Besides, under
Art. 2038 of the Civil Code, “one of the parties can not
set up mistake of fact against the other if the latter, by
virtue of the compromise has withdrawn from a litigation
already commenced.” It may be conceded that the City
was unaware that the judgment in the Eminent Domain
case had attained finality. Ignorance of a judgment is
not a valid ground for attacking a compromise. The
course of action should have been an action for rescis-
sion which has not been availed of here. Art. 2040 of the
Civil Code explicitly provided: “If after a litigation has
been decided by a final judgment, a compromise should
be agreed upon, either or both parties being unaware
of the existence of the final judgment, the compromise
may be rescinded.” Ignorance of a judgment which may
be revoked or set aside is not a valid ground for at-
tacking a compromise. Julian was well within his right
in seeking the enforcement of the compromise through
a petition for mandamus on the strength of Art. 2041
of the Civil Code, providing that: “If one of the parties
fails or refuses to abide by the compromise, the other
party may either enforce the compromise or regard it as
rescinded and insist upon his original demand.”
(b) or rescind it and insist on his original demand.
In either case, damages may be recovered if there
should be additional injury caused by failure to abide
by the terms of the compromise.

999
Art. 2041 CIVIL CODE OF THE PHILIPPINES

Barreras, et al. v. Hon. Garcia, et al.

L-44715-16, Jan. 26, 1989

While the approval of the compromise agreement by

the court dismisses the case, or considers it closed, the
law, however, anticipates situations wherein the parties
refuse to comply with the terms of a compromise agree-
ment.
Clearly, therefore, when a party fails or refuses to
abide by the compromise, the other party may either
enforce the compromise by a writ of execution, or regard
it as rescinded and insist upon his original demand.
Non-fulfillment of the terms of the compromise justifies
execution.

(2) No Necessity for Judicial Rescission

Under this Article, there is no necessity for a judicial
declaration of rescission, for the party aggrieved may “regard”
the compromise agreement as already “rescinded.” (Leonor v.
Sycip, L-14220, Apr. 29, 1961).

(3) No Rescission After Benefits are Enjoyed

Republic v. Sandiganbayan
49 SCAD 45
1993

The Court has consistently ruled that a party to a com-

promise cannot ask for a rescission after it has enjoyed its
benefits.

1000
CIVIL CODE OF THE PHILIPPINES

Chapter 2

ARBITRATIONS

Art. 2042. The same persons who may enter into a

compromise may submit their controversies to one or more
arbitrators for decision.

COMMENT:

(1) ‘Arbitration’ Defined

Arbitration is the process whereby by mutual agreement
a third party decides a dispute between two persons.

Mindanao Portland Cement Corp. v. McDonough

L-23390, Apr. 24, 1967

FACTS: In a contract, there was a provision requiring

arbitration in case of certain disputes concerning materials,
plans, etc. After a particular dispute, one party went to court
to compel the other to submit the matter to arbitrators. Issue:
May the court decide the dispute on the merits?
HELD: No. All it can do, in this summary proceeding
to enforce the arbitration proviso, is to determine whether or
not the parties should really go to the arbitrators. Arguments
on the merits must not be addressed to the court, but to the
arbitrators.

Bengson v. Chan
L-27283, Jul. 29, 1977

FACTS: In a contract for the construction of a condominium

building, it was expressly agreed that should there be any
dispute, a board of arbitrators must first be resorted to before

1001
Art. 2042 CIVIL CODE OF THE PHILIPPINES

taking any judicial action. The owner went to court because the
building was not finished on time, but there was no prior resort
to arbitration. Issue: Will the case now be dismissed?
HELD: No, the case will not be dismissed, although there
was no prior resort to arbitration. This is so because under
the arbitration law, in a case like this, what the court should
do is to refer the matter to the arbitrators who are supposed
to be selected by the parties.

Allied Banking Corp. v. CA & BPI

GR 123871, Aug. 31, 1998

FACTS: By participating in the clearing operations of

the Philippine Clearing House Corporation (PCHC), petitioner
agreed to submit disputes of this nature to arbitration.
ISSUE: Can PCHC invoke the jurisdiction of the trial
courts without a prior recourse to the PCHC Arbitration
Committee?
HELD: No. Having given its free and voluntary consent
to the arbitration clause, petitioner cannot unilaterally take
it back according to its whim. In the world of commerce,
especially in the field of banking, the promised word is cru-
cial. Once given, it may no longer be broken. Arbitration as
an alternative method of dispute resolution is encouraged by
the Supreme Court. Aside from unclogging judicial dockets,
it also hastens solutions especially of commercial disputes.

LM Power Engineering Corp. v.

Capitol Industrial Construction Groups, Inc.
GR L-141833, Mar. 26, 2003

FACTS: In a dispute involving electrical work at the Third

Part of Zamboanga, petitioner took over some of the work
contracted to petitioner. Allegedly, the latter failed to finish
it because of inability of procure materials. Upon completion
of its task under the contract, petitioner killed respondent
in an amount contested for its accuracy by respondent. The
latter also took refuge in the termination clause of the con-
tract. That clause allowed it to set-off the cost of the work

1002
CIVIL CODE OF THE PHILIPPINES Art. 2042

that petitioner had failed to undertake — due to termination

or takeover — against the amount it owed the latter.
Because of the dispute, petitioner filed a complaint with
the Regional Trial Court (RTC) for collection of the amount
representing alleged balance due it under the contract. Instead
of filing an answer, respondent filed a motion to dismiss, alleg-
ing the complaint was premature because there was no prior
recourse to arbitration. The RTC denied the motion and after
trial, it directed respondent to pay petitioner the amount of
the claim.
Petitioner claims there is no conflict regarding interpreta-
tion or implementation of the agreement. Without having to
resort to prior arbitration, it is entitled to collect the value of
services rendered thru an ordinary action for collection of a
sum of money from respondent. Upon the other hand, respond-
ent contends there is need for prior arbitration as provided
in the agreement. Issue: Whether or not certain provisions of
the agreement could be applied to the facts owing to parties’
incongruent position regarding the dispute.
HELD: The instant case involves technical discrepancies
that are better left to an arbitral body that has expertise
in those areas. In any event, the inclusion of an arbitration
clause in a contract does not ipso facto divest the courts of
jurisdiction to pass upon the findings of arbitral bodies, because
awards are still judicially reviewable under certain conditions.
And because there was no prior referral to arbitration, the
Supreme Court affirmed the decision of the Court of Appeals
directing the parties to refer their dispute for arbitration in
accordance with their contract.
Be that as it may, alternative dispute resolution (ADR)
methods — like arbitration, mediation, negotiation, and con-
ciliation — are encouraged by the Supreme Court. By enabling
parties to resolve their disputes amicably, they provide solutions
that are less consuming, less tedious, less confrontational, and
more productive of goodwill and lasting relationship.

(2) Distinguished from ‘Compromise’

In arbitration, a third party gives the solution; in com-
promise, the decision is arrived at by the parties concerned.

1003
Arts. 2043-2044 CIVIL CODE OF THE PHILIPPINES

(3) Special Law on Arbitration

Rep. Act 876 provides for arbitration.

Art. 2043. The provisions of the preceding Chapter upon

compromises shall also be applicable to arbitrations.

COMMENT:
Applicability of Provisions on Compromise
The Article is self-explanatory.

Art. 2044. Any stipulation that the arbitrators’ award

or decision shall be final, is valid, without prejudice to
Articles 2038, 2039, and 2040.

COMMENT:
(1) Finality of Arbitral Award
The arbitrator’s decision is FINAL except:
(a) if there is vitiated consent;
(b) or if the parties had previously agreed that to be binding
it must be accepted by them, and they have not accepted.
(See Cassels v. Reid, 9 Phil. 580).

(2) Stipulation on Arbitration Before Judicial Suit

It is permissible to agree that in case of dispute, the
matter will first be submitted to arbitration before the case
is brought to court. (Chong v. Assurance Corp., 8 Phil. 339).
However, if the arbitration is NOT clearly made a condition
precedent, the court action can proceed. (Vega v. San Carlos
Milling Co., 51 Phil. 911).
[NOTE: The law recognizes the validity, enforceability,
and irrevocability of arbitration agreements. (See Sec. 2, RA
876, otherwise known as “The Arbitration Law”). Art. 2044
of the Civil Code likewise allows the parties to an arbitration
agreement to stipulate that the arbitral award shall be final,
without prejudice to Arts. 2038-2040.]

1004
CIVIL CODE OF THE PHILIPPINES Art. 2044

[NOTE Further:
The Philippines is a signatory to the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards
(New York, Jun. 10, 1958), otherwise known as the New York
Convention. (Arthur P. Autea, “International Commercial Arbi-
tration: The Philippine Experience,” Philippine Law Journal,
Vol. 77, No. 2, Dec. 2002, p. 143).].

(3) Cases

National Union Five Insurance Co. of Pittsburg

v. Stolt-Nielsen Phils., Inc.
184 SCRA 682 (1990)
Arbitration, as an alternative mode of settling disputes,
has long been recognized and accepted in our jurisdiction.
(Chap. 2, Title XIV, Book IV, Civil Code). Republic Act 876
(The Arbitration Law) also expressly authorizes arbitration
of domestic disputes.
Foreign arbitration as a system of settling commercial
disputes of an international character was likewise recognized
when the Philippines adhered to the United Nations “Conven-
tion on the Recognition and Enforcement of Foreign Arbitral
Awards of 1958,” under the May 10, 1965 Resolution 71 of the
Philippine Senate, giving reciprocal recognition and allowing
enforcement of international agreements between parties of
different nationalities within a contracting state.

Santos v. Northwest Orient Airlines

210 SCRA 256
(1992)
The Philippines being a signatory to the New York Con-
vention, the same has the force and effect of law.
The New York Convention actually refers to the Conven-
tion on the Recognition and Enforcement of Foreign Arbitral
Awards (New York, Jun. 10, 1958).

(4) Some Observations

“In all international commercial arbitration cases,” it
has been observed that “parties always agree, either in their

1005
Art. 2044 CIVIL CODE OF THE PHILIPPINES

arbitration agreements or in their agreed arbitration rules,

that the award to be rendered by the arbitrator shall be final
and binding.” (Arthur P. Autea, “International Commercial Ar-
bitration: The Philippine Experience,” Philippine Law Journal,
Vol. 77, No. 2, Dec. 2002, p. 145). In fact, both the Philippine
Civil Code (Art. 2044) and the UNCITRAL Arbitration Rules
(Art. 32[2]), respectively, recognize the validity of any stipula-
tion that the arbitrator’s award or decision “shall be final”
and “binding on the parties.” with the latter “undertak[ing]
to carry out the award without delay.”
Lamentably, however, “losing parties not only appeal but
also assail the factual findings (See Sec. 24, The Arbitration
Law) and appreciation of evidence by the arbitrator “in the
hope of re-litigating anew what the arbitrator had already
settled. (Autea, “Int’l Comm’l Arbitration: The Phil. Experi-
ence,” supra).

Question of Fact and of Law Re Arbitral Awards

Asset Privatization Trust v. Court of Appeals
300 SCRA 579
(1998)
As a rule, the award of an arbitrator cannot be set aside
for mere errors of judgment either as to the law or as to the
facts. Courts are without power to amend or overrule merely
because of disagreement with matters of law or facts deter-
mined by the arbitrators. They will not review the findings of
law and fact contained in an award, and will not undertake
to substitute their judgment for that of the arbitrators, since
any other rule would make an award the commencement, not
the end, of litigation.
Errors of law and fact, or an erroneous decision of matters
submitted to the judgment of the arbitrators, are insufficient to
invalidate an award fairly and honestly made. Judicial review
of an arbitration is, thus, more limited than judicial review
of a trial. Nonetheless, the arbitrator’s award is not absolute
and without exceptions. The arbitrators cannot resolve issues
beyond the scope of the submission agreement. Parties to such
an agreement are bound by the arbitrators’ award only to the
extent and in the manner prescribed by the contract and only
if the award is rendered in conformity thereto.

1006
CIVIL CODE OF THE PHILIPPINES Art. 2044

(5) The Matter of ‘Filing Fee’

Sun Insurance Office, Ltd. (SIOL) v. Asuncion

170 SCRA 274
(1989)
It is not simply the filing of the complaint or appropriate
initiatory pleading but the payment of the prescribed docket
fee, that vests a trial court with jurisdiction over the subject
matter or nature of the action.
[NOTE: At any time within one month after the award
is made, any party to the controversy which was arbitrated
may apply to the court having jurisdiction for an order con-
firming the award. (Sec. 23, The Arbitration Law).]

(6) Court to Decide All Motions, Petitions, or Applications

Within 10 Days After Hearing
The court shall decide all motions, petitions, or applica-
tions filed under the provisions of the Arbitration Law, within
10 days after such motions, petitions, or applications have
been heard by it. (Sec. 6, The Arbitration Law)
[NOTE: “While some Philippine courts are able to see
thru the dilatory tactics of the losing party, and eventually
uphold the enforcement of the foreign arbitral award, the sad
part is that they are unable to resolve the dilatory issues
within the 10-day period under Sec. 6 of the Arbitration Law.
Sec. 6 is honored more in the breach than in the observance.
It is probably not an exaggeration to state that it is hardly
observed at all. But if Sec. 6 were to be consciously observed
by Philippine courts, the delay that losing parties may inter-
pose will be short-lived and will not succeed in frustrating
the enforcement of foreign arbitral awards.” (A.P. Autea, “Int’l
Comm’l Arbitration: The Phil. Experience,” supra, p. 149).].

Puromines, Inc. v. CA
220 SCRA 281
(1993)

Since there obtains a written provision for arbitration as

well as failure on respondent’s part to comply therewith, the

1007
Art. 2044 CIVIL CODE OF THE PHILIPPINES

court rightly ordered the parties to proceed to their arbitra-

tion in accordance with the terms of their agreement. (Sec.
6, The Arbitration Law [RA 876]).
Respondent’s arguments touching upon the merits of
the dispute are improperly raised. They should be addressed
to the arbitrators. The duty of the court in this case is not
to resolve the merits of the parties’ claims but only to deter-
mine if they should proceed to arbitration or not. (Mindanao
Portland Cement Corp. v. McDonough Construction Co. of
Florida, 19 SCRA 808 [1987]).

(7) Inclusion of Third Parties as Additional Parties to

Defeat an Arbitration Clause

Toyota Motor Phils. Corp. v. CA

216 SCRA 236
(1992)

The contention that the arbitration clause has become

dysfunctional because of the presence of third parties is un-
tenable. (See the following cases: Associate Bank v. CA, 233
SCRA 137 [1994]; Allied Banking Corp. v. CA, 294 SCRA 803
[1998]; and Home Bankers Savings & Trust Co. v. CA, 318
SCRA 558 [1999]).
[NOTE: In the cases of Associate Bank v. CA, supra
and Allied Banking Corp. vs. CA, supra, the Supreme Court
dismissed a third party complaint and directed the parties
therein to arbitrate, regardless of the related principal action
that was then pending in court. (Cited in A.P. Autea, “Int’l
Comm’l Arbitration: The Phil. Experience,’’ supra, p. 155.)
In Home Bankers Savings & Trust Co., supra, it was held:
“Arbitration, as an alternative method of dispute resolution
in encouraged. Aside from unclogging judicial dockets, it also
hastens solutions especially of commercial disputes. The Court
looks with favor upon such amicable arrangements and will
only interfere with great reluctance to anticipate or nullify the
action of the arbitrator.” (Cited in A.P. Autea, “Int’l Comm’l
Arbitration: The Phil. Experience,” op. cit., p. 154).]

1008
CIVIL CODE OF THE PHILIPPINES Art. 2044

(8) The Del Monte Case

The relatively recent case of Del Monte Corp.-USA v.
CA (351 SCRA 373 [2001]), according to an acknowledged
authority on international arbitration practice, “gave rise to
a new problem in international commercial arbitration — the
inclusion of third parties as additional parties to defeat an
arbitration clause.” (A.P. Autea, “Int’l Comm’l Arbitration: The
Phil. Experience,” supra, p. 149). He “summits that the deci-
sion of the Supreme Court in the Del Monte case threatens to
radically depart from establish jurisprudence in the subject of
arbitration consistently observed by the precedent cases [earlier
alluded to in] Associated Bank v. CA, Allied Banking Corp.
v. CA, and Home Bankers Savings & Trust Co. v. CA,” and
[which all spr[u]ng from the landmark case of Toyota Motor
Phils. Corp. v. CA. (Ibid., p. 155). He adds that “[w]ith the
Del Monte decision, the pronouncement [earlier quoted] in
Home Bankers Savings & Trust Co. v. CA, inevitably fades
into history.” (Ibid., p. 154).

Del Monte Corp.-USA v. CA

351 SCRA 373
(2001)

FACTS: Under a distributorship agreement, Del Monte

Corp.-USA (“Del Monte”) appointed Montebueno Marketing,
Inc. (“Montebueno”) as sole and exclusive distributor of the
former’s products in the Philippines.
The agreement provided for the following arbitration
clause re governing law and arbitration:
“This Agreement shall be governed by the laws of
the State of California and/or, if applicable, the United
States of America. All disputes arising out of or relating
in this agreement or the parties’ relationship, including
the termination thereof, shall be resolved by arbitration
in the City of San Francisco, State of California, under
the Rules of American Arbitration Association.
“The arbitration panel shall consist of three mem-
bers, one of whom shall be selected by [Del Monte], one
of whom shall be selected by [Montebueno], and third

1009
Art. 2044 CIVIL CODE OF THE PHILIPPINES

of whom shall be selected by the other two members

and shall have relevant experience in the industry. The
parties further agree that neither shall commence any
litigation against the other arising out of this Agreement
or the termination thereof as to any matter not subject
to arbitration or with respect to any arbitration proceed-
ing or award, except in a court located in the State of
California. Each party consents to jurisdiction over it by
and exclusive venue in such a court.”
Montebueno, et al., filed a complaint against Del Monte,
et al., for violation of Arts. 20, 21 and 23 of the Civil Code.
The former alleged that the latter’s products continued to be
brought into the country by parallel importers despite the
appointment of Montebueno as sole and exclusive distributor
of Del Monte products thereby causing them (Montebueno, et
al.) great embarrassment and substantial damage. Del Monte,
et al. filed a “Motion to Suspend Proceedings” invoking the
arbitration clause in the distributorship agreement and Sec.
7 of the Arbitration Law (RA 876) re stay of civil action.
The trial court deferred consideration of the motion
rationalizing that “the grounds alleged therein do not consti-
tute [grounds for] the suspension of the proceedings as this
action is for damages with prayer for the issuance of [a] Writ
of Preliminary Attachment and not on the distributorship
agreement.” Subsequently, however, the trial court issued an
order denying the motion based on the ground that it “will
not serve the ends of justice and to allow said suspension
will only delay the determination of the issues, frustrate the
quest of the parties for a judicious determination of their re-
spective claims, and/or deprive and delay their rights to seek
redress.” But in so disposing, the trial court had occasion to
contravene the doctrine laid down in Puromines, Inc. v. Court
of Appeals (220 SCRA 281 [1993]), where it was ruled: “Since
there obtains a written provision for arbitration as well as
failure on respondent’s part to comply therewith, the court
rightly ordered the parties to proceed to their arbitration in
accordance with the terms of their agreement. (Sec. 6, RA
876). Respondent’s arguments touching upon the merits of
the dispute are improperly raised. They should be addressed
to the arbitrators. The duty of the court in this case is not to

1010
CIVIL CODE OF THE PHILIPPINES Art. 2044

resolve the merits of the parties’ claims but only to determine

if they should proceed to arbitration or not.” (Ibid., citing
Mindanao Portland Cement Corp. v. McDonough Construction
Co. of Florida, GR L-23390, 19 SCRA 808 [1967]).
On appeal, the Court of Appeals (CA) affirmed the trial
court on the ground that the alleged damaging acts required
the interpretation of Art. 21 of the Civil Code and that in
determining whether Del Monte, et al. had violated said
provision would require a full blown trial. Del Monte filed
a Motion for Reconsideration but the motion was denied.
Thereupon, Del Monte filed a petition for certiorari with the
Supreme Court, and which the latter denied on Feb. 7, 2001.
In affirming the CA, the highest tribunal also directed the
trial court to proceed with the hearing of the case.
In holding that the arbitration clause in the distributor-
ship agreement only applied to the parties thereto, the Supreme
Court opined that only parties to the Agreement, i.e., petitioners
[Del Monte Corp.-USA (DMC-USA)] and its Managing Director
for Export Sales Paul E. Derby, Jr. and private respondents
[Montebueno marketing, Inc.] and its Managing Director Lily
Sy are bound by the Agreement and its arbitration clause as
they are the only signatories thereto. Petitioners Daniel Col-
lins and Luis Hidalgo, and private respondent [Salvosa Foods,
Inc.], not parties to the Agreement cannot even be considered
assigns or heirs of the parties, are not bound by the Agreement
and the arbitration clause therein.
Consequently, referral to arbitration in the State of
California pursuant to the arbitration clause and the sus-
pension of the proceedings in Civil Case 2637-MN pending
the return of the arbitral award could be called for but only
as to petitioners DMC-USA and P.E. Derby, Jr., and private
respondents Montebueno and L. Sy, and not as to the other
parties in this case. This is consistent with the case of Heirs
of Augusto L. Salas, Jr. v. Laperal Realty Corp. (320 SCRA
610 [1990]), which superseded that of Toyota Motor Phils.
Corp. v. Court of Appeals (216 SCRA 236 [1992]).
In Toyota, Motor Phils. Corp. v. CA (supra), “the con-
tention that the arbitration clause has become dysfunctional
because of the presence of third parties is centenable [con-

1011
Art. 2044 CIVIL CODE OF THE PHILIPPINES

sidering that] contracts are respected as the law between

the contracting parties [and] as such, the parties are thereby
expected to abide with good faith in their contractual com-
mitments.” However, in Salas, Jr. vs. Laperal Realty Corp.
(supra), only parties to the agreement, their assigns or heirs
have the right to arbitrate or could be compelled to arbitrate.
In recognizing the right of the contracting parties to arbitrate
or to compel arbitration, the splitting of the proceedings to
arbitration as to some of the parties on one hand and trial
for the others upon the other hand, or the suspension of trial
pending arbitration between some of the parties, should not
be allowed as it would, in effect, result in multiplicity of suits,
duplicitous procedure and unnecessary delay.
Accordingly, the object of arbitration is to allow the
expeditious determination of a dispute. Dearly, the issue
before this Court could be speedily and efficiently resolved
in its entirety if simultaneous arbitration proceedings and
trial, or suspension of trial pending arbitration are allowed.
The interest of justice would only be served if the trial court
hears and adjudicates the case in a single albeit complete
proceedings.
Del Monte, et al. filed a Motion for Reconsideration but
which was denied by the Supreme Court in a Resolution dated
Jul. 18, 2001. Held the Court: “The inclusion of third parties
to defeat the arbitration clause presupposes bad faith. And
bad faith is never presumed. In the instant case, it is not
alleged nor even hinted at that the inclusion of third parties
was specifically and intentionally done to negate the effect of
the arbitration clause. Consequently, the pronouncement of
the Court in Salas, Jr. v. Laperal Realty Corp. (supra) that
only parties to the agreement, their assigns or heirs have the
right to arbitrate, or could be compelled to arbitrate, must be
adopted.”
[NOTE: “With the declaration of the Supreme Court in
Del Monte Corp.-USA v. CA (351 SCRA 373 [2001]) that “the
case of A.L. Salas, Jr. v. Laperal Realty Corp. (320 SCRA 610
[1999]) superseded that of Toyota Motor Phils. Corp. v. CA
(216 SCRA 236 [1992]), the Del Monte Case (supra) needs to
be revisited. The Salas case (supra) which was rendered by

1012
CIVIL CODE OF THE PHILIPPINES Arts. 2045-2046

a division (of the Court), cannot overturn the doctrine laid

down in (the) Toyota case (supra), which was rendered by
another division, without running afoul with the mandatory
provision under Art. VII, Sec. 4(3) of the 1987 Phil. Const.,
which reads that cases or matters heard by a division shall
be divided or resolved with the concurrence of a majority of
the Members who actually took part in the deliberations on
the issues in the case and voted thereon, and in no case,
without the concurrence of at least three of such Members.
When the required number is not obtained, the case shall be
decided en banc. Provided, That no doctrine or principle of
law laid down by the court in a decision rendered en banc or
in division may be modified or reversed except by the court
sitting en banc. The case of Republic v. Delos Angeles (159
SCRA 264 [1988]), declared this constitutional provision as
mandatory.” (A.P. Autea, “International Commercial Arbitra-
tion: The Philippine Experience,” Philippine Law Journal, Vol.
77, No. 2, Dec. 2002, p. 156).].

Art. 2045. Any clause giving one of the parties power

to choose more arbitrators than the other is void and of
no effect.

COMMENT:
Equal Number of Arbitrators
The Article explains itself.

Art. 2046. The appointment of arbitrators and the

procedure of arbitration shall be governed by the provi-
sions of such rules of court as the Supreme Court shall
promulgate.

COMMENT:
Authority of the Supreme Court to Promulgate Rules
on Arbitration
The Article is self-explanatory.

1013
 CIVIL CODE OF THE PHILIPPINES

TITLE XV
GUARANTY

Chapter 1

NATURE AND EXTENT OF GUARANTY

INTRODUCTORY COMMENT:
(1) Guaranty in the Broad Sense
Guaranty may be:
(a) personal guaranty;
(b) or real guaranty.

(2) Personal Guaranty

This may be in the form of:
(a) guaranty (properly so-called or guaranty in the strict
sense)
(b) suretyship (one where the surety binds himself solidarily,
not subsidiarily, with the principal debtor).

(3) Real Guaranty

Here, the guaranty is PROPERTY —
(a) if real property — the guaranty may be in the form
of:
1) a real mortgage;
2) antichresis.
(b) if personal property — the guaranty may be in the form
of:

1014
CIVIL CODE OF THE PHILIPPINES Art. 2047

1) pledge;
2) chattel mortgage.

San Miguel Corporation

v. National Labor Relations Commission
GR 58630, Nov. 25, 1983

A cash bond to bail out an employee is not a loan

(for ownership is not transferred) but money entrusted
to the employee.

Art. 2047. By guaranty a person, called the guarantor,

binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the contract is
called a suretyship.

COMMENT:
(1) Guaranty in the Strict Sense
This Article refers to guaranty properly so-called, or
guaranty in the strict sense. The first paragraph defines this
contract of guaranty. The parties thereto are the guarantor and
the creditor. Strictly speaking, the contract between the debtor
and the guarantors is called the contract of indemnity.

(2) Characteristics of the Contract of Guaranty

(a) It is a contract between the guarantor and the credi-
tor.

Vizconde v. IAC
GR 74231, Apr. 10, 1987
FACTS: PAG and CJV were charged with and convict-
ed of estafa. The people’s evidence — a receipt — reads:
“Received from MJL one diamond ring, which I
agree to sell for P85,000 on commission basis and pay

1015
Art. 2047 CIVIL CODE OF THE PHILIPPINES

her in the following manner: P85,000 — post dated check.

It is understood that in the event the above postdated
check is dishonored on its due date, the total payment
of the above item, shall become immediately due and
demandable without awaiting further demand.
“I guarantee that the above check will be sufficiently
funded on the due date.
(SGD) PAG I guarantee jointly and severally.” (SGD)
CJV
HELD: The joint and several undertaking assumed
by CJV in a separate writing below the main body of the
receipt merely guaranteed the civil obligation of PAG to
pay MJL the value of the ring in the event PAG failed
to return the article. It cannot be construed as assuming
any criminal responsibility consequent upon the failure
of PAG to return the right or deliver its value.
When a person acts merely as a guarantor of the
obligation assumed by another to a third person for the
return of such third person’s right or the delivery of its
value, whatever liability was incurred by the principal
obligor for defaulting on such obligation, that of the
guarantor consequent upon such default is merely civil,
not criminal. It is error therefore, to convict the guaran-
tor of estafa.
(b) Generally, there must be a meeting of the minds be-
tween said parties. (PNB v. Garcia, 47 Phil. 662; Texas
[Phil.] Co. v. Alonzo, 73 Phil. 90). In general, therefore,
the creditor must notify the guarantor that the former
is accepting the guaranty, unless the guaranty is not
merely an offer but a direct and unconditional one. In
such a case, all that is required is for the creditor to act
upon the promise; no prior notice is needed to indicate
his acceptance. (Visayas Surety and Insurance Corpora-
tion v. Laperal, 69 Phil. 688). Reason: In a sense, the
contract may be said to be unilateral. (Ibid.)
(c) It is consensual, nominate, accessory, unilateral (in that
only the guarantor is obligated to the creditor and not vice
versa). (See Texas [Phil.] Co. v. Alonzo, 73 Phil. 90).

1016
CIVIL CODE OF THE PHILIPPINES Art. 2047

(d) As to form, the contract of guaranty is governed by the

Statute of Frauds, being a special promise to answer for
the debt, default, or miscarriage of another.” (See Art.
1403, No. 2). Hence, an oral promise of guaranty is not
enforceable. (See Nolasco Brothers, Inc. v. Villarino, CA
17616-R, Aug. 8, 1958).

(3) Guarantor Distinguished from Surety

GUARANTOR SURETY

(a) subsidiary liability (a) primary liability

(b) pays if debtor CANNOT (b) pays if debtor DOES
NOT
(c) insurer of the debtor’s (c) insurer of the debt
solvency

(Machetti v. Hospicio de San Jose, 43 Phil. 297 and Higgins

v. Sellner, 41 Phil. 142).

(4) Surety Distinguished from a Solidary Debtor

A surety is almost the same as a solidary debtor, except
that the latter is himself a principal debtor. In all applicable
provisions, the provisions of this Title also apply to a surety.
(Manila Surety and Fidelity Co. v. Batu Construction & Co.,
et al., 53 O.G. 8836).

(5) Procedure for Enforcement of Surety’s Liability

The procedure for the enforcement of the surety’s liability
under a bond for delivery of personal property is described in
Sec. 8, Rule 58 and Sec. 20, Rule 57 of the Revised Rules of
Court. (Luneta Motor Co. v. Antonio Menendez, L-16880, Apr.
30, 1963). In this Luneta Motor Co. case, the Court had occa-
sion to state that in order to recover on a replevin (recovery
of personal property) bond, the following requisites must be
complied with:
(a) application for damages must be filed before trial or
before entry of trial judgment;
(b) due notice must be given the other party and his surety;
and

1017
Art. 2048 CIVIL CODE OF THE PHILIPPINES

(c) there must be a proper hearing, and the award of dam-

ages, if any, must be included in the final judgment. (See
also Alliance Surety Co., Inc. v. Piccio, L-9950, Jul. 31,
1959).

(6) ‘Guarantor’ Distinguished from the ‘Debtor’

A guarantor is a person distinct from the debtor. While
the guarantor is subsidiarily liable, the debtor is principally
liable.

(7) Instance When a Suretyship is Deemed a Continuing

One
Ongkiko v. BPI Express Card Corp.
486 SCRA 206 (2006)
FACTS: By executing an undertaking, petitioner solidarily
obliged himself to pay respondent all the liabilities incurred
under the credit card account, whether under the principal,
renewal, or extension card issued, regardless of the charges
or novation in the terms and conditions in the issuance and
use of the credit card. Issue: Whether or not the surety is
bound by the liabilities of the principal until it has been fully
paid.
HELD: Yes, for under the circumstances, the suretyship
agreement is a continuing one. Thus, in a similar case, the
Supreme Court exhorted prospective sureties to exercise cau-
tion in signing treaty undertakings prepared by credit card
companies, and to read carefully the terms and conditions of
the agreement. (See Molino v. Security Diners International
Corp., 363 SCRA 358 [2001]).

Art. 2048. A guaranty is gratuitous, unless there is a

stipulation to the contrary.

COMMENT:
(1) Gratuitous Character
Generally, the contract of guaranty is GRATUITOUS,
but there can be a contrary stipulation.

1018
CIVIL CODE OF THE PHILIPPINES Arts. 2049-2050

(2) Relation Between an ‘Accommodation Party’ and the

‘Accommodated Party’

Tomas Ang v. Associated Bank and Antonio

Ang Eng Liong
GR 146511, Sep. 5, 2007
The relationship is one of principal and surety –– the
accommodation party being the surety. Altho, a contract of
suretyship is in essence accessory or collateral to a valid
principal obligation, the surety‘s liability to the creditor is
immediate primary, and absolute — he is directly and equally-
bound with the principal.

Art. 2049. A married woman may guarantee an obligation

without the husband’s consent, but shall not thereby bind the
conjugal partnership, except in cases provided by law.

COMMENT:
Married Woman as Guarantor
Generally, a wife-guarantor responds with her parapher-
nal property.

Art. 2050. If a guaranty is entered into without the knowl-

edge or consent, or against the will of the principal debtor,
the provisions of Articles 1236 and 1237 shall apply.

COMMENT:

(1) Guaranty Entered Into Without Debtor’s Knowledge,

Consent, or Against the Latter’s Will
A guarantor can recover from the debtor what the former
had to pay the creditor, even if the guaranty was without the
debtor’s consent or against his will, but the recovery will only
be to the extent that the debtor had been benefited. (See Arts.
1236 and 1237 and De Guzman v. Santos, 68 Phil. 371).

(2) Cross-References
(a) Art. 1236. The creditor is not bound to accept payment
or performance by a third person who has no interest

1019
Arts. 2051-2052 CIVIL CODE OF THE PHILIPPINES

in the fulfillment of the obligation, unless there is a

stipulation to the contrary.
Whoever pays for another may demand from the
debtor, what he has paid, except that if he paid without
the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial
to the debtor.
(b) Art. 1237. Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as
those arising from a mortgage, guaranty, or penalty.

Art. 2051. A guaranty may be conventional, legal or

judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor of the
principal debtor, but also in favor of the other guarantor,
with the latter’s consent, or without his knowledge, or even
over his objection.

COMMENT:
(1) Guaranty Classified According to Manner of Creation
According to manner of creation, guaranty may be:
(a) conventional (by agreement);
(b) legal (required by law);
(c) judicial (required by the court as when an attachment
is to be lifted).

(2) Sub-Guaranty
A sub-guaranty may be created. This is to guarantee an
obligation of a guarantor.

Art. 2052. A guaranty cannot exist without a valid

obligation.
Nevertheless, a guaranty may be constituted to guar-
antee the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation.

1020
CIVIL CODE OF THE PHILIPPINES Art. 2052

COMMENT:
(1) Can a Guaranty Exist Even Without a Valid Principal
Obligation
A guaranty is merely an accessory contract, so if the
principal obligation is void, the guaranty is also void. (De la
Rosa v. De Borja, 53 Phil. 990). However, by express provi-
sion of the second paragraph, a guaranty can be valid even
if the principal obligation is:
(a) voidable;
(b) unenforceable;
(c) natural.

(2) Consideration
The consideration of the guaranty is the same as the
consideration of the principal obligation. As long as the
principal debtor receives some benefit, this is all right even
if the guarantor himself has NOT received any benefit. (Phil.
Guaranty Co. v. Dinio, 54 O.G. 5331).

Willex Plastic Industries Corp. v.

CA & International Corporate Bank
GR 103066, Apr. 25, 1996
FACTS: Inter-Resin Industrial (IRI) and Willex Plastic
Industries Corp. (WPIC) executed a “continuing guaranty”
in favor of Investment & Underwriting Corp. of the Phils.
(IUCP), jointly and severally guaranteeing payment of sums
obtained and to be obtained from IRI from IUCP. For failure
of IRI and WPIC to pay what IUCP had paid to Manilabank
under IUCP and IRI’s “continuing surety agreements,” IUCP,
thru its successor Atrium Capital Corp. (ACC), filed a case
against them before the Manila RTC.
The trial court ordered IRI and WPIC to jointly and
severally pay Interbank (successor of ACC) the amount of
their indebtness, plus, interest, liquidated the damages, at-
torney’s fees, and litigation expenses. The Court of Appeals
(CA) affirmed the trial court’s ruling and denied the motion
for reconsideration filed by WPIC. On appeal, the Supreme
Court affirmed the CA’s decision.

1021
Art. 2053 CIVIL CODE OF THE PHILIPPINES

HELD: WPIC, as guarantee, is bound by the same con-

sideration that makes the contract effective between principal
parties thereto. In this case, the “continuing guaranty” would
cover sums obtained and/or to be obtained by IRI from Inter-
bank. Hence, the contract of suretyship in this case has both
retrospective and prospective application. Furthermore, since
the “continuing guaranty” embodies an express remuneration
of the right of excussion, WPIC can be proceeded against
without first exhausting all the properties of IRI.

Art. 2053. A guaranty may also be given as security for

future debts, the amount of which is not yet known; there
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be secured.

COMMENT:
(1) Guaranty for Present and Future Debts
There can be a guaranty for:
(a) present debts;
(b) future debts (even if the amount is not yet known). (Art.
2053). Therefore, a bond posted to secure additional credit
that the principal debtor had applied for is not void just
because the said bond was signed and filed before the
additional credit was extended by the creditor. (Naric v.
Fodas, et al., L-11517, Apr. 30, 1958).

(2) Liquidated Debt

A debt is already considered liquidated under this article
when it is for a price fixed in a contract for the delivery of
future goods and the seller is now ready to deliver said goods
within the period stipulated. (Smith, Bell & Co. v. Nat. Bank,
42 Phil. 733).

(3) Continuing Surety Agreements Are Quite Commonplace

in Present Day Commercial Practice

1022
CIVIL CODE OF THE PHILIPPINES Art. 2054

South City Homes, Inc., Fortune Motors

(Phils.), Palawan Lumber Manufacturing
Corp. v. BA Finance Corp.
GR 135462, Dec. 7, 2001

FACTS: Petitioners assert that the suretyship agreement

they signed is void because there was no principal obligation
at the time of signing as the principal obligation was signed
6 mos. later.
HELD: The law allows a suretyship agreement to secure
future loans even if the amount is not yet known. (See Art.
2053, Civil Code).
Of course, a surety is not bound under any particular
principal obligation until that principal obligation is born. But
there is no theoretical or doctrinal difficulty inherent in say-
ing that the suretyship agreement itself is valid and binding
even before the principal obligation intended to be secured
thereby is born, any more than there would be in saying
that obligations which are subject to a condition precedent
are valid and binding before the occurrence of the condition
precedent.
Comprehensive or continuing surety agreements are, in
fact, quite commonplace in present-day financial and commer-
cial practice. A bank or financing company which anticipates
entering into a series of credit transactions with a particular
company, commonly requires the projected principal debtor to
execute a continuing surety agreement along with its sureties.
By executing such an agreement, the principal places itself
in a position to enter into the projected series of transactions
with its creditor. With such suretyship agreement, there
would be no need to execute a separate surety contract or
bond for each financing or credit accommodation extended to
the principal debtor.

Art. 2054. A guarantor may bind himself for less, but

not for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations
shall be reduced to the limits of that of the debtor.

1023
Art. 2054 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Obligation of Guarantor May Be Less, But Not More
Than Obligation of Principal Debtor
Example:
A borrowed from B P10 million. No mortgage was con-
stituted. C guaranteed to B the payment of A’s debt, and to
show his sincerity, C even mortgaged his land in favor of
B. If A cannot pay, and C cannot pay, may B foreclose the
mortgage on C’s land?
ANS.: No. The obligation of C being merely accessory
to A’s debt, it should not be more onerous than the latter. If
the principal debt is not secured by a mortgage, the guaranty
should also not be secured by a mortgage; otherwise, this
would be making the guarantor’s liability more onerous than
that of the principal debtor.
[NOTE: A person, however, without becoming a guaran-
tor, may secure or guarantee another’s debt by mortgaging
his (the former’s) own property. Thus, under the last para-
graph of Art. 2085, “Third persons who are not parties to
the principal obligation may secure the latter by pledging or
mortgaging their own property.” It is, of course, understood
that one who mortgages his property to guarantee another’s
debt without expressly assuming personal liability for such
debt, CANNOT be compelled to pay the deficiency remaining
after the mortgage has been foreclosed. (Phil. Trust Co. v.
Echaus Tan Siua, 52 Phil. 582 and Parsons Hardware Co.,
Inc. v. Acosta, CA-GR 194344-R, May 5, 1939).]
Art. 2054 can also apply to surety. (Hospicio de San
Jose v. Fidelity & Surety Co., 62 Phil. 926 and Uy Isabelo v.
Yandoc, CA-GR 8801-R, Jun. 20, 1956).

Pacific Banking Corp. v. IAC

GR 72275, Nov. 13, 1991
FACTS: Celia Regala obtained from Pacific Banking
Corp. a Pacificard Credit Card under the terms and condi-
tions issued by the bank. On the same date, Roberto Regala,
Jr., spouse of Celia, executed a “Guarantor’s undertaking” in
favor of the bank, which provides: “I/We, the undersigned,

1024
CIVIL CODE OF THE PHILIPPINES Art. 2054

hereby agree, jointly and severally with Celia Syjuco Regala

to pay the Pacific Banking Corporation upon demand any
and all indebtedness, obligations, charges, or liabilities due
and incurred by said Celia Syjuco Regala with the use of the
Pacificard or renewal thereof issued in his favor by the Pacific
Banking Corporation. Any changes of or Novation in the terms
and conditions in connection with the issuance or use of said
Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us
from the responsibility hereunder, it being understood that
the undertaking is a continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia Syjuco Regala
have been fully satisfied or paid.” Celia as such Pacificard
holder, had purchased goods or services on credit under her
Pacificard, for which Pacific Bank advanced the cost amounting
to P92,803.98 at the time of the filing of complaint. In view of
Celia’s failure to settle her account, demand was sent to her
and to Roberto Regala under his “guarantor’s” undertaking.
Later, Pacific sued both Celia and Roberto. The trial court
rendered judgment against both Celia and Roberto who were
ordered jointly and severally to pay the bank P92,803.98 with
interest at 14% per annum from the time of demand until the
principal is fully paid plus 15% of the principal obligation as
attorney’s fees. The Court of Appeals modified the trial court’s
decision. Roberto was made liable only to the extent of the
monthly credit limit granted to Celia, i.e., at P2,000 a month
and only for advances made during the one-year period of
the card’s effectivity counted from Oct. 29, 1975 to Oct. 29,
1976.
HELD: The Supreme Court set aside the decision of the
Court of Appeals and reinstated that of the trial court and held
that the undertaking signed by Roberto Regala, Jr., although
denominated “Guarantor’s Undertaking” was in substance a
contract of surety. As a surety he bound himself jointly and
severally with the debtor Celia Regala “to pay the Pacific
Banking Corporation upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred by said
Celia Syjuco Regala with the use of Pacificard or renewals
thereof issued in her favor by Pacific Banking Corporation.”
This undertaking was also provided as a condition in the is-
suance of the Pacificard to Celia. Under Art. 2054 of the Civil

1025
Art. 2054 CIVIL CODE OF THE PHILIPPINES

Code, “a guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the amount and the
onerous nature of the conditions.” The credit limit granted to
Celia Regala was P2,000 per month and that Celia Regala
succeeded in using the card beyond the original period of its
effectivity, Oct. 29, 1979. However, Roberto’s liability should
not be limited to that even. As surety of his wife, he expressly
bound himself up to the extent of the debtor’s indebtedness,
likewise expressly waiving any discharge in case of any change
or novation in the terms and conditions in connection with the
issuance of the Pacificard credit card. Roberto in fact made
his commitment as a surety a continuing one, binding upon
himself until all the liabilities of Celia have been fully paid.

(2) Problems
(a) A borrowed from B P1 million. Can C act as surety and
guarantee the payment and limit his liability to merely
P300,000?
ANS.: Yes, the guarantor or the surety can bind
himself for less than the principal debtor.
(b) In case (a), suppose A can pay only P900,000, can B get
anything from C?
ANS.: Yes, B can still get P100,000 from C. Out of
the P1 million debt, P700,000 was unsecured; P300,000
was secured (by the suretyship). It follows that, apply-
ing the rule of application of payments, the payment of
the P900,000 should first be applied to the unsecured
debt of P700,000, and the remaining P200,000 should
be applied to the secured debt. This is so because the
unsecured debt is clearly more onerous than the secured
one. It follows that since only P200,000 of the secured
debt has been paid, the creditor can still claim from the
surety the amount of P100,000.
[NOTE: This does not contradict the statement that
the guarantor of the surety may bind himself for less
than the principal debt. After all, in the problem pre-
sented the surety bound himself to pay up to P300,000.
Had the principal debtor been completely insolvent, the
creditor could only ask for P300,000 from the surety.

1026
CIVIL CODE OF THE PHILIPPINES Art. 2054

The Supreme Court has repeatedly stated that:

“Where in a bond the debtor and surety have bound
themselves solidarily, but limiting the liability of the
surety to a lesser amount than that due from the prin-
cipal debtor, any such payment as the latter may have
on account of such obligation, must be applied first to
the unsecured portion of the debt, for, as regards the
principal debtor, the obligation is more onerous as to the
amount not secured.” (Hongkong and Shanghai Banking
Corporation v. Aldanese, 48 Phil. 990).]

(3) Rule if a Person Has Two Debts

When a person has two debts, one as a sole debtor, and
another as solidary co-debtor, his more onerous obligation
to which first payment is to be applied, is the debt as sole
debtor. (8 Manresa 290).

Commonwealth of the Phil. v. Far Eastern Sure-

ty and Insurance Co.
83 Phil. 305

FACTS: The Far Eastern Surety & Insurance Co., Inc.

bound itself to pay jointly and severally with the principal
debtor the sum of P10,000.00 although the debt was really
P11,230. The principal debtor was able to pay P10,000 only.
When sued, the Far Eastern Surety claimed that inasmuch
as the P10,000 had been fully satisfied, the surety cannot
now be held liable for the balance. It alleged that as surety
it had agreed to guarantee the payment of merely P10,000.
Issue: Is said surety liable for the balance?
HELD: Yes, since in a case like this, we have to apply
the rule on the application of payments. The P10,000 already
given should first be applied to the unsecured portion and the
balance to the secured debt.

(4) Rule if Debt is Increased

If the indebtedness is increased without the guarantor’s
consent, he is completely released from the obligation as
guarantor or surety. (Nat. Bank v. Veraguth, 50 Phil. 253).

1027
Art. 2055 CIVIL CODE OF THE PHILIPPINES

(5) Liability of Guarantor for Interest

If a guarantor upon demand fails to pay, he can be held
liable for interest, even if in thus paying, the liability becomes
more than that in the principal obligation. The increased liability
is not because of the contract but because of the default and
the necessity of judicial collection. It should be noted, however,
that the interest runs from the time the complaint is filed, not
from the time the debt becomes due and demandable. (Tagana
v. Aldanese, 43 Phil. 582 and Plaridel Surety & Insur. Co. v.
P.I. Galang Machinery Co., 53 O.G. 1449).

(6) Effect of a Penalty Clause

If a surety bond has a penalty clause (in case of a
violation of a condition), said penalty may be demanded in
the proper case even if its value is MORE than the amount
of the principal debt. (General Insurance & Surety Corp. v.
Republic, L-13873, Jan. 31, 1963).

Art. 2055. A guaranty is not presumed; it must be ex-

press and cannot extend to more than what is stipulated
therein.
If it be simple or indefinite, it shall comprise not only
the principal obligation, but also all its accessories, including
the judicial costs, provided with respect to the latter, that
the guarantor shall only be liable for those cost incurred
after he has been judicially required to pay.

COMMENT:
(1) Form of the Contract
To be enforceable, the contract of guaranty (between the
guarantor and the creditor) must be in writing, since this is “a
special promise to answer for the debt, default, or miscarriage
of another.” (Art. 1403, Civil Code). Hence, an oral guaranty
is unenforceable. (Nolasco Brothers, Inc. v. Villarino, CA-GR
17616-R, Aug. 8, 1958).
(NOTE: Even if oral, however, the defense may be
WAIVED by the guarantor, since it is well known that the
defense of the Statute of Frauds is waivable.)

1028
CIVIL CODE OF THE PHILIPPINES Art. 2055

Be it noted therefore that the guaranty must be EXPRESS

(it is not presumed).

PNB v. CA, Luzon Surety Co., et al.

GR 33174, Jul. 4, 1991
FACTS: On Aug. 6, 1955, Estanislao Depusoy, doing
business under the name of E.E. Depusoy Construction and
the Director of Public Works, entered into a building con-
tract for the construction of the GSIS building, Depusoy to
furnish all materials, labor, plans and supplies needed in
the construction. Depusoy applied for credit accommodation
with the PNB. This was approved subject to the conditions
that he would assign all payments to be received from the
Bureau of Public Works of the GSIS to the Bank, furnish a
surety bond, and the surety to deposit P10,000 to the PNB.
The total accommodations granted to Depusoy was P100,000.
This was later extended by another P10,000 and P25,000, but
in no case should the loan exceed P100,000. In compliance
with the conditions, Depusoy executed a Deed of Assignment
of all money to be received by him from the GSIS. Luzon
thereafter executed two surety bonds, one for P40,000 and the
other for P60,000. Under the credit accommodation, Depusoy
received on Jan. 14, 1957, P50,000 from the bank which he
promised to pay in installments on the dates therein indi-
cated. On Jan. 17, 1957, he received another P50,000 under
the same conditions. Under the arrangement, all payments
made by GSIS were payable to the PNB. The checks, however,
were not sent directly to the PNB. Depusoy received them.
In turn, he delivered the checks to the bank. PNB then ap-
plied the money thus received, first, to the checks, and the
balance to the current account of Depusoy with the bank. A
total of P1,309,461 was paid by the GSIS to the bank for the
account of Depusoy. Of this amount P246,408 was paid for
the importation of construction materials and P1,063,408 was
received by the Loans and Discounts Department of the Bank.
Depusoy defaulted in his building contract with the Public
Works Bureau. In 1957, the Bureau rescinded its contract
with Depusoy. No further amounts were thereafter paid by the
GSIS to the bank. Depusoy’s loan remained unpaid, including
interest, amounting to P100,000. The PNB then sued Depusoy

1029
Art. 2055 CIVIL CODE OF THE PHILIPPINES

and Luzon. The trial court dismissed the case against Luzon,
saying that the surety bonds it issued guaranteed only the
faithful performance of the deed of assignments, and nothing
else. That the bonds were extended by letters did not change
their conditions. The Court of Appeals affirmed the trial court’s
decision with the modification that Depusoy shall pay 10%
interest on the amount of the judgment.
HELD: The Supreme Court affirmed the Court of Appeals’
decision and explained that the 10% interest should be consid-
ered as and for attorney’s fees. The Court held that the bonds
executed by Luzon were to guarantee the faithful performance
of Depusoy of his obligation under the Deed of Assignment
and not to guarantee the payment of the loans or the debt of
Depusoy to the bank to the extent of P100,000. The language
of the bonds is clear. It leaves no room for interpretation. Even
if there had been any doubt on the terms and conditions of
the surety agreement, the doubt should be resolved in favor
of the surety. As concretely put in Art. 2055 of the Civil Code,
a guaranty is not presumed, it must be expressed and cannot
extend to more than what is stipulated therein.

(2) Kinds of Guaranty According to Period or Condition

(a) with a term (express or implied);
(b) with a condition (suspensive or resolutory);
(c) simple or indefinite (no period specified; no amount fixed)
— here all the consequences provided for in the second
paragraph of Art. 2055 are enforceable.

National Marketing Corporation v.

Gabino Marquez, et al.
L-25553, Jan. 31, 1969

FACTS: Gabino Marquez owed the Namarco a cer-

tain amount of money for the purchase of a tractor and
a rice thresher. The Plaridel Surety and Insurance Co.
signed the contract as surety, binding itself solidarily with
Marquez and waiving any prior demand on the debtor.
When Marquez failed to pay, Namarco sued the surety

1030
CIVIL CODE OF THE PHILIPPINES Art. 2055

more than 10 years after the maturity date, although

from time to time written extrajudicial demands for pay-
ments had been made. The surety was asked to pay not
only the original amount but also the interests thereon.
Previous to the suit against the surety, the surety had
not been informed of the demand against Marquez. The
surety thus alleges three defenses, namely:
(a) that the action has prescribed,
(b) that it had not been informed of the demand against
Marquez, and
(c) that assuming it was liable for the principal debt, there
should not be any liability for the interest.
HELD:
(a) The action has not prescribed because under Art. 1115
of the Civil Code, one way of interrupting the prescrip-
tion of actions is by a written extrajudicial demand by
the creditor.
(b) The surety had waived in the contract any notification of
demand on the debtor, and even if it had not so waived,
still it had bound itself solidarily.
(c) The surety is liable not only for the principal debt but
also for the interest because under Art. 2055, par. 2 of
the Civil Code — if the guaranty be simple or indefinite,
it shall comprise not only the principal obligation but
also all its accessories, including judicial costs, provided
with respect to the latter, that the guarantor shall only
be liable for those costs incurred after he had been ju-
dicially required to pay.

(3) Strictly Construed

A guaranty is strictly construed against the creditor and
in favor of the guarantor or surety.
Examples:
(a) If the surety makes himself liable only if the creditor
informs him of the debtor’s default within a certain

1031
Art. 2056 CIVIL CODE OF THE PHILIPPINES

period, and notification is not done, the surety is not

liable. (Santos v. Mejia, 94 Phil. 211).
(b) If a surety guarantees that the debtor will “render an
accounting,” and the debtor really does so, but does not
deliver the money supposed to be given to the creditor,
the surety is not liable for he did not guarantee the de-
livery of the money. (Uy Aloo v. Cho Jan Ling, 27 Phil.
247).
(c) If a surety guarantees a “delivery of a firearm upon de-
mand,” he does not necessarily gurantee that the firearm
will be produced for inspection. (Gov’t. v. Herrero, 38
Phil. 410).
(d) A surety is liable only for the obligations of the debtor
stipulated upon, not for prior obligations, unless this
retroactive effect had been clearly agreed upon. (Bank
of the Phil. Islands v. Forester, 49 Phil. 843).
(e) If a surety binds itself only for a limited period, it can not
be held liable generally beyond said time limit. (Santos
v. Media, 94 Phil. 211).
(f) A guarantor is not liable for past defaults of the debtor.
Reason: a guaranty has only a prospective, not retroactive
effect, unless the contract clearly indicates a contrary
intent. (Bueno contra Ambrosio, 87 Phil. 225). Thus,
also, a guaranty generally secures only the debts con-
tracted AFTER the guaranty takes effect. (El Vencedor
v. Canlas, 44 Phil. 699). This is a consequence of the
statutory directive that a guaranty is not presumed, but
must be express and cannot extend to more than what
is stipulated. (See Traders Insurance & Surety Co., Inc.
v. Dy Eng Giok, L-9073, Nov. 17, 1958).

Art. 2056. One who is obliged to furnish a guarantor

shall present a person who possesses integrity, capacity
to bind himself, and sufficient property to answer for the
obligation which he guarantees. The guarantor shall be
subject to the jurisdiction of the court of the place where
this obligation is to be complied with.

1032
CIVIL CODE OF THE PHILIPPINES Art. 2057

COMMENT:
(1) Qualification of Guarantor
(a) integrity (at time of perfection);
(b) capacity to bind (at time of perfection);
(c) sufficient property (at time of perfection; excluding his
own properties that may be out of reach, or which are
under litigation).
(NOTE: The creditor can naturally WAIVE the
requirements, for right in general is waivable.)

(2) Proper Court

The court of the place of performance (loci solutionis)
has jurisdiction over the guarantor.

Art. 2057. If the guarantor should be convicted in first

instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case
is excepted where the creditor has required and stipulated
that a specified person should be the guarantor.

COMMENT:
(1) Effect of Conviction of a Crime Involving Dishonesty
(a) The creditor may demand a substitute guarantor
(b) Exception — when the guarantor had been selected by
the creditor
(c) The law says ‘‘first instance” not “court of first in-
stance.”

(2) Subsequent Loss of Integrity or Insolvency

Subsequent loss of integrity or insolvency generally does
not end the guaranty; creditor is given right to demand SUB-
STITUTION OF GUARANTOR. This right may be waived.
(See Estate of Hemady v. Luzon Surety & Ins. Co., 53 O.G.
2786).

1033
Art. 2057 CIVIL CODE OF THE PHILIPPINES

(3) Liability of Heirs if the Guarantor Dies

If a guarantor dies, his heirs are still liable, to the
extent of the value of the inheritance because the obligation
is not purely personal, and is therefore transmissible. It is
not personal because all the guarantor is interested in is
the recovery of the money, regardless of its giver. (Estate of
Hemady v. Luzon Surety & Ins. Co., 53 O.G. 2786).
[NOTE: An action against a guarantor who dies during
pendency of the same, being one for the recovery of money
or debt, should be dismissed, but may be instituted in the
proceeding for the settlement of his estate. (Villegas v. Za-
panta and Zorilla, L-11056, Dec. 26, 1958). Even if the ac-
tion had not yet been commenced, same may be filed in the
proceedings, as a claim against the estate. (Estate of Hemady
v. Luzon Surety & Ins. Co., 53 O.G. 2786).]

1034
CIVIL CODE OF THE PHILIPPINES

Chapter 2

EFFECTS OF GUARANTY

Section 1
EFFECTS OF GUARANTY BETWEEN THE
GUARANTOR AND THE CREDITOR

INTRODUCTORY COMMENT:
In general, the effects between the guarantor and the
creditor are the following:
(1) The guarantor is entitled to the benefit of excussion
(benefit of exhaustion) of the debtor’s properties except
in the cases mentioned under Art. 2059, and provided
that the guarantor follows Art. 2060.
(2) A compromise between the creditor and the principal
debtor benefits but does not prejudice the guarantor.
(Art. 2063, Civil Code).
(3) If there should be several guarantors, they are in general
entitled to the benefit of division (pro-rata liability). (See
Art. 2065, Civil Code).

Art. 2058. The guarantor cannot be compelled to pay

the creditor unless the latter has exhausted all the property
of the debtor, and has resorted to all the legal remedies
against the debtor.

COMMENT:
(1) Benefit of Excussion
Generally, a guarantor has the right to demand exhaus-
tion of the debtor’s assets (BENEFIT OF EXCUSSION OR
EXHAUSTION OR SIMPLY EXCUSSION) provided:

1035
Art. 2058 CIVIL CODE OF THE PHILIPPINES

(a) he sets it up as defense before judgment is rendered

against himself (guarantor) (See Saavedra v. Price, 68
Phil. 699);
(b) he has not pledged nor mortgaged his own property to
the creditor for the satisfaction of the principal obligation
for clearly, a mortgagor is not entitled to the benefit of
exhaustion (Southern Motors, Inc. v. Barbosa, 99 Phil.
263);
(c) he does not fall in the cases enumerated in Art. 2059
(See Jaucian v. Querol, 38 Phil. 707);
(d) he complies with Art. 2060. (See Garcia v. Lianco, C.A.,
50 O.G. 1145).

(2) Bar Question

What do you understand by excussion?
ANS.: By excussion is meant the right of the guarantor
to have all the properties of the debtor and all legal remedies
against him first exhausted before he can be compelled to pay
the creditor. (See Art. 2058).
[NOTE: A mortgagor is NOT entitled to the benefit of
excussion of the property of the principal debtor. (Saavedra
v. Price, 68 Phil. 699 and Southern Motors, Inc. v. Barbosa,
99 Phil. 263).]

(3) Duty of Creditor

If a creditor wants to hold the guarantor liable, he (the
creditor) must do the following:
(a) exhaust all the property of the debtor (Art. 2058) unless
the guarantor is not entitled to such benefit under Art.
2059;
(b) resort to all the legal remedies against the debtor (Art.
2058) (This includes SUIT against the debtor.) (See Wise
and Co., Inc. v. Tanglao, 63 Phil. 372);
(c) prove that the debtor is still unable to pay (See Wise
and Co., Inc. v. Tanglao, 63 Phil. 372);

1036
CIVIL CODE OF THE PHILIPPINES Art. 2059

[NOTE: Just because the debtor has been declared

insolvent in insolvency proceeding this does not mean
that the debtor cannot pay, for part of the debtor’s assets
may still be available to the creditor. One good way of
proving inability to pay is to prove an UNSATISFIED
writ of execution that has been returned. (See Machetti
v. Hospicio de San Jose, 43 Phil. 297).]
(d) notify the guarantor of the debtor’s inability to pay, oth-
erwise if the guarantor is prejudiced by lack of notice,
he cannot be made to pay, unless of course there is a
WAIVER on the part of the guarantor. (Roces Hermanos,
Inc. v. China Insurance and Surety Co., Inc., Aug. 9,
1941 issue of the Official Gazette, p. 1257).

(4) Query
Suppose the guarantor has already been sued, will a
writ of execution be rendered against him?
ANS.: Not necessarily, for it is essential to sue first
the debtor and exhaust his assets. (Southern Motors, Inc. v.
Barbosa, 99 Phil. 263).

Art. 2059. This excussion shall not take place:

(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within
the Philippines unless he has left a manager or representa-
tive;
(5) If it may be presumed that an execution on the
property of the principal debtor would not result in the
satisfaction of the obligation.

COMMENT:
(1) When Guarantor Is Not Entitled to Benefit of Excus-
sion
Keyword for the instances when the guarantor is not
entitled to the BENEFIT OF EXCUSSION (BAR).

1037
Art. 2060 CIVIL CODE OF THE PHILIPPINES

R — renounce
U — useless because execution will not be satisfied
S — solidarily bound
I — insolvency of debtor
A — absconded, etc.

(2) Additional Instances When Guarantor Is NOT Entitled

to the Benefit of Excussion
(a) if the guaranty is in a judicial bond (Art. 2084)
(b) if Art. 2060 is not complied with
(c) if the principal debt is a natural, voidable, or unenforce-
able obligation. (See Art. 2062, where there can still be
guaranty but generally the principal debtor would not
be liable.)

(3) Re Paragraph 4 of the Article (Absconding Debtor)

(a) “He” refers to the principal debtor.
(b) If there are still assets in the Philippines belonging to
the absconding debtor, said assets may be attached. (Rule
57, Revised Rules of Court).

Art. 2060. In order that the guarantor may make use

of the benefit of excussion, he must set it up against the
creditor upon the latter’s demand for payment from him,
and point out to the creditor available property of the
debtor within Philippine territory, sufficient to cover the
amount of the debt.

COMMENT:
Requisites Before Guarantor Can Make Use of Excus-
sion
(a) Guarantor must set it up when the creditor demands
payment.
[NOTE: The demand can be made only AFTER a
judgment has been rendered against the principal debtor.

1038
CIVIL CODE OF THE PHILIPPINES Arts. 2061-2062

Just because the guarantor was sued at the same time

as the debtor this does not mean that the creditor has
already made the demand on the guarantor. (Vda. de
Syquia v. Jacinto, 60 Phil. 861).]
(b) Guarantor must point out AVAILABLE (not things in
litigation or encumbered ones) property of debtor WITHIN
the Philippines. (Art. 2060). (Ruling Case Law, 3045-
3046).

Art. 2061. The guarantor having fulfilled all the condi-

tions required in the preceding article, the creditor who is
negligent in exhausting the property pointed out shall suffer
the loss, to the extent of said property, for the insolvency
of the debtor resulting from such negligence.

COMMENT:
Effect of Creditor’s Negligence
The Article says that the negligent creditor suffers the
loss to the extent of the value of the property pointed out by
the guarantor but not exhausted by the creditor.

Art. 2062. In every action by the creditor, which must

be against the principal debtor alone, except in the cases
mentioned in Article 2059, the former shall ask the court
to notify the guarantor of the action. The guarantor may
appear so that he may, if he so desire, set up such defenses
as are granted him by law. The benefit of excussion men-
tioned in Article 2058 shall always be unimpaired, even if
judgment should be rendered against the principal debtor
and the guarantor in case of appearance by the latter.

COMMENT:
(1) Generally Suit Must Be Against Principal Debtor
Alone
As expressly worded in the Article, the creditor must
generally sue ONLY the principal debtor (except, of course,
when the guarantor is not entitled to the benefit of excussion).

1039
Art. 2063 CIVIL CODE OF THE PHILIPPINES

The Article applies, however, only to cases accruing after the

effectivity of the new Civil Code. Under the old law, suit could
be filed against BOTH, but even then, the judgment must
specify that the guarantor’s liability was only SUBSIDIARY
generally. (De Leon v. Ching Leng, L-7122, Jan. 29, 1959).
It is clear therefore that no writ of execution could is-
sue against the guarantor’s properties, unless the principal
debtor was unable to pay. (Ibid.; see Arroyo v. Jungsay, 34
Phil. 589).

(2) Suit by the Creditor to Recover the Debt

While the guarantor MUST be notified he does NOT
have to appear for the law uses the phrase “may appear.”

(3) Reason for Notifying Guarantor

To enable him to put up defense he may desire to offer.
(See Garcia v. Lianco, C.A., 50 O.G. 1145).

(4) Obligatory Nature of the Notification

The notification of the guarantor in this article is OBLIGA-
TORY. (See Garcia v. Lianco, et al., C.A., 50 O.G. 1145).

Art. 2063. A compromise between the creditor and

the principal debtor benefits the guarantor but does not
prejudice him. That which is entered into between the
guarantor and the creditor benefits but does not prejudice
the principal debtor.

COMMENT:
(1) Effect of Compromise Between Creditor and Principal
Debtor
The guarantor BENEFITS, but is NOT PREJUDICED.

(2) Effect of Compromise Between the Guarantor and the

Creditor
The debtor BENEFITS, but is NOT PREJUDICED.

1040
CIVIL CODE OF THE PHILIPPINES Arts. 2064-2066

Art. 2064. The guarantor of a guarantor shall enjoy the

benefit of excussion, both with respect to the guarantor and
to the principal debtor.

COMMENT:
Sub-Guarantor Enjoys Excussion
The Article explains itself.

Art. 2065. Should there be several guarantors of only

one debtor and for the same debt, the obligation to answer
for the same is divided among all. The creditor cannot
claim from the guarantors except the shares which they
are respectively bound to pay, unless solidarity has been
expressly stipulated.
The benefit of division against the co-guarantors ceases
in the same cases and for the same reasons as the benefit
of excussion against the principal debtor.

COMMENT:
(1) Benefit of Division
(a) This Article speaks of the BENEFIT OF DIVISION.
(b) Example:
If 5 guarantors are liable for a total of P1,000,000,
each will be held responsible for only P200,000 provided
the benefit of division exists.

(2) When the Benefit of Division Ceases

The same instances when the benefit of excussion ceases.

Section 2
EFFECTS OF GUARANTY BETWEEN THE
DEBTOR AND THE GUARANTOR

Art. 2066. The guarantor who pays for a debtor must

be indemnified by the latter.

1041
Art. 2067 CIVIL CODE OF THE PHILIPPINES

The indemnity comprises:

(1) The total amount of the debt;
(2) The legal interests thereon from the time the pay-
ment was made known to the debtor, even though it did
not earn interest for the creditor;
(3) The expenses incurred by the guarantor after hav-
ing notified the debtor that payment had been demanded
of him;
(4) Damages, if they are due.

COMMENT:
(1) Indemnity to Be Paid By the Debtor for Whom the
Guarantor Has Paid
Keyword — TIED:
T — total amount of debt
I — interest (legal)
E — expenses
D — damages, if due

(2) Guaranty as a Strict Indemnity

Since a guaranty is a strict indemnity, he can recover
only what was paid plus losses and damages, including costs
and interest. (Tagawa v. Aldanese and Union Guarantee Co.,
43 Phil. 852; Saenz v. Yap Chuan, 16 Phil. 76 and Perez v.
Barcia, 52 Phil. 197).

Art. 2067. The guarantor who pays is subrogated by

virtue thereof to all the rights which the creditor had
against the debtor.
If the guarantor has compromised with the creditor,
he cannot demand of the debtor more than what he has
really paid.

1042
CIVIL CODE OF THE PHILIPPINES Art. 2068

COMMENT:
(1) Right of Guarantor to Subrogation
(a) Subrogation transfers to the person subrogated, the credit
with all the rights thereto appertaining, either against
the debtor or against third persons, be they guarantors
or possessors of mortgages, subject to stipulation in a
conventional subrogation. (Art. 1212).
(b) This Article deals with the benefit of subrogation. This
results by operation of law from the act of payment and
there is no necessity for the guarantor to ask the creditor
to expressly assign his rights of action. (Manresa). The
right is not contractual; it is based on natural justice.
(Somes v. Molina, 9 Phil. 653).
(c) Purpose: To enable the guarantor to enforce the indemnity
given in the preceding article.
(d) It is believed that Art. 2067 may be availed of only by a
guarantor who became such with the knowledge and con-
sent of the principal debtor. (See Arts. 1237 and 2050). Now
then, as long as consent to the guaranty was obtained, the
right of subrogation is absolute even if the debtor refuses
the subrogation. (See Somes v. Molina, 9 Phil. 653).

Urrutia and Co. v. Moreno and Reyes

28 Phil. 260
FACTS: The creditor sued both the principal debtor
and the surety. The property of the principal debtor was
sold under execution, and the surety paid the judgment
shortly afterwards. The surety now wanted to redeem
the properties of the debtor which had been sold. The
surety alleged the right of subrogation.
HELD: The surety did not have the right to redeem.
While he was subrogated to the rights of the creditor,
he was not subrogated to the rights of the debtor.

Art. 2068. If the guarantor should pay without notify-

ing the debtor, the latter may enforce against him all the
defenses which he could have set up against the creditor
at the time the payment was made.

1043
Arts. 2069-2070 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Effect if Guarantor Pays Without Notifying Debtor
The effect is set forth in the Article.

(2) Reason for the Article

The liability of the guarantor being merely subsidiary,
he should really wait till after the debtor has tried to comply.
The guarantor should not, thru his own fault or negligence, be
allowed to jeopardize the rights of the debtor. By paying the
debt without first notifying the debtor, the guarantor deprives
the debtor of the opportunity to set up defenses against the
creditor. (Manresa).

Art. 2069. If the debt was for a period and the guarantor
paid it before it became due, he cannot demand reimburse-
ment of the debtor until the expiration of the period unless
the payment has been ratified by the debtor.

COMMENT:
(1) Payment By Guarantor Before Debt Becomes Due
The effect is indicated in this Article.

(2) Reason for the Article

There was no need for the advance payment. (Manresa).

(3) Ratification By the Debtor

Ratification by the debtor may be express or implied.

Art. 2070. If the guarantor has paid without notifying

the debtor, and the latter not being aware of the payment,
repeats the payment, the former has no remedy whatever
against the debtor, but only against the creditor. Neverthe-
less, in case of a gratuitous guaranty, if the guarantor was
prevented by a fortuitous event from advising the debtor of
the payment, and the creditor becomes insolvent, the debtor
shall reimburse the guarantor for the amount paid.

1044
CIVIL CODE OF THE PHILIPPINES Art. 2070

COMMENT:
(1) Payment By Both the Guarantor and the Debtor
Examples:
(a) A owes B P100,000 with C as guarantor. C paid the
P100,000 to B when the debt fell due, but C did this
without first notifying A. Not being aware of the payment
by C, A repeated the payment. Can C recover from A?
ANS.: No. C cannot recover from A. C has no remedy
whatever against A, the debtor. C’s only remedy is to
recover from B, the creditor. (1st sentence, Art. 2070).
(b) Suppose in example (a), the guaranty was gratuitous,
and suppose the only reason C was not able to notify A
was because of a fortuitous event, what are C’s rights?
ANS.: C must still recover from B. But if B, the
creditor is insolvent, then A, the debtor, shall reimburse
C, the guarantor, for the amount paid. This is therefore a
different case from that presented in example (a), because
in said example, even if B, the creditor, is insolvent A
does not have to reimburse C, the guarantor, because
under the facts of the case, C is clearly at fault for hav-
ing no justifiable reason for not advising the debtor of
the payment.

(2) Gratuitous Guaranty

Note that the second sentence of Art. 2070 is applicable
only in case of a gratuitous guaranty. It is clear that it should
not be applied if the guaranty is onerous or for a compensation.
The law favors a gratuitous guarantor because he receives
nothing extra for his efforts and obligations, and it would be
rather unfair if under the premises given, he cannot recover
from the principal debtor, who should not indeed unjustly
enrich himself at the expense of another.

(3) Comment of Manresa

The object of Art. 2070 is to prevent the guarantor from
impairing the rights of the principal debtor. The latter should,

1045
Art. 2071 CIVIL CODE OF THE PHILIPPINES

therefore, not be denied the right to pay his creditor, if he

has not been previously notified of the payment made by the
guarantor, and consequently, payment by the debtor under
such circumstances should produce the same effect as if no
payment had been made by the guarantor. As to the liability
of the creditor to return to the guarantor what that latter
has paid, no sound principle of law can be invoked against
it. No one should be allowed to enrich himself unduly to the
prejudice of another. (Manresa, vol. 12).

(4) Applicable Only When Debtor Had Not Previously Au-

thorized the Guarantor to Pay
It is believed that the preceding comments (Nos. 1 to
3) on the article apply only when the debtor had not previ-
ously authorized the guarantor to pay. For in such a case,
the debtor must now inquire from the guarantor whether or
not the latter has already paid.

Art. 2071. The guarantor, even before having paid, may

proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him
from the guaranty within a specified period, and this period
has expired;
(4) When the debt has become demandable, by reason
of the expiration of the period for payment;
(5) After the lapse of ten years, when the principal
obligation has no fixed period for its maturity, unless it be
of such nature that it cannot be extinguished except within
a period longer than ten years;
(6) If there are reasonable grounds to fear that the
principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of
becoming insolvent.

1046
CIVIL CODE OF THE PHILIPPINES Art. 2071

In all these cases, the action of the guarantor is to

obtain release from the guaranty, or to demand a security
that shall protect him from any proceedings by the creditor
and from the danger of insolvency of the debtor.

COMMENT:

(1) Rights of Guarantor Before Payment

It should be noted that Art. 2071 differs from Art. 2066.

Art. 2071 refers to the rights of the guarantor before payment,
whereas Art. 2066 refers to his rights after payment. Art.
2071 does not give the guarantor the right to obtain a money
judgment in his favor, for the simple reason that he has not
yet paid, whereas in Art. 2066, a money judgment would be
proper since in this case, there has already been a payment.
Art. 2071 is of the nature of a preliminary remedy, whereas
Art. 2066 is a substantive right. Art. 2066 gives a right of
action, which without the provisions of the other might be
worthless. (Kuenzle & Streiff v. Tan Sunco, 16 Phil. 670 and
Perez v. Baria, 52 Phil. 197). In Art. 2071, the guarantor has
either of two rights:
(a) to obtain release from the guaranty;
(b) to demand security.

(2) Problems
(a) A borrowed P900,000 from B. C is the guarantor. The
debt has already fallen due, for the term has already
expired. Is C allowed to bring an action against A even
before C had paid B?
ANS.: Yes. (Art. 2071, par. 4). The purpose is to
obtain release from the guaranty, or to demand a security
that shall protect him from any proceedings by the credi-
tor and from the danger of insolvency of the debtor. (Art.
2071, 1st par.). The purpose is certainly not to recover
money, since the guarantor has not yet paid. (Kuenzle
and Streiff v. Tan Sunco, 16 Phil. 670). If a trial judge
should render a money judgment for the guarantor in

1047
Art. 2071 CIVIL CODE OF THE PHILIPPINES

a case like this, it is clear that such a judgment would

be erroneous.
There would be no reason for it. And, furthermore,
such a money judgment is not among the remedies enu-
merated in this provision of the law. (Perez v. Barcia,
62 Phil. 197).
(b) In problem (a), suppose the guarantor wins in this action,
and suppose, for example, he obtains a security from the
principal debtor, would this be proper?
ANS.: Yes, this would be proper for such a remedy
is one of those enumerated. And, therefore, a judgment
on this point is proper, BUT he ought not to be allowed
to realize on said judgment to the point of actual collec-
tion of the same until he (the guarantor) has satisfied
or caused to be satisfied the obligation the payment of
which he assumed. Otherwise, a great opportunity for
collusion and improper practices between the guarantor
and the principal debtor would be offered which might
result in injury and prejudice to the creditor who holds
the claim against them. (Kuenzle and Streiff v. Tan
Sunco, supra).

(3) How Guarantor or Surety Can Enforce the Rights Under

the Article
It being evident that the purpose of this article is to give
the guarantor or surety a remedy in anticipation of the payment
of the debt, which debt being one he could be called upon to
pay at any time, it remains only to say, in this connection,
that the only procedure known under our present practice to
enforce that right is by action. (Kuenzle and Streiff v. Tan
Sunco, supra). Of course, this action may be in the form of a
cross-claim against his co-defendant, the debtor. (Pan Asiatic
Commercial Co., Inc. v. World Wide Insurance & Surety Co.,
Inc., CA-GR 12083-R, Jun. 30, 1956).

(4) Problem
The creditor failed to make a demand upon the principal
debtor although the debt was already due. The guarantor,
afraid that the principal debtor might sooner or later become

1048
CIVIL CODE OF THE PHILIPPINES Art. 2071

insolvent, brought an action against the creditor to compel

said creditor to make the demand upon the principal debtor.
Will the action prosper?
ANS.: No, the action will not prosper because the remedy
of the fearful guarantor should be against the principal debtor
in accordance with Art. 2071. (Banco Español v. Donaldson
Sim & Co., 6 Phil. 418).

Mercantile Insurance Co., Inc. v. Felipe

Ysmael, Jr., and Co., Inc.
L-43862, Jan. 13, 1989

The principal debtors, defendants-appellants herein, are

simultaneously the same persons who executed the Indem-
nity Agreement. The position occupied by them is that of a
principal debtor and indemnitor at the same time, and their
liability being joint and several with the plaintiff-appellee’s,
the Philippine National Bank may proceed against either for
fulfillment of the obligation as covered by the surety bonds.
There is, therefore, no principle of guaranty involved and,
therefore, the provisions of Art. 2071 does not apply. Other-
wise stated, there is more need for the plaintiff-appellee to
exhaust all the properties of the principal debtor before it
may proceed against defendants-appellants.
The trial court did not err in ordering defendants-ap-
pellants to pay jointly and severally the plaintiff the sum of
P100,000 plus 15% as attorney’s fees.

(5) The Nature of the Remedies

The remedies provided for under Art. 2071 are alterna-
tive remedies in favor of the guarantor at his election and
the guarantor who brings an action under this article must
choose the remedy and apply for it specifically. (Tuason v.
Machuca, 46 Phil. 561).

(6) Applicability of the Article to Sureties

Art. 2071, despite its use of the term “guarantor” can
apply also to a “surety.” (Atok Finance Corp. v. CA, 41 SCAD
450 [1993]). The reference in Art. 2047 to the provisions of

1049
Art. 2071 CIVIL CODE OF THE PHILIPPINES

Sec. 4, Ch. 3, Title I, Book IV of the new Civil Code, on

solidary obligations, does not mean that suretyship, which
is a solidary obligation, is withdrawn from the applicable
provisions governing guaranty. (Manila Surety and Fidelity
Co., Inc. v. Batu Construction & Co., L-9353, May 21, 1967,
53 O.G. 8836).

(7) When Surety’s Action Is Not Premature

If an indemnity bond executed by a debtor in favor of
the surety provides that “said indemnity shall be paid to the
company as soon as it becomes liable for the payment of any
amount under the bond, whether or not it shall have paid such
sum or sums of money, or any part thereof,’’ it cannot be said
that the surety’s action against the debtor is premature just
because the debtor has not yet been made actually liable in
view of a pending case. The fact that the creditor has actually
filed an action in court demanding payment from the surety
under the bond it has posted is more than enough to entitle
the surety to enforce the indemnity agreement executed by
the debtor. (Manila Surety and Fidelity Co., Inc. v. Cruz, L-
10414, Apr. 18, 1958 and Alto Surety and Ins. Co. v. Aguilar,
L-5626, Mar. 16, 1954).

The Cosmopolitan Insurance Co., Inc. v.

Angel B. Reyes
L-20199, Nov. 23, 1965
FACTS: Angel B. Reyes, who owed the government some
money from the payment of his income tax entered into an
agreement with the Cosmopolitan Insurance Co., Inc., whereby
the latter was to file a bond in favor of the Commissioner
of Internal Revenue to secure payment of the tax by Reyes.
The Company then filed the bond. In consideration of the
bond, Reyes signed an indemnity agreement whereby he
bound himself to indemnify the Company, upon its demand,
even BEFORE the surety shall have paid the Government.
Because of Reyes’ failure to pay the tax, the Company became
liable on its bond. Prior to payment to the Government, the
Company sought indemnity from Reyes. Reyes countered that
the provision in the contract requiring him to pay even before
the Company has paid the tax is void because it is contrary
to law and public policy.

1050
CIVIL CODE OF THE PHILIPPINES Arts. 2072-2073

HELD: The agreement is valid and does not in any way

militate against the public good; neither is it contrary to the
policy of the law. Therefore, in accordance with the indemnity
agreement, the surety may demand from Reyes, even before
paying to the Commissioner of Internal Revenue. (See also
Security Bank v. Globe Assurance, 58 O.G. 3708, Apr. 30,
1962).

Art. 2072. If one, at the request of another, becomes a

guarantor for the debt of a third person who is not present,
the guarantor who satisfies the debt may sue either the
person so requesting or the debtor for reimbursement.

COMMENT:

Guarantor Who Becomes One At the Request of an

Absent Debtor
Note that the guarantor who pays can sue for reimburse-
ment:
(a) either the person who made the request, or
(b) the debtor.

Section 3
EFFECTS OF GUARANTY AS BETWEEN
CO-GUARANTORS

Art. 2073. When there are two or more guarantors of

the same debtor and for the same debt, the one among them
who has paid may demand of each of the others the share
which is proportionally owing from him.
If any of the guarantors should be insolvent, his share
shall be borne by the others, including the payer, in the
same proportion.
The provisions of this article shall not be applicable,
unless the payment has been made in virtue of a judicial
demand or unless the principal debtor is insolvent.

1051
Art. 2073 CIVIL CODE OF THE PHILIPPINES

COMMENT:

(1) Right of Guarantor Who Pays

This Article is applicable only when there has been pay-
ment. If there has been no payment by way of the guarantors,
this Article cannot be applied. Furthermore, this payment
must have been made:
(a) in virtue of a judicial demand;
(b) or because the principal debtor is insolvent.

(2) Example of Par. 1

A, B, and C are D’s guarantors. D was insolvent, and
A had to pay the whole debt. Later, A can demand from
B and C 1/3 of the debt from each. This is so because A’s
share is supposed to be also 1/3. Of course, each of them can
later demand proportional reimbursement from the principal
debtor.

(3) Example of Par. 2

A, B, and C are D’s guarantors of a debt of P300,000
in favor of E. Since D was insolvent, A paid P300,000 to E.
Under par. 1, he can therefore demand P100,000 each from
B and C. But B is insolvent. How much can A demand from
C?
ANS.: P150,000. A cannot demand the extra P100,000
(share of B) from C because in that way, C would have a
greater burden. The law provides that the insolvent guar-
antor’s share (B) must be borne by the others (including the
payer A) proportionally.

(4) Distinguished from Benefit of Division

This Article should not be confused with the article giv-
ing as a rule to several guarantors the benefit of division (Art.
2065) for in said article, there has been no payment as yet.
Moreover, in Art. 2073, the payment must have been made

1052
CIVIL CODE OF THE PHILIPPINES Arts. 2074-2075

because of judicial proceedings or because the principal debtor

was insolvent. (Cacho v. Valles, 45 Phil. 107).

Art. 2074. In the case of the preceding article, the co-

guarantors may set up against the one who paid, the same
defenses which would have pertained to the principal debtor
against the creditor, and which are not purely personal to
the debtor.

COMMENT:
Right of Co-Guarantors Against the Guarantors Who
Paid
The Article gives the co-guarantors the SAME defenses
which would have pertained to the principal debtor. EXCEP-
TION: defenses purely personal to the debtor (like fraud or
force).

Art. 2075. A sub-guarantor, in case of the insolvency of

the guarantor for whom he bound himself, is responsible to
the co-guarantors in the same terms as the guarantor.

COMMENT:
Liability of Sub-Guarantors to Co-Guarantors
The Article is self-explanatory.
Note that the Article applies if the guarantor is INSOL-
VENT.

1053
 CIVIL CODE OF THE PHILIPPINES
Art. 2060

Chapter 3

EXTINGUISHMENT OF GUARANTY

Art. 2076. The obligation of the guarantor is extin-

guished at the same time as that of the debtor, and for the
same causes as all other obligations.

COMMENT:
(1) Two Causes for Extinguishment of the Guaranty
(a) direct (when the guaranty itself is extinguished, inde-
pendently of the principal obligation)
(b) indirect (when the principal obligation ends, the accessory
obligation of guaranty naturally ends). (Manresa). (See
Shannon v. Phil. Lumber & Trans. Co., 61 Phil. 876).

(2) Effect of Novation

(a) If a contract is novated without the guarantor’s consent,
the guaranty ends. (Barretto v. Albo, 62 Phil. 593; Nat’l.
Bank v. Veraguth, 50 Phil. 253).
(b) Therefore, a novation where the debtor is substituted
or where the credit is increased, releases the guarantor
who did not consent thereto. (Barretto v. Albo, 62 Phil.
593; Nat. Bank v. Veraguth, 50 Phil. 253).
[NOTE: Consent, however, on the part of the guar-
antor may be given expressly or implicitly before or after
the novation. (NARIC v. Guillioso, et al., {C.A.} 53 O.G.
4151).]
[NOTE: If the interest rates are increased without
the guarantor’s consent, he is not liable for the increase,
but is liable still for the principal obligation and the

1054
CIVIL CODE OF THE PHILIPPINES Arts. 2077-2078

original rate of interest. (Bank of the P.I. v. Albaladejo

y Cia, 53 Phil. 141).]

Capitol Insurance v. Ronquillo Trading

GR 36488, Jul. 25, 1983

If a surety contract expires, the principal is no

longer bound to pay the premiums. This is true even
if there is a pending lawsuit involving a liability that
arose while the surety agreement was still subsisting.

Art. 2077. If the creditor voluntarily accepts immovable

or other property in payment of the debt, even if he should
afterwards lose the same through eviction, the guarantor
is released.

COMMENT:
Effect of Dacion En Pago
(a) Note that the dacion en pago here refers to both IM-
MOVABLE or OTHER (personal) PROPERTY.
(b) Eviction revives the principal obligation, but NOT the
guaranty, for the creditor here took the risk.

Art. 2078. A release made by the creditor in favor of

one of the guarantors, without the consent of the others,
benefits all to the extent of the share of the guarantor to
whom it has been granted.

COMMENT:
Release by Creditor in Favor of One of the Guaran-
tors
Example: A, B, C, and D are co-guarantors for P1,000,000
A is released with the consent of B, C, and D. B, C, and D will
each be responsible for P333,33 1/3. If A is released without
the consent of B, C, and D, then B, C, and D will each be
responsible for only P250,000. This is the clear intention of
the law. There is an opinion which says that the remaining

1055
Art. 2079 CIVIL CODE OF THE PHILIPPINES

P750,000 should be divided among the 4 of them, making B,

C, and D liable for only P187,500 each. This clearly is wrong
because what was released was only P250,000. Even if B,
C, and D will each give, the total under this second opinion
would be only P562,500. This cannot have been the intention
of the law. (See Comments of Manresa).

Art. 2079. An extension granted to the debtor by the

creditor without the consent of the guarantor extinguishes
the guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension of time referred to herein.

COMMENT:
(1) Effect of Extension Granted By the Creditor
Example:
A owed B P10 million payable in 10 years. C was the
guarantor. B extended without the consent of C the period to
12 years. The obligation of C as guarantor is extinguished.

(2) Comment of Manresa

The object of the provision is to avoid prejudice to the
guarantor. If the payment is delayed on account of the ex-
tension, the principal debtor may become insolvent and the
guarantor’s right to reimbursement would be rendered useless.
(Vol. 12).

Philippine General Ins. Co. v. Mutuc

L-19632, Nov. 13, 1974
FACTS: In a surety bond, the sureties bound themselves
to be liable in case of extension or renewal of the bond, without
the necessity of executing another indemnity agreement for
the purpose and without the necessity of their being notified
of such extension or renewal. Is the agreement valid?
HELD: Yes, the agreement is valid; there is nothing in
it that militates against the law, good customs, good morals,
public order, or public policy.

1056
CIVIL CODE OF THE PHILIPPINES Art. 2079

(3) Failure of Creditor to Demand Payment

(a) The reason for the second sentence is that, after all, the
guarantor would not be prejudiced since his recourse
would be to avail himself of the right granted under Art.
2071 (Banco Español v. Donaldson Sim & Co., 5 Phil.
418).
(b) Deferring the filing of the action does not imply a
change in the efficacy of the contract or liability of any
kind on the part of the debtor. It is merely — without
demonstration or proof to the contrary — respite, cour-
tesy, leniency, passivity, inaction. It does not constitute
novation, because this must be express. The receipt of
interest stipulated in the same contract after the ob-
ligation has become due does not constitute novation,
it being merely a compliance with the obligation itself.
It would however be different, if the interest has been
paid in advance, covering a definite period, because in
that case, his action would be barred during said period
by his own act, which would have created a new term
of the obligation, and a tacit extension of time. (Banco
Español v. Donaldson Sim & Co., 5 Phil. 418).

General Insurance and Surety Corp. v. Republic

L-13873, Jan. 31, 1963

FACTS: On May 15, 1954, the Central Luzon

Educational Foundation, Inc. and the General Insur-
ance Surety Corp. posted in favor of the Department
of Education a bond required by said Department. The
Foundation was operating the Sison and Aruego Col-
lege of Urdaneta, Pangasinan. The bond in the amount
of P10,000 was posted “to guarantee the adequate and
efficient administration of said school or college, and the
observance of all regulations ... and compliance with all
obligations including the payment of the salaries of all
its teachers and employees, past, present, and future...”
It appeared that on the date of the execution of the
bond, the Foundation was indebted to two of its teach-
ers for salaries, to wit: Remedios Laoag, for the sum of
P695.64 and H.B. Arandia, for the sum of P820.00, or

1057
Art. 2079 CIVIL CODE OF THE PHILIPPINES

a total of P1,515.64. On Feb. 4, 1955, Remedios Laoag

and the Foundation agreed that the latter would pay
the former’s salaries, which were then already due, on
Mar. 1, 1955. When the demand for said amount was
refused the Solicitor General in behalf of the Republic
of the Philippines, filed a complaint for the forfeiture of
the bond. The Surety, however, maintained that it was
already released from the obligations under the bond,
inasmuch as Remedios Laoag extended the time to Mar.
1, 1965. In support of this proposition, the Surety cited
Art. 2079. It also contended that it cannot be made to
answer for more than the unpaid salaries of H.B. Arandia,
which it claimed, amounted to only P820, because of Art.
2054, which provides that “a guarantor may bind himself
for less, but not for more than the principal debtor both
as regards the amount, and the onerous nature of the
conditions. Should he have bound himself for more, his
obligations shall be reduced to the limits of that of the
latter.” Issues: (a) Was the guaranty extinguished by
the extension granted by Remedios Laoag? (b) Was the
surety liable for the whole amount of the bond?
HELD: (a) Art. 2079 is not applicable because the
supposed extension of time was granted, not by the
Department of Education or by the Government but by
the teachers. As already stated, the creditors of the bond
were not the teachers, but the Department of Educa-
tion or the government. (b) The Surety is liable for the
whole amount of the bond. The penal nature of the bond
suffices to dispose of this claim. The conditions for the
bond having been violated, the Surety must answer for
the penalty.

The Commissioner of Immigration v.

Asian Surety and Insurance Co., Inc.
L-22552, Jan. 30, 1969
FACTS: The Asian Surety and Insurance Co. ex-
ecuted a bond in the sum of P7,000 to guarantee that
a certain Chinese student admitted temporarily to the
Philippines “would actually depart from the Philippines
on or about Apr. 7, 1958, OR within such period as in his

1058
CIVIL CODE OF THE PHILIPPINES Art. 2079

discretion, the Immigration Commissioner or his author-

ized representative may properly allow.” The departure
was not made on Apr. 7, 1958 because the Bureau of
Immigration extended several times the temporary stay
of the Chinese without notifying the surety company. The
last extension expired in Nov. 1960 (the end of the first
semester of the school year 1960-1961). Because the surety
company did not know of this extension and its date of
expiration, it was not able to effectuate the Chinese’s
departure from the Philippines. Sometime later (on Jun.
13, 1961), deportation proceedings were instituted against
the Chinese; on the same day, a warrant of arrest was
issued against him, and the surety bond was declared
forfeited. Three days later (Jun. 16, 1961), the surety
company surrendered the Chinese. The company then
sought the lifting of the order of confiscation, alleging
that the only reason it could not comply with the bond
was because of the extensions granted by the Immigra-
tion Commissioner –– extensions not made known to the
company. Issue: Should the bond be forfeited?
HELD: Yes, the bond should be forfeited because
of the following reasons:
(1) The surety company was not able to comply with the
duty to effectuate the departure of the Chinese on
or before the expiration date of the last extension.
While it is true that the extensions were made by
the Commissioner of Immigration, still these were
allowed by the terms of the bond (the said Com-
missioner being allowed to grant a period for such
departure).
(2) The non-notification of the extensions to the surety
company is not important. Reason: the company
could have made the proper inquiries. This step
was not done, so the company cannot blame any
one except itself.
(3) The rule that a surety bond should be construed
strictly in favor of the surety (rule of strictissimi
juris) does not apply to compensated surety (sure-
ties which receive compensation, and organized for

1059
Art. 2079 CIVIL CODE OF THE PHILIPPINES

the purpose of assuming classified risks in large

numbers — as distinguished from gratuitous or
accommodation sureties, who should be protected
against unjust financial impoverishment). (See
Pastoral v. Mutual Security Insurance Corporation,
L-20469, Aug. 31, 1965 and Pacific Tobacco Co. v.
Lorenzana, 102 Phil. 234).
(4) The surety companies must be strictly dealt with
to reduce the problem of overstaying aliens.

Concurring opinion of Justice A. Dizon (with whom Jus-

tice J.B.L. Reyes concurs):
Art. 2079 of the Civil Code, an extension granted
to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. BUT this provision
does not apply to the instant case because under the terms
of the bond, the surety had agreed that the Chinese would
depart from the Philippines on or before Apr. 7, 1958 OR
within such period as, in his discretion, the Commissioner
of Immigration or his authorized representative may prop-
erly allow.” This amounts to company’s consent to all the
extensions granted to the Chinese.

(4) Problems
(a) A borrowed money from B, payable in installments, with
C as the guarantor. The contract provided that upon the
failure to pay one installment, the whole unpaid balance
automatically became due (acceleration clause).
A failed to pay one installment on time, but was
granted extension by B, without C’s consent. Issue: Is C
released?
HELD: Yes, inasmuch as the extension here referred
really to the whole amount of the indebtedness. (Radio
Corporation of the Phil. v. Roa, 62 Phil. 211).
(b) Suppose in problem (a), there was no “balance automati-
cally due” clause, and suppose the creditor had granted an
extension for merely one installment without the consent
of the guarantor, does this release the guarantor?

1060
CIVIL CODE OF THE PHILIPPINES Art. 2080

HELD: There is a release insofar as that particular

installment is concerned, but not insofar as the other
installments are concerned. It is well settled that where
a guarantor is liable for different payments such as in-
stallments of rent, or upon a series of promissory notes,
an extension of time as to one or more will not affect the
liability of the guarantor for the others. (Basque, 49 Phil.
126).

(5) Neglect of Creditor to Collect

The neglect of a creditor to sue or to attempt to collect
a debt after it falls due does not discharge the guarantors
from their liability notwithstanding the fact that the principal
became insolvent, subsequent to the maturity of the debt.
(Bank of the P.I. v. Albadejo, 53 Phil. 141).

Art. 2080. The guarantors, even though they be solidary,

are released from their obligation whenever by some act
of the creditor they cannot be subrogated to the rights,
mortgages, and preferences of the latter.

COMMENT:
(1) When Guarantors Are Released Because of an Act of
the Creditor That Prevents Subrogation
The Article releases the guarantors — even if they be
solidary.

(2) Reason for the Article

It is possible that the guarantor became one only because
of the presence of rights, mortgages, and preferences of the
creditor — to all of which he expected to be subrogated.

(3) Meaning of “Act”

“Act” should also include “inaction.”
Examples:
(a) Of “act” — when the creditor remits a mortgage or a
pledge.

1061
Art. 2081 CIVIL CODE OF THE PHILIPPINES

(b) “Inaction” — when the creditor fails to register a mort-

gage.

(4) When Guarantor is at Fault

If there can be no subrogation because of the guaran-
tor’s fault, he cannot avail himself of this Article; hence, he
is still bound as guarantor. (Manila Trading and Supply Co.
v. Jordana, [C.A.] 37 O.G. 2722).

(5) When Guarantor Can Make Use of the Article

The guarantor can make use of this Article only during
the proceeding against him for payment, not before (Municipal-
ity of Gasan v. Marasigan, 63 Phil. 510), nor after rendition
of judgment. (See Molina v. De la Riva, 8 Phil. 569).

(6) Art. 2080 Does Not Apply in a Contract of Suretyship

Ang v. Associated Bank

GR 146511, Sep. 5, 2007
Contrary to petitioner’s adamant stand, Art. 2080 of the
new Civil Code is inapplicable in a contract of suretyship.
Art. 2047 of the Code states that if a person binds himself
solidarily with the principal debtor, the provisions of Sec. 4,
Chap. 3, Title I, Book IV of the Civil Code must be observed.
Accordingly, Arts. 1207 up to 1222 thereof (on joint and soli-
dary obligations) shall govern the relationship of petitioner
with the respondent bank. (Associated Bank [now known as
United Overseas Bank Philippines]).

Art. 2081. The guarantor may set up against the credi-

tor all the defenses which pertain to the principal debtor
and are inherent in the debt; but not those that are purely
personal to the debtor.

COMMENT:
Defenses Available to the Guarantor
(a) defenses inherent in the principal obligation. (Art.
2081).

1062
CIVIL CODE OF THE PHILIPPINES Art. 2081

Examples: Prescription, res judicata, payment, il-

legality of cause. (Chinese Chamber of Commerce v. Pua
Te Ching, 16 Phil. 406).
(b) defenses ordinarily personal to the principal debtor, but
which are inherent in the debt. (Art. 2081).
Example: Vitiated consent (or intimidation, etc.).
(Chinese Chamber of Commerce v. Pua Te Ching, 16
Phil. 406).
(c) defenses of the guarantor himself.
Examples:
1) vitiated consent on his part
2) compensation between debtor and creditor
3) remission of the principal obligation or of the guar-
anty
4) merger of the person of debtor and creditor
(NOTE: Reason for the last 3 examples: extin-
guishment of the principal obligation extinguishes
the guaranty.)

1063
 CIVIL CODE OF THE PHILIPPINES

Chapter 4

LEGAL AND JUDICIAL BONDS

Art. 2082. The bondsman who is to be offered in virtue of

a provision of law or of a judicial order shall have the quali-
fications prescribed in Article 2056 and in special laws.

COMMENT:
(1) Qualification of a Bondsman
See Rule 114, Sec. 9, Revised Rules of Court.

(2) The Bond

(a) A bond merely stands as a guaranty (solidary guaranty)
for a principal obligation, which exists independently of
said bond, the latter being merely an accessory obliga-
tion. (Valencia v. RFC, et al., L-10749, Apr. 25, 1958).
(b) A bond being for the benefit of the creditor (in some cases,
the government), it follows that the creditor can legally
waive a bond requirement. This may be done for example
by extending the principal contract once or twice, despite
the expiration of the bond originally set up. (Board of
Liquidators v. Floro, et al., L-15155, Dec. 29, 1960).
(c) If a bond is given to suspend the execution of a final
decree, the object is impossible, hence the bond is void.
The surety company would therefore incur no obliga-
tion under such a bond. (Republic Savings Bank v. Far
Eastern Surety, L-14959, Aug. 31, 1960).

Singson v. Babida
L-30096, Sept. 27, 1977

Surety bonds should be signed not only by the sureties

but also by the principal obligors (the defendants in a case,

1064
CIVIL CODE OF THE PHILIPPINES Arts. 2083-2084

for example). If not signed by the latter the surety bonds

are void, there being no principal obligation (which is of
course the cause or consideration of such surety bonds).

(3) Right to Be Heard

A bondsman or surety must be given an opportunity to be
heard; otherwise, the writ of execution issued is void. (Luzon
Surety Co. v. Guerrero, 17 SCRA 400 [1966] and Luzon Surety
Co. v. Beson, et al., L-26865-66, Jan. 30, 1970). Even when
execution is proper, the party against whom it is directed is
still entitled to a hearing if he wants to show subsequent
facts that would make the execution unjust (Luzon Surety
Co. v. Beson, et al., L-26865-66, Jan. 30, 1970 and Abellana
v. Dosdos, 13 SCRA 244 [1965].) (See, however, Sy Bang v.
Mendez, Sr., 226 SCRA 770 [1993].), where the rules do not
require a hearing on the approval of the bond, provided that
the Judge is satisfied with the solvency of the surety.)

Art. 2083. If the person bound to give a bond in the

cases of the preceding article, should not be able to do so,
a pledge or mortgage considered sufficient to cover his
obligation shall be admitted in lieu thereof.

COMMENT:
Rule if the Bond Is Not Given
Note that instead of the bond, a pledge or a mortgage
may be made.

Art. 2084. A judicial bondsman cannot demand the ex-

haustion of the property of the principal debtor.
A sub-surety in the same case, cannot demand the ex-
haustion of the property of the debtor or of the surety.

COMMENT:
(1) No Right to Excussion
A judicial bondsman, being a surety, is not entitled to
the benefit of excussion granted a guarantor. The benefit is
also denied a sub-surety.

1065
Art. 2084 CIVIL CODE OF THE PHILIPPINES

(2) Liability of Surety if Creditor Was Negligent in Col-

lecting
A surety is still liable even if the creditor was negligent
in collecting from the debtor. As stated in American Jurispru-
dence, “the contract of suretyship is not that the obligee will
see that the principal pays the debt or fulfills the contract,
but that the surety will see that the principal pay or perform.”
(50 Am. Jur. 904 and Judge Advocate General v. Court of
Appeals & Alto Surety Co., L-10671, Oct. 23, 1958).

(3) Effect of Violation by Creditor of Terms of the Surety

Agreement
A violation by the creditor of the terms of the surety
agreement entitles the surety to be released therefrom. (As-
sociated Ins. & Surety Co. v. Bacolod Murcia Milling Co., L-
12334, May 22, 1959). However, where an assurance company
has profited in the issuance of the bond by the receipt of the
premium paid, it cannot later go back and assail the valid-
ity of the bond which it had furnished for a premium on the
mere allegation or ground that the release of a prisoner was
unauthorized under the provisions of law. (People v. Enriquez,
et al., L-13006, Feb. 29, 1960).

(4) Bond Filed for Aliens Stay

If a surety bond filed for an alien stay in the country
is forfeited because of violation of its conditions, its subse-
quent unauthorized cancellation thru mistakes or fraud does
not relieve the surety. A bond surrendered thru mistake or
fraud may, therefore, be considered as a valid and subsist-
ing instrument. (Far Eastern Surety and Ins. Co. v. Court of
Appeals, L-12019, Oct. 16, 1958).

(5) Rule When Performance is Rendered Impossible

Even when a surety’s performance of the bond is rendered
impossible by an act of God, or of the obligee, or of the law,
it is the surety’s duty to inform the court of the happening
of the event so that it may take action or decree in the dis-
charge of the surety. Thus, if the surety took no such steps,

1066
CIVIL CODE OF THE PHILIPPINES Art. 2084

it is equally chargeable with negligence in this connection.

(People v. Otiak Omal & Luzon Surety Co., Inc., L-14457,
Jun. 30, 1961.)

(6) Obligation of Surety to Keep the Accused Under His

Surveillance
It is well settled that surety is the jailer of the accused,
and is responsible for the latter’s custody. Therefore, it is not
merely his right but his obligation to keep the accused at
all times under his surveillance. (People v. Tuising, 61 Phil.
404). A trial court has no authority to relieve the bonding
company from a part of its liability under the bail bond by
ordering a mere trial confiscation of the bond, where the body
of its principal has not been surrendered to the court despite
several extensions of time granted said company to produce
him. For it is the bonding company’s responsibility to produce
the accused before the court whenever required. Failure to
do so is indisputably complete breach of the guaranty. (Peo-
ple v. Gantang Kasim and Luzon Surety Co., L-12624, May
25, 1960). However, if three days after the forfeiture of the
bond, the accused immediately submitted to the jurisdiction
of the court giving weighty reasons for his failure to appear,
the amount to be forfeited really may be reduced to a certain
degree. (People v. Cruz & Globe Assurance, L-15214-15, Oct.
26, 1960).

People v. Ignacio Sanchez, et al.

L-34222, Jan. 24, 1974
FACTS: The defendant in a criminal case was convicted,
but did not appear for execution of the judgment. He was or-
dered arrested, and his appeal bond was ordered confiscated.
When the surety caught the accused, the surety asked that
judgment on the bond be reduced. May this be done?
HELD: Yes, and the reduction would generally depend
on the discretion of the judge.

House v. De La Costa
68 Phil. 742
FACTS: A brought an action for the recovery of a sum
of money from B. In the meantime, a certain property of B

1067
Art. 2084 CIVIL CODE OF THE PHILIPPINES

was attached. B obtained a discharge of the attachment by

offering bondsman C. C undertook to guarantee the return of
the property to the cost should B lose the case. Pending the
case, A bought said property from B. A won the case but B
failed to pay. Hence, A brought this action against C for the
liability under the bond. Is C liable?
HELD: C is no longer liable. It is true, C guaranteed the
return of the property but then he cannot do so now because
A himself has already bought said property. A’s own act has
made performance by the surety impossible.

(7) Special Act on Performance Bonds

Act 3688, regulating PERFORMANCE BONDS, when
speaking of the place where the action on the bond must be
brought, simply deals with VENUE which is a procedural,
not a jurisdictional, matter. (Navarro v. Aguila, 66 Phil. 604).
In case of inconsistency, the provision of Act 3688 must be
deemed repealed by those of Com. Act 103, insofar as they deal
with the settlement of “all questions, matters, controversies,
or disputes arising between and or affecting employers and
employees or laborers.” (Phil. Surety and Ins. Co. v. Tiburcio,
L-12766, May 25, 1960).

1068
CIVIL CODE OF THE PHILIPPINES

TITLE XVI
PLEDGE, MORTGAGE
AND ANTICHRESIS
Chapter 1

PROVISIONS COMMON TO PLEDGE

AND MORTGAGE

Art. 2085. The following requisites are essential to the

contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment
of a principal obligation;
(2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mort-
gage have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging
their own property.

COMMENT:
(1) Consideration of Pledge or Mortgage
Pledges and mortgages are accessory contracts; there-
fore, their consideration is the same as the consideration of
the principal obligation. (China Banking Corp. v. Lichauco,
46 Phil. 460). If the principal contract is void, so also is the
pledge given as security therefor.

1069
Art. 2085 CIVIL CODE OF THE PHILIPPINES

(2) Ownership
(a) The pledgor or the mortgagor must be the owner, oth-
erwise the pledge or mortgage is VOID. (National Bank
v. Palma Gil, 55 Phil. 639). Future property therefore
cannot be mortgaged or pledged because of the lack
of ownership. (Dilag v. Heirs of Resurreccion, 76 Phil.
650).
(b) An agent cannot therefore pledge or mortgage in his
own name the property of the principal, otherwise the
contract is VOID. BUT the agent can do so, in the name
of the principal, for here the real pledgor or mortgagor
is the principal. Hence, if the agent is properly author-
ized, the contract is VALID. (See Arenas v. Raymundo,
19 Phil. 46).
(c) The pledgor or mortgagor need not be the debtor or
borrower; thus, one who owns property can pledge or
mortgage it to secure another’s debt. Note here that
pledgor or mortgagor is the OWNER of the property.
(d) If a forger pledges or mortgages another’s property, the
pledge or mortgage is VOID, unless the land concerned
was already registered in the forger’s name, in which
case innocent third parties should not be prejudiced.
(See Veloso v. La Urbana, 58 Phil. 681; Lopez v. Seva,
69 Phil. 311 and De Lara v. Ayroso, 95 Phil. 185).

(3) Nullity of Pledge or Mortgage

Even if the pledge or mortgage is VOID the principal
obligation (loan) may still be VALID. Therefore, the debt may
still be recovered in an ordinary action. (See Lozano v. Tan
Suico, 23 Phil. 16 and Julian v. Lutero, 49 Phil. 703).

(4) Liability of Mortgagor for Another’s Debt

One who mortgages his property to guaranty another’s
debt, without expressly assuming personal liability for such
debt, CANNOT be compelled to pay the deficiency remaining
after the mortgage has been foreclosed. (Phil. Trust Co. v.
Echaus Tan Siua, 52 Phil. 852).

1070
CIVIL CODE OF THE PHILIPPINES Art. 2085

(5) Essential Requisites for Pledge and Mortgage

PLEDGE MORTGAGE

(a) accessory contract — made (a) same as in pledge

to secure fulfillment of a
principal obligation
(b) pledgor must be abso- (b) mortgagor must be ab-
lute owner of property solute owner of property
pledged mortgaged

(c) pledgor must have free (c) mortgagor must have

disposal or be author- free disposal or be au-
ized thorized
(d) thing pledged may be (d) mortgaged property may
alienated when principal be alienated when prin-
becomes due for pay- cipal obligation becomes
ment to the creditor. (Art. due for payment to the
2087). creditor. (Art. 2087).
(e) thing pledged must be
placed in the possession
of the creditor, or of a
third person by common
agreement. (Art. 2093).

(6) Case

Guillermo Adriano v. Romulo Pangilinan

GR 137471, Jan. 16, 2002
FACTS: Petitioners contends that because he did not
give his consent to the real estate mortgage (his signature
having been forged), then the mortgage is void and produces
no force and effect.
Not only was it proven in the trial court that the signa-
ture of the mortgagor had been forged, but also that some-
body else — an impostor — had pretended to be the former
when the mortgagee made an ocular inspection of the subject

1071
Art. 2085 CIVIL CODE OF THE PHILIPPINES

property. The Court of Appeals, for its part, faulted petitioner

for entrusting to Angelina Salvador the TCT covering the
property. Without his knowledge or consent, however, she
caused or abetted an impostor’s execution of the real estate
mortgage. Petitioner had been negligent in entrusting and
delivering his TCT 337942 to his “distant relative” Salvador,
who undertook to find a money lender. In the present case,
the mortgagor was an impostor, not the registered owner.
ISSUE: Was petitioner negligent in entrusting and de-
livering his TCT to a relative who was supposed to help him
find a money lender, and if so, was such negligence sufficient
to deprive him of his property?
HELD: To be able to address the issue, it is crucial to de-
termine whether herein respondent was an “innocent mortgagee
for value.” The answer is no, because he failed to observe due
diligence in the grant of the loan and in the execution of the real
estate mortgage. (GSIS v. CA, 287 SCRA 204 [1998]) for which
he must bear the consequences of his negligence.
For instance, respondent’s testimony negated his assertion
that he exercised due diligence in ascertaining the identity of
the alleged mortgagor when he made an ocular inspection of
the mortgaged property. And since he knew that the property
was being leased, respondent should have made inquiries
about the rights of the actual possessors; he could have eas-
ily verified from the lessees whether the claimed owner was,
indeed, their lessor.
Petitioner’s act of entrusting and delivering his TCT
and Residence Certificate (now known as “Community Tax
Certificate”) to Salvador was only for the purpose of helping
him find a money lender. Not having executed a power of
attorney in his favor, he clearly did not authorize her to be
his agent in procuring the mortgage. He only asked her to
look for possible money lenders. (See Art. 1878, Civil Code).
As between petitioner and respondent, the failure of the
latter to verify essential facts was the immediate cause of his
predicament. If he were an ordinary individual without any
expertise or experience in mortgages and real estate deal-
ings, his failure to verify essential facts would probably have

1072
CIVIL CODE OF THE PHILIPPINES Art. 2085

been understandable. However, he has been in the mortgage

business for seven years. Assuming that both parties were
negligent, respondent should bear the loss. His superior
knowledge of the matter should have made him more cau-
tious before releasing the loan and accepting the identity of
the mortgagor. (See Uy vs. CA, 246 SCRA 703 [1993]).
Given the particular circumstances of this case, the
negligence of petitioner is not enough to offset the fault of
respondent himself in granting the loan. The former should not
made to suffer for respondent’s failure to verify the identity
of the mortgagor and the actual status of the subject property
before agreeing to the real estate mortgage. Respondent’s own
negligence was the primary, immediate, and overriding reason
that put him in his present predicament.
To summarize, both law and equity favor petitioner.
Three (3) reasons are adduced, to wit:
1. The relevant legal provision, Art. 2085, requires that the
mortgagor be the absolute owner of the thing mortgaged.
Here, the mortgagor was an impostor who executed
the contract without the knowledge and consent of the
owner.
2. Equity dictates that a loss brought about by the concur-
rent negligence of two persons shall be borne by one who
was in the immediate, primary, and overriding position
to prevent it. Herein respondent, who is engaged in
the business of lending money secured by real estate
mortgages, could have easily avoided the loss by simply
exercising due diligence in ascertaining the identity of
the impostor who claimed to be the owner of the property
being mortgaged.
3. Equity merely supplements, not supplements, the law.
The former cannot contravene or take the place of the
latter.
In any event, respondent is not precluded from
availing himself of proper remedies against Salvador
and her cohorts.
[NOTA BENE: A Torrens certificate serves as
evidence of an indefeasible title to the property in favor

1073
Art. 2085 CIVIL CODE OF THE PHILIPPINES

of the person whose name appears therein. The Torrens

system does not create or vest title. It only confirms and
records title already existing and vested. IT does not
protect a usurper from the true owner. It cannot be a
shield for the commission of fraud. It does not permit
one to enrich himself at the expense of another. (Adriano
v. Pangilinan, supra).]

(7) A DST is not an Imposition on the Document Itself but

on the Privilege to Enter Into a Taxable Transaction
of Pledge

Michel J. Lhuillier Pawnshop, Inc. v. Commissioner

of Internal Revenue
501 SCRA 450 (2006)
FACTS: The law is clear and needs no further interpre-
tation. No law on legal hermeneutics could change the fact
that the entries contained in a pawnshop ticket spell out a
contract of pledge, and that the exercise of the privilege to
conclude such a contract is taxable under Sec. 195 of the
National Internal Revenue Code (NIRC).
Sec. 195 of the NIRC imposes DST on every pledge
regardless of whether the same is “conventional pledge” gov-
erned by the new Civil Code or one that is governed by the
provisions of Presidential Decree (PD) 114.
It should be pointed out that the NIRC provisions on
the Documentary Stamp Tax (DST) has been amended by RA
No. 9243. Among the highlights thereof were the amendments
to Sec. 199 thereof, which incorporated 12 more categories of
documents in addition to the initial categories exempted from
DST. Expression unius est exclusio alterius. The omission of
pawnshop tickets only means that it is not among the docu-
ments exempted from the DST.
ISSUES: (1) When we say that a DST on pledge is an
excise tax on the exercise of a right to transfer obligations,
rights, or properties incident thereto, does it mean an impo-
sition on the document itself?; (2) Are all pledges subject to
DST?; and (3) Are “good faith” and “honest belief” that one
is subject to tax on the basis of previous interpretation of

1074
CIVIL CODE OF THE PHILIPPINES Art. 2086

government agencies tasked to implement the tax law, suf-

ficient justifications to delete the imposition of surcharges and
interests?
HELD: (1) No. It is not an imposition on the document
itself but on the privilege to enter into a taxable transac-
tion. Pledge is among the privileges the exercise of which is
subject to the DST. Thus, for purposes of taxation, the same
pawn ticket is proof of an exercise of a taxable privilege of
concluding a contract of pledge. Moreso, it is the exercise of
the privilege to enter into an accessory contract of pledge, as
distinguished from a contract of loan; (2) Sec. 195 of the NIRC
unqualifiedly subjects all pledges to the DST, unless there
is a law exempting them in clear and categorical language.
For one who claims an exemption from tax payments rests
the burden of justifying the exemption by words too plain to
be mistaken and too categorical to be misinterpreted and (3)
Yes, and such is the settled rule.
[NOTE: Pawnshops are not included in the term “lend-
ing investors” for the purpose of imposing the 5% percent-
age tax. (CIR v. Trustworthy Pawnshop, Inc., 488 SCRA 538
[2006]).]

Art. 2086. The provisions of Article 2052 are applicable

to a pledge or mortgage.

COMMENT:
Applicability of Art. 2052 (Guaranty of Voidable, Etc.,
Obligations)
(a) Even if the principal debt is voidable, unenforceable, or
merely natural, the pledge or mortgage is valid.
(b) If the principal obligation is void, the pledge or mortgage
is also void.
(c) Art. 2052. “A guaranty cannot exist without a valid
obligation.
Nevertheless, a guaranty may be constituted to guar-
antee the performance of a voidable or an unenforceable
contract. It may also guarantee a natural obligation.’’

1075
Art. 2087 CIVIL CODE OF THE PHILIPPINES

Art. 2087. It is also of the essence of these contracts

that when the principal obligation becomes due, the things
in which the pledge or mortgage consists may be alienated
for the payment to the creditor.

COMMENT:
(1) Right to Have the Property Alienated So That the Debt
May Be Paid
This Article does not mean that the creditor automatically
become the owner, if at the time the debt falls due, the debt
is still unpaid. It only means that the property pledged or
mortgaged may be sold (to anybody, including the creditor) so
that from the proceeds of such alienation the debt might be
paid. (See Villarama v. Crisostomo, [C.A.] 54 O.G. 6894 and
El Hogar Filipino v. Paredes, 45 Phil. 178). If a loan from the
GSIS is obtained by installments, but the debtor-mortgagor
signed a promissory note for every release (of the money),
providing that the loan shall earn interest, said money re-
leased immediately earns interest, even if the entire loan had
not yet been given. Insurance on the property mortgaged, by
express stipulation of the GSIS contract, is also chargeable
against the debtor. If under the terms of the contract, there
can be an extrajudicial foreclosure upon non-fulfillment on its
condition, said stipulation can be given effect. (Jose C. Zulueta
v. Hon. Andres Reyes, et al., L-21807, May 29, 1967).

(2) Violations of Conditions May Authorize Immediate

Foreclosure
As a rule, the mortgage can be foreclosed only when the
debt remains unpaid at the time it is due, but the violation of
certain conditions in the mortgage may authorize immediate
foreclosure. (Gov’t. of the P.I. v. Espejo, 57 Phil. 496). Hence,
if a mortgage contract prohibits the mortgagor to execute a
lease or a second mortgage on the property without the written
consent of the mortgagee, a violation of this condition would
make the mortgage debt due and demandable, and would
entitle the mortgagee immediately to bring an action for the
foreclosure of the mortgage. (Vasquez v. Jocson & Araneta,
62 Phil. 537). Regarding the stipulations that may be agreed

1076
CIVIL CODE OF THE PHILIPPINES Art. 2087

upon, would it be lawful to stipulate in a mortgage of real

property that the property can be sold at a public auction
without judicial proceeding in case the mortgage debt is not
paid within the time stipulated?
ANS.: Yes. (Lopez & Javelona v. El Hogar Filipino, 47
Phil. 247). As a matter of fact, the extrajudicial foreclosure
of mortgages is authorized by Act 3135, passed on Mar. 6,
1924. The silence of the Rules of Court as to extrajudicial
foreclosure of mortgage on real property does not operate to
blot out such a remedy. The right to extrajudicial foreclosure
when so stipulated in a mortgage is established by substan-
tive law. (II Moran, Comments on the Rules of Court, p. 234).
The Supreme Court has even declared that the power of the
mortgagee to sell the mortgaged property to satisfy his credit
survives after the death of the mortgagor. Property which is
however in custodia legis, cannot be extrajudicially foreclosed,
because this is not provided for in Act 3135. (Pasno v. Ravina,
54 Phil. 378).

(3) Price
Just because the price is considered inadequate this does
not mean that the foreclosure sale should be cancelled. It
would be otherwise if the price were shocking. (See Bank of
P.I. v. Green, 52 Phil. 249). It has been held that the price of
P8,375 at the public auction for property assessed at P19,140
is not so shocking to the conscience as to warrant the cancel-
lation of a sale which was carried out with the formalities
of the law, especially where the mortgagor had been given
ample opportunity, to sell the property at a higher price. (Go
Letting & Sons, etc. v. Leyte Land Transportation Co., et al.,
L-8887, May 28, 1958).

El Hogar Filipino v. Phil. Nat’l. Bank

64 Phil. 582
FACTS: Property was mortgaged to the El Hogar Filipino.
With the consent of the mortgagee, it was mortgaged for the
second time to the Philippine National Bank (PNB) (junior
mortgagee). When the mortgage was foreclosed, the proceeds
realized were just enough to pay off the first mortgage. Has
the PNB still a lien on the property?

1077
Art. 2087 CIVIL CODE OF THE PHILIPPINES

HELD: No more. The security in favor of the PNB, as

second creditor and mortgagee, was extinguished. Its only right
under the mortgage, aside from the right to repurchase, would
have been to apply to the payment of its credit the excess of
the proceeds of the sale after the payment of that of the El
Hogar Filipino, such being the effect of the subordination of its
mortgage to that of the latter. However, there was no excess
and so the mortgage in favor of the PNB was extinguished
because it cannot be enforced by said bank beyond the total
value of the mortgaged land. Consequently, the land passed to
the purchaser (at the foreclosure sale) free from the mortgage
in favor of the PNB. The bank’s claim that the second mort-
gage in its favor stands to the prejudice of the purchaser is
untenable particularly because, as the purchaser in this case
is the first mortgagee itself (El Hogar Filipino), the result,
inverting the legal effects of two mortgages would practically
be to convert the second mortgage into a first mortgage, and
the first mortgage into second mortgage.
(NOTE: Although there is no more mortgage in favor of
the PNB, this does not mean that the debtor should not pay
his debt any more in favor of the PNB.)

Solomon and Lachica v. Dantes

63 Phil. 522

FACTS: A’s debt in B’s favor is secured by a mortgage.

Does this existence of the mortgage prevent B from maintain-
ing a personal action for the recovery of the debt from A?
HELD: No, B can bring such personal action for the
recovery of the debt covered by the mortgage.

Lopez v. Director of Lands

47 Phil. 23

FACTS: A was indebted to B. As a security, A’s land was

mortgaged in favor of B. A did not pay his taxes, and so the
land was sold at a tax sale to C. Does C have to respect the
mortgage in B’s favor?
HELD: Yes. The tax title issued under the procedure
adopted in the City of Manila for the recovery of delinquent

1078
CIVIL CODE OF THE PHILIPPINES Art. 2088

taxes, conveys only such title as was vested in the delinquent

taxpayer. Such sale cannot affect the rights of other lien hold-
ers unless by the procedure adopted, they had been given an
opportunity to defend their rights.
[NOTE: Although as a rule, there is an implied warranty
against eviction, this does not render liable a sheriff auctioneer,
mortgagee, pledgee, or other person professing to sell by virtue
of authority in fact or law, for the sale of a thing in which a third
person has a legal or equitable interest (Last paragraph, Art.
1547). Note also that “if the property is sold for non-payment
of taxes due and not made known to the vendee before the sale,
the vendor is liable for eviction.” (Art. 1551).]

Art. 2088. The creditor cannot appropriate the things

given by way of pledge or mortgage, or dispose of them.
Any stipulation to the contrary is null and void.

COMMENT:
(1) Pactum Commissorium
(a) A borrowed from B a sum of money. A offered his house
by way of a mortgage. It was expressly stipulated in the
contract that upon non-payment of the debt on time, the
house would belong to B. Is the stipulation valid?
ANS.: No, such a stipulation (pacto comisorio) is
null and void. “This forfeiture clause has traditionally
not been allowed because it is contrary to good morals
and public policy.” (Report of the Code Commission, p.
156; See Perez v. Cortez, 35 Phil. 211 and Tan Chun Tic
v. West Coast Life Ins. Co., 54 Phil. 361).
(b) It is true that a debtor, instead of paying in cash, can
just alienate in favor of his creditor property to satisfy
the debt (dation in payment) but it would be illegal for
the debtor to previously authorize the creditor to appro-
priate the property pledged or mortgaged as the latter’s
own in payment of the debt. It is true that the property
may be alienated in favor of anybody in order that the
debt may be paid, as long as the formalities of the law

1079
Art. 2088 CIVIL CODE OF THE PHILIPPINES

are complied with, and it is true that even the creditor

himself may get the property but he cannot become the
owner automatically just because the debtor does not pay
his debt. To provide for automatic ownership would be
to stipulate a pactum commissorium. In one case, the
Supreme Court held: “The stipulation in the mortgage
that the land covered thereby shall become the property
of the mortgagee upon failure to pay the debt within the
period agreed upon, constitutes a pactum commissorium
and is therefore null and void.” (Tan Chun Tic v. West
Coast Life, 54 Phil. 361). Similarly, a stipulation that
in case of non-payment, the mortgaged property would
be considered full payment “without further action in
court,” is null and void, being “pactum commissorium.”
(Reyes v. Nebrija, 98 Phil. 639).

(2) Cases

Warner, Barnes and Co. v. Buenaflor

and Macoy
(C.A.) 36 O.G. 3290
FACTS: A pledged his property in favor of B to secure
a loan. It was expressly stipulated in the contract that the
pledgee could purchase the things pledged at the current
purchase price if the debt was not paid on time. Is this a
valid stipulation?
HELD: Yes. What is prohibited by Art. 2088, dealing
with pacto comisorio, is the automatic appropriation by the
creditor or pledgee in payment of the loan at the expiration
of the period agreed upon. The reason for the prohibition is
that the amount of the loan is ordinarily much less than the
real value of the things pledged. Where there is express au-
thorization of the pledgee to purchase the things pledged at
the current market price, the contract would not come within
the prohibition.
[NOTE: If a mortgagor promises to sell the property to
the mortgagee upon default, this is merely a personal obli-
gation, and does not bind the land. Hence, he can still sell
the land to a stranger BUT he would be liable for damages.
(Guerrero v. Yñigo & Court of Appeals, 96 Phil. 37).]

1080
CIVIL CODE OF THE PHILIPPINES Art. 2088

Ranjo v. Salmon
15 Phil. 436

The creditor is not allowed to appropriate to himself the

thing held as pledge or under mortgage, nor can he dispose of
the same as owner. He is merely entitled, after the principal
obligation becomes due, to move for the sale of the things
pledged, in order to collect the amount of the claim from the
proceeds.

Dalay v. Aquiatin and Maximo

47 Phil. 951

FACTS: A document contained this clause: “If I cannot

pay the aforesaid amount when the date agreed upon comes,
the same shall be paid with the lands given, as security...”
The issue is: does this partake of the nature of pacto comisorio
and therefore in violation of Art. 2088?
HELD: Two things are prohibited under Art. 2088: (1)
the appropriation by the creditor of the things given by way
of pledge or mortgage; and (2) the disposition thereof by the
creditor. The stipulation quoted does not authorize either one
or the other. Clearly, it does not authorize the creditor to
dispose of the properties mortgaged. Neither does it authorize
him to appropriate the same. What it says is merely a promise
to pay the debt with such properties, if at its maturity, the
debt remains unsatisfied. It is merely a promise made by the
debtor to assign the property given as security in payment
of the debt, a promise accepted by the herein creditor. There
is no doubt that under the law, a debtor may make an as-
signment of his properties in payment of debt. (Art. 1255,
Civil Code). And the assignment is not made unlawful by the
fact that the said properties are mortgaged, because the title
thereto remains in the debtor; nor is a promise to make such
an assignment in violation of the law. Therefore, Art. 2088
is not applicable to the stipulation in question.
[NOTE: “We disagree to such holding of the court. While
it is true that in form said stipulation may not be consid-
ered a pactum commissorium, it is nonetheless true that it
has the same effect which pactum commissorium produces.

1081
Art. 2088 CIVIL CODE OF THE PHILIPPINES

Furthermore, it places the debtor at a great disadvantage.

In case the property is mortgaged for an amount very much
lower than its real value, the creditor would have the benefit
of acquiring the same at a very low price. Upon the other
hand, if the property mortgaged is sold and the proceeds of
the sale are more than the amount of the loan, the claim of
the creditor is paid, and the balance of the sale is given to
the debtors.” (Ventura, Land Registration and Mortgages, p.
368).]
Furthermore, is this not tantamount to a forfeiture? For,
suppose the lands are worth, let us say, 4 times the mortgage
debt, should the creditor be allowed to get the entire lands
for himself? If so, is this not forfeiture (of 3/4 of the value of
the land) speaking of which the Code Commission says: “This
forfeiture clause has traditionally been outlawed, because it
is contrary to good morals and public policy.” (Report of the
Code Commission, p. 156). Moreover, the new Civil Code
presumes in certain cases a contract with pacto de retro, to
be an equitable mortgage precisely for the purpose of prevent-
ing an indirect violation of Art. 2088, which prohibits a pacto
comisorio. If we are to hold that the creditor in the problem
presented would be entitled to the whole land, what then
would be the use of introducing reforms in the “pacto de retro
problems”? If it is claimed, however, that the creditor would
not be entitled to the whole land, what then is the meaning
of the clause — “If I cannot pay the aforesaid amount when
the date agreed upon comes, the same shall be paid with the
lands given as security”? Suppose, the debtor does not want
to pay with the land, cannot under the premises given, the
court compel him to do so? And if this is done, is this not
practically countenancing a forfeiture?
It is true that the law allows an assignment in favor of
creditor for the payment of a debt but this assignment is made
only afterwards, not at the time the obligation is constituted.
If, however, the clause is construed to mean that the land
will be responsible for the payment of the debt, that is, if the
land is worth four times the debt, the creditor should return
3/4 of the value of the price, this construction in our opinion
would be legal for in this case there would be no unwarranted
forfeiture.

1082
CIVIL CODE OF THE PHILIPPINES Art. 2088

A. Francisco Realty & Development Corp. v.

CA & Sps. Romulo S.A. Javillonar
and Erlinda P. Javillonar
GR 125055, Oct. 30, 1998

FACTS: Petitioner granted a loan to respondent spouses,

in consideration of which the latter executed a promissory
note, a deed of mortgage, and an undated deed of sale of
the mortgaged property in favor of petitioner as mortgagee.
As respondent spouses failed to pay the interest, petitioner
registered the sale of the land in its favor and a new transfer
certificate of title was issued in its name. Respondent spouses
likewise failed to pay the principal loan. When respondent
spouses refused to vacate the property, petitioner filed an
action for possession before the trial court.
The trial court rendered a decision in favor of petitioner
but, upon appeal, was reversed by the Court of Appeals (CA).
On appeal, the Supreme Court affirmed with modification the
CA’s decision.
HELD: The stipulations in the promissory notes provid-
ing that, upon failure of respondent spouses to pay interest,
ownership of the property would be automatically transferred
to petitioner and the deed of sale in its favor would be
registered in its name constitute in substance pactum com-
missorium, which is prohibited under Art. 2088. The subject
transaction being void, the registration of the deed of sale,
by virtue of which petitioner was able to obtain a certificate
of title covering the subject lot, must also be declared void.

(3) Mortgagee Cannot Sell During Existence of Principal

Obligation
Is a mortgagee allowed during the existence of the prin-
cipal debt, to sell the property mortgaged to him?
ANS.: No, because this would certainly be an act of dis-
position. The answer would be the same even if the contract
allows the sale, for in such a case, said stipulation would be
null and void.

1083
Art. 2089 CIVIL CODE OF THE PHILIPPINES

(4) Case

Hechanova v. Adil
GR 49940, Sep. 25, 1986

A deed of mortgage which contains a stipulation that in

case the mortgagor fails to pay the debt secured by the mort-
gage, the mortgagee shall become the owner of the property
is null and void.

Art. 2089. A pledge or mortgage is indivisible, even

though the debt may be divided among the successors in
interest of the debtor or of the creditor.
Therefore, the debtor’s heir who has paid a part of
the debt cannot ask for the proportionate extinguishment
of the pledge or mortgage as long as the debt is not com-
pletely satisfied.
Neither can the creditor’s heir who received his share
of the debt return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which,
there being several things given in mortgage or pledge,
each one of them guarantees only a determinate portion
of the credit.
The debtor, in this case, shall have a right to the ex-
tinguishment of the pledge or mortgage as the portion of
the debt for which each thing is specially answerable is
satisfied.

COMMENT:

(1) Indivisibility of a Pledge or Mortgage

Examples:
(a) A borrowed P1 million from B, secured by a mortgage on
A’s land. A died leaving children X and Y. X paid P50,000
to B. Can X ask for the proportionate extinguishment of
the mortgage?

1084
CIVIL CODE OF THE PHILIPPINES Art. 2090

ANS.: No (Par. 2, Art. 2089), but of course the debt

is now only half. Indeed, a mortgage is indivisible, but
the principal obligation may be divisible.
(b) A borrowed P1 million from B, secured by a mortgage
on A’s land. B died leaving two children, R and T. A
paid R P500,000. Is R allowed to cancel the mortgage?
ANS.: No. (Par. 3, Art. 2089).

(2) Example of the Exception

A borrowed P1 Million from B, secured by the pledge
of a ring for a debt of P200,000; and by a mortgage on A’s
land, for the balance of P800,000. If A pays P200,000, can he
demand the return of the ring?
ANS.: Yes, because in this case the ring guaranteed only
P200,000. (Pars. 3 and 4, Art. 2089).

(3) Mortgage on Both a House and Its Lot

If a mortgage is constituted on a house and its lot,
both should be sold TOGETHER at the foreclosure, and not
separately. (Bisayas, et al. v. Lee, et al., [C.A.] 53 O.G. 1518).
Similarly, if the mortgage is on two lots, the mortgagee can
demand the sale of either or both. This is because the mort-
gage is INDIVISIBLE. (Aquino v. Macondray and Co., 97
Phil. 731).

(4) Non-Applicability to Third Persons

The indivisibility of a mortgage does not apply to third
persons. (Nat. Bank v. Agudelo, 58 Phil. 655).

Art. 2090. The indivisibility of a pledge or mortgage is

not affected by the fact that the debtors are not solidarily
liable.

COMMENT:
(1) Indivisibility Applies Even if Debtors Are Not Soli-
dary
The Article explains itself.

1085
Art. 2090 CIVIL CODE OF THE PHILIPPINES

(2) Case

Ong v. IAC
GR 74073, Sep. 13, 1991

FACTS: Madrigal Shipping Co., Inc. was granted a

P2,094,000-loan by Solidbank payable on or before Jul. 27,
1978, at 10% interest per annum. As security, Madrigal pledged
in favor of the bank a barge and a tugboat. Madrigal failed
to pay its obligation to Solidbank. When the bank was to sell
the pledged properties, it found out that the tugboat and the
barge had surreptitiously been taken from Pasig River, where
they were moored and towed to the North Harbor, without the
knowledge and consent of the bank. Meanwhile, Ong bought
the barge which was subject of the pledge from Ocampo, a
successful bidder in a public auction by virtue of a writ of
execution issued by the National Labor Relations Commission,
in a labor case. The Bank then sued Ong for replevin with
damages before the Regional Trial Court. The trial court or-
dered the seizure of the barge upon posting of a bond in the
sum of P1,000,000. Thereafter, the court ordered Ong to put
up a counterbond of P400,000 executed in favor of Solidbank;
otherwise, the latter’s motion to release the property subject
of replevin will be granted. The Court of Appeals sustained
the trial court.
ISSUE: Whether the contract of pledge entered into
by and between Solidbank and Madrigal is binding on Ong.
Ong rely heavily on the fact that the contract of pledge by
and between Solidbank and Madrigal was not recorded under
Sections 804 and 809 of the Tariff and Customs Code and
argue that it is not binding on third persons, like Ong.
HELD: The Supreme Court affirmed the appellate court’s
decision and held that all the requisites for a valid pledge
has been complied with. The pledge agreement is a public
agreement, the same having been notarized. The pledge was
delivered to Solidbank which had it moored at the Pasig River
where it was guarded by a security guard. Madrigal, owner of
the barge, pledged the vessel and tugboat to securing its obli-
gation to the bank in the amount of P2,094,000. No payment
was made by Madrigal as pledgor. Therefore, Solidbank has

1086
CIVIL CODE OF THE PHILIPPINES Arts. 2091-2092

the right to it until it is paid. Solidbank is obviously a lawful

and rightful possessor of the personal property pledged.

Art. 2091. The contract of pledge or mortgage may se-

cure all kinds of obligations, be they pure or subject to a
suspensive or resolutory condition.

COMMENT:

The Kinds of Obligations Which a Pledge or a Mortgage

May Secure
The Article is self-explanatory.

Art. 2092. A promise to constitute a pledge or mortgage

gives rise only to a personal action between the contracting
parties, without prejudice to the criminal responsibility in-
curred by him who defrauds another, by offering in pledge
or mortgage as unencumbered, things which he knew were
subject to some burden, or by misrepresenting himself to
be the owner of the same.

COMMENT:
(1) A Promise to Constitute a Pledge or Mortgage
A borrowed 10 million from B. A promised to execute a
mortgage to guarantee this debt. The promise was accepted.
Suppose A has not yet constituted the mortgage, can we say
that there already exists a mortgage here?
ANS.: No, there is no mortgage as yet — no real right
has been created. What exists, however, is a personal right
of B to demand the constitution of the mortgage. Thus in one
case, inasmuch as the debtor had made a promise to constitute
a pledge and inasmuch as the promise had been accepted
by the creditor-bank, it was held that the bank could have,
under Art. 2082, compelled the fulfillment of the agreement.
(See Mitsui Bussan Kaisha v. Hongkong & Shanghai Bank,
36 Phil. 27).

1087
Art. 2092 CIVIL CODE OF THE PHILIPPINES

(2) Judicial Declaration of Lien Is Sufficient

It has been held that though there is nothing wrong in
requiring the debtor to execute the mortgage, still in certain
cases a judicial declaration of the existence of the lien would
be sufficient. For “a court of equity never requires an unneces-
sary thing, and in this case, all the rights of the creditor will
be adequately protected by declaring that the indebtedness
recognized by the debtor, constitutes a lien in the nature of a
mortgage upon the Hacienda Salvacion, it appearing that the
registration of the whole has been effected. It is a maxim of
jurisprudence that equity regards that as done which ought
to be done, and in obedience to this precept, as between the
parties to this record, the property must be considered to be
subject to the same lien, as if the mortgage which had been
agreed to be made had been actually executed. (Laplana v.
Garchitorena Chereau, 48 Phil. 163).

(3) Double Remedies

Is it inconsistent to ask in one action that: (a) the mort-
gage be constituted; or (b) the indebtedness be paid?
HELD: No, they are not inconsistent. (Laplana v. Gar-
chitorena Chereau, supra).

(4) Estafa
Any person who, pretending to be the owner of any real
property, shall convey, sell, encumber, or mortgage the same
shall be guilty of estafa. (Art. 316, par. 1, Revised Penal Code).
This crime has 3 constituent elements:
(1) the property should be real property, for otherwise, the
crime might be theft or another crime, but not estafa;
(2) the offender must have pretended to be the owner, that
is, he should not have been in good faith; otherwise,
deceit or fraud would not be present; and
(3) the fictitious owner must have executed some acts of
ownership to the prejudice of the true owner.

1088
CIVIL CODE OF THE PHILIPPINES Art. 2092

(5) Another Instance of Estafa

Any person who, knowing that real property is encum-
bered, shall dispose of the same as unencumbered, is also
guilty of estafa. (Art. 316, par. 2, Revised Penal Code). It is
essential in a case like this that fraud or deceit be practiced
upon the vendee at the time of the sale. (People v. Mariano,
40 O.G. [45] No. 8, p. 91).

(6) Ownership Not a Necessary Element of Estafa

The Supreme Court in Hernandez v. Court of Appeals,
228 SCRA 429 (1993), held that ownership is not a necessary
element of the crime of estafa.

1089
 CIVIL CODE OF THE PHILIPPINES

Chapter 2

PLEDGE

Art. 2093. In addition to the requisites prescribed in

Article 2085, it is necessary, in order to constitute the
contract of pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by common
agreement.

COMMENT:
(1) Thing Pledged Must Be in Possession of the Creditor
or a Third Person By Common Agreement
This requisite is most essential and is characteristic of a
pledge without which the contract cannot be regarded as entered
into because precisely in this delivery lies the security of the
pledge. (Manresa). Indeed, if Art. 2093 is not complied with,
the pledge is VOID. (El Banco Español-Filipino v. Peterson, 7
Phil. 409). Until the delivery of the thing, the whole rests in
an executory contract, however strong may be the engagement
to deliver it, and the “pledgee” acquires no right of property in
the thing. (U.S. v. Terrel, 2 Phil. 222). Hence, if a pledgee fails
or neglects to take this property into his possession, he is pre-
sumed to have waived the right granted him by the contract.
(U.S. v. Terrel, supra). Furthermore, mere taking of possession
is insufficient to continue the pledge. The pledgee must continue
in said possession. (Pacific Commercial Co. v. National Bank,
49 Phil. 237). Furthermore, mere symbolical delivery is insuf-
ficient. There must be actual possession — actual delivery of
possession. (Betita v. Ganzon, 49 Phil. 87).

(2) Effectivity Against Third Persons

A pledgee shall not take effect against third persons if
a description of the thing pledged and the date of the pledge
do not appear in a public instrument. (Art. 2096).

1090
CIVIL CODE OF THE PHILIPPINES Art. 2094

(3) Symbolic Delivery

Although we have seen that symbolic delivery is not suf-
ficient, still if the pledgee, before the pledge, had the thing
already in his possession, then the requirement of the law
has been satisfied. For then, said pledgee would be in actual
possession. The same thing may be said in case the thing
pledged is in the possession of a third person by common
agreement. (See Art. 2093).

(4) Example
In one case, A pledged to B the goods found in a warehouse
formerly rented by A. By common consent, it was agreed that C,
a depositary, would take charge of the goods in the warehouse.
Has the contract of pledge been perfected in this case?
HELD: Yes, since C became the depositary by common
agreement. (Banco Espanol-Filipino v. Peterson, et al., 7 Phil.
409).

Betita v. Ganzon
49 Phil. 87

FACTS: Buhayan pledged to Betita 4 carabaos which

Buhayan owned but which were actually in the possession
of Jacinto. Betita never took possession of the carabaos. Fur-
thermore, nothing in the contract stated that Jacinto was by
common consent made the depositary in Betita’s behalf. Has
a pledge been lawfully constituted here?
HELD: No. The delivery of possession of the property
pledged requires actual possession and a mere symbolic de-
livery is insufficient.

Art. 2094. All movables which are within commerce may

be pledged, provided they are susceptible of possession.

COMMENT:
What May Be Pledged
(a) Only movables can be pledged (including incorporeal
rights — See Art. 2095).

1091
Art. 2095 CIVIL CODE OF THE PHILIPPINES

(b) Real property cannot be pledged. A pledge cannot include

a lien on real property. (Pac. Com. Co. v. Phil. Nat’l.
Bank, 49 Phil. 236).
(c) Certificates of stock or of stock dividends, under the
Corporation Code, are quasi-negotiable instruments in
the sense that they may be given in pledge to secure
an obligation.

Pac. Com. Co. v. Phil. Nat’l. Bank

49 Phil. 236

FACTS: The Gulf Plantation Co., to secure a loan not

exceeding P165,000, constituted a pledge in favor of the
Philippine National Bank. The document was prepared
on the customary blank form of pledge. It was entered
into on Aug. 24, 1918, and endorsed on Feb. 24, 1921
by the Register of Deeds with the words “received this
24th day of Feb. 1921, at 9:30 A.M.” The property was
never placed in the possession of the bank. Furthermore,
the property consisted of some bales of hemp, and the
rest were all real properties consisting of buildings and
lands.
HELD: The pledge is not valid for failure to deliver
possession, but even granting its validity, it can only refer
to the personal property and not to the real property.

The Manila Banking Corp. v. Teodoro, et al.

GR 53955, Jan. 13, 1989

In case of doubt as to whether a transaction is a

pledge or a dation in payment, the presumption is in
favor of a pledge, the latter being the lesser transmis-
sion of rights and interests.

Art. 2095. Incorporeal rights, evidenced by negotiable

instruments, bills of lading, shares of stock, bonds, warehouse
receipts and similar documents may also be pledged. The
instrument proving the right pledged shall be delivered to
the creditor, and if negotiable, must be indorsed.

1092
CIVIL CODE OF THE PHILIPPINES Art. 2096

COMMENT:

(1) Pledge of Incoporeal Rights

(a) The instrument proving the right pledged must be DE-
LIVERED.
(b) If negotiable, said instrument must be ENDORSED.

(2) Pledge Certificate

A pledge certificate by itself is not a negotiable instru-
ment, and therefore even if delivered and endorsed to an
assignee, he would have no right to redeem the property,
unless the creditor-pledgee consents. (Concepcion v. Agencia
Empeños de A. Aguirre, [C.A.] 63 O.G. 1431).

Art. 2096. A pledge shall not take effect against third

persons if a description of the thing pledged and the date
of the pledge do not appear in a public instrument.

COMMENT:
(1) Effectivity of Pledge Against Third Persons
(a) A public instrument must be made.
(b) The instrument must contain the DESCRIPTION of the
thing pledged and the DATE of the pledge.

(2) Reason for the Law

A debtor in bad faith may attempt to conceal his property
by simulating a pledge thereof with an accomplice. Art. 2096
is, of course, mandatory in character.

(3) Mere Delivery Not Sufficient

To affect third persons, mere delivery of possession is
insufficient. “This provision (Art. 2096) has been interpreted
in the sense that for the contract to affect third persons, it
must appear in a public instrument in addition to delivery of
the thing pledged.” (Bachrach Motor Co. v. Lacson Ledesma,
64 Phil. 681).

1093
Art. 2097 CIVIL CODE OF THE PHILIPPINES

(4) Assignee Under the Insolvency Law

An assignee of a person under the Insolvency Law is
a third person within the meaning of Art. 2096 of the Civil
Code. This is because the assignee insofar as the collection
of credits is concerned, is the representative of the creditors
and not of the bankrupt. Furthermore, when goods or mer-
chandise have been pledged to secure the payment of a debt
of a particular creditor, the other creditors of the pledgor
are “third persons” with relation to the pledge contract and
pledgor and pledgee. (Te Pate v. Ingersoll, 43 Phil. 394).

(5) Problem
A is indebted to B, so A pledges his diamond ring to
B. The ring is delivered to B, but in the public instrument
executed, there is no description of the ring, and the date of
the pledge does not appear. If A sells the ring to C, does C
have to respect the pledge in favor of B?
ANS.: No. C does not have to respect the pledge since
as to him, the pledge is not effective and valid. (Art. 2096).

(6) Effect if No Public Instrument Is Made

When the contract of pledge is not recorded in a public
instrument, it is void as against third persons; the buyer of
the thing pledged is a third person within the meaning of the
article. The fact that the person claming as pledgee has taken
actual physical possession of the thing sold will not prevent
the pledge from being declared void insofar as the innocent
stranger is concerned. (Tec Bi and Co. v. Chartered Bank of
India, Australia and China, 16 O.G. 908; Ocejo, Perez and
Co. v. International Bank, 37 Phil. 631).

Art. 2097. With the consent of the pledgee, the thing

pledged may be alienated by the pledgor or owner, subject
to the pledge. The ownership of the thing pledged is trans-
mitted to the vendee or transferee as soon as the pledgee
consents to the alienation, but the latter shall continue in
possession.

1094
CIVIL CODE OF THE PHILIPPINES Art. 2098

COMMENT:
Pledgor May Alienate Thing Pledged
Example:
A pledged his diamond ring with B. A may sell the ring
provided that B consents. The sale is, however, subject to the
pledge, that is, the pledge would bind third persons if Art.
2096 has been followed. If C buys the ring, the ownership of
the ring is transferred to him, as soon as B consents to the
sale but B shall continue to be in possession of the ring.

Art. 2098. The contract of pledge gives a right to the

creditor to retain the thing in his possession or in that of
a third person to whom it has been delivered, until the
debt is paid.

COMMENT:
(1) Creditor’s Right to Retain
Example:
A owes B P1 million. As security, A pledged his diamond
ring with B. B has the right to retain the ring until the P1
Million debt is paid.

(2) Rule Under the Old Law

Under the old Civil Code, the second paragraph of the
equivalent article (1866, old Civil Code) granted the creditor
the right to retain the property pledged as guaranty for any
other obligation of the debtor. But said second paragraph
has been eliminated. “It is thought that said provision was
unjust. If the creditor wants the original pledge to apply also
to the new claim, he should so demand at the time the later
obligation is entered into. It cannot be fairly presumed that
the debtor consented to the new pledge.” (Report of the Code
Commission, p. 156)
Example: A borrowed P1 million from B. As security, A
pledged his diamond ring. Later, A borrowed P200,000. When
the first debt fell due, A paid the P1 million and demanded

1095
Art. 2099 CIVIL CODE OF THE PHILIPPINES

the return of the ring. But B wants to retain the ring until
he has been paid the remaining debt of P200,000. Issue: Has
B the right to retain the ring?
ANS.: Under the old Civil Code, yes; but under the new
Civil Code, no.

(3) No Double Pledge

Property which has been lawfully pledged to a creditor
cannot be pledged to another as long as the first one subsists.
(Mission de San Vicente v. Reyes, 19 Phil. 524). This is so,
for otherwise, how can the thing pledged be delivered to the
second creditor? It must be noted that if the first pledgee or
creditor gives up the possession of the property pledged, such
pledge is thereby extinguished notwithstanding the continua-
tion of the principal obligation guaranteed by the pledge. (See
Art. 2110, Civil Code).

Art. 2099. The creditor shall take care of the thing

pledged with the diligence of a good father of a family; he
has a right to the reimbursement of the expenses made for
its preservation, and is liable for its loss or deterioration,
in conformity with the provisions of this Code.

COMMENT:
Duty of Pledgee to Take Care of Thing Pledged
(a) When the possession of property belonging to a debtor is
delivered to a creditor simply as a guaranty for the pay-
ment of a debt, the title does not pass to the temporary
possessor, who has no right to damage or to destroy, and
is liable for any injury he may cause. (Bonjoc v. Cuison,
13 Phil. 301). But the pledgee should not be held respon-
sible for fortuitous events except if there is a contrary
stipulation, or when the nature of the obligation requires
the assumption of risk. (Art. 1174, Civil Code).
(b) If the pledgee has exercised all the care and diligence
which the law requires of her, she cannot be held respon-
sible for the theft of the jewelry pledged with her. Had

1096
CIVIL CODE OF THE PHILIPPINES Art. 2099

the theft occurred as a result of her fault or negligence,

she would have been liable. (San Jose and Carlos v.
Ruiz, 71 Phil. 541).

Cruz and Serrano v. Chua A.H. Lee

54 Phil. 10

FACTS: Cornelio Cruz pledged valuable jewelry to the

Monte de Piedad which gave him 2 pawn tickets. These two
pawn tickets were in turn pledged by him to Chua A. H.
Lee. The tickets could be renewed from time to time upon
payment of the proper interest. Lee renewed them once, but
did not continue as time passed. Eventually, the tickets lost
their value. Issue: Is Lee responsible for the loss of the value
of the tickets?
HELD: Yes. The principal question requiring decision in
the case before us is one of law, namely, whether a person
who takes a pawn ticket in pledge is bound to renew the
ticket from time to time, by the payment of interest, or pre-
mium, as required by the pawnbroker, until the rights of the
pledgor are finally foreclosed. It must be borne in mind that
the ordinary pawn ticket is a document by virtue of which
the property in the thing pledged passes from hand to hand
by mere delivery of the ticket, and the contract of pledge is
therefore absolvable to bearer. It results that one who takes
a pawn ticket in pledge acquires domination over the pledge;
and it is the holder who must renew the pledge if it is to be
kept alive. The law (Art. 2099) contemplates that the pledgee
may have to undergo expenses in order to prevent the pledge
from being lost; and these expenses the pledgee is entitled to
recover from the pledgor. From this, it follows that where the
pledge is lost by a failure like this — failure of the pledgee to
renew the loan — he is liable for the resulting damage. Nor,
in this case, was the duty of the pledgee destroyed by the
fact that the pledgee had obtained a judgment for the debt
of the pledgor which was secured by the pledge. The duty to
use the diligence of a good father of the family in caring for
the pledge subsists as long as the pledged article remains in
the power of the pledgee.

1097
Arts. 2100-2102 CIVIL CODE OF THE PHILIPPINES

Art. 2100. The pledgee cannot deposit the thing pledged

with a third person, unless there is a stipulation author-
izing him to do so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged.

COMMENT:
(1) Pledgee Cannot Deposit the Thing Pledged
Generally, the pledgee cannot deposit the thing pledged
with a third person. Exception — if there is a stipulation
authorizing such deposit.

(2) Responsibility of Pledgee for Subordinates’ Acts

The second paragraph stresses the master and servant
rule.

Art. 2101. The pledgor has the same responsibility as a

bailor in commodatum in the case under article 1951.

COMMENT:
Same Responsibility as a Bailor in Commodatum
Art. 1951. The bailor who, knowing the flaws of the thing
loaned, does not advise the bailee of the same, shall be liable
to the latter for the damages which he may suffer by reason
thereof.

Art. 2102. If the pledge earns or produces fruits, income,

dividends, or interests, the creditor shall compensate what
he receives with those which are owing him; but if none
are owing him, or insofar as the amount may exceed that
which is due, he shall apply it to the principal. Unless there
is a stipulation to the contrary, the pledge shall extend to
the interest and earnings of the right pledged.
In case of a pledge of animals, their offspring shall
pertain to the pledgor or owner of the animals pledged,
but shall be subject to the pledge, if there is no stipulation
to the contrary.

1098
CIVIL CODE OF THE PHILIPPINES Arts. 2103-2104

COMMENT:

Rules if Pledge Produces Fruits or Interests

(a) Fruits and interests may compensate for those to which
the pledgee himself is entitled or may be applied to the
principal.
(b) Generally, the pledge extends to offspring of animals,
but there can be a contrary stipulation.

Art. 2103. Unless the thing pledged is expropriated, the

debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which
pertain to the owner of the thing pledged in order to recover
it from, or defend it against a third person.

COMMENT:

(1) Ownership Retained By Pledgor

Generally, the pledgor continues to be the owner. Excep-
tion — when the object is expropriated.

(2) Exercise By Pledgee of Rights of Owner

Despite ownership by the pledgor, the pledgee may ex-
ercise certain rights of the owner.

Art. 2104. The creditor cannot use the thing pledged,

without the authority of the owner, and if he should do so,
or should misuse the thing in any other way, the owner may
ask that it be judicially or extrajudicially deposited. When
the preservation of the thing pledged requires its use, it
must be used by the creditor but only for that purpose.

COMMENT:

Use By Creditor of Thing Deposited

(a) The Article explains itself.

1099
Arts. 2105-2107 CIVIL CODE OF THE PHILIPPINES

(b) The deposit referred to here is an instance of a neces-

sary deposit. That is made in compliance with a legal
obligation.

Art. 2105. The debtor cannot ask for the return of the
thing pledged against the will of the creditor, unless and
until he has paid the debt and its interest, with expenses
in a proper case.

COMMENT:
When Debtor Can Demand the Return of Thing
Pledged
(a) When he has PAID the debt, interest, and expenses in
the proper case — the debtor may demand the return
of the thing pledged.
(b) In an obligation with a term, there can be no demand
of the property pledged till after the term had arrived.
The prescriptive period for recovery of the property be-
gins from the time the debt is extinguished by payment
and a demand for the return of the property is made.
(Sarmiento v. Javellana, 43 Phil. 880).

Art. 2106. If through the negligence or willful act of

the pledgee, the thing pledged is in danger of being lost
or impaired, the pledgor may require that it be deposited
with a third person.

COMMENT:
When Pledgor May Require That the Object Be Depos-
ited With a Third Person
The Article explains itself.

Art. 2107. If there are reasonable grounds to fear the

destruction or impairment of the thing pledged, without the
fault of the pledgee, the pledgor may demand the return of
the thing, upon offering another thing in pledge, provided
the latter is of the same kind as the former and not of

1100
CIVIL CODE OF THE PHILIPPINES Art. 2108

inferior quality, and without prejudice to the right of the

pledgee under the provisions of the following article.
The pledgee is bound to advise the pledgor, without
delay, of any danger to the thing pledged.

COMMENT:
When Destruction or Impairment Is Feared, Without
the Fault of the Pledgee
This Article is applicable if the danger arises without
fault or negligence on the part of the pledgee. Two remedies
are granted, one for the pledgor, the other, for the pledgee.
(a) For the pledgor — demand the return but there must
be a substitute.
(b) For the pledgee — he may cause the same to be sold
at a public sale. The pledge continues on the proceeds.
(Art. 2108).
(NOTE: The pledgee’s right is superior to that of
the pledgor The law says the pledgor is given the right
“without prejudice to the right of the pledgee.”)

Art. 2108. If, without the fault of the pledgee, there is

danger of destruction, impairment, or diminution in value
of the thing pledged, he may cause the same to be sold at
a public sale. The proceeds of the auction shall be a secu-
rity for the principal obligation in the same manner as the
thing originally pledged.

COMMENT:
Destruction, Impairment, or Diminution in Value of the
Thing Pledged
(a) Example: A pledged canned goods with B. Because the
goods were in danger of deterioration, B sold them for
P20,000. Who owns the P20,000?
ANS.: A owns the P20,000, but B shall keep the
money as security in the same manner as the canned
goods originally pledged.

1101
Arts. 2109-2110 CIVIL CODE OF THE PHILIPPINES

(b) Note that the sale under this Article must be a “public
sale.” Note also that here the pledgee is without fault.

Art. 2109. If the creditor is deceived on the substance

or quality of the thing pledged, he may either claim another
thing in its stead, or demand immediate payment of the
principal obligation.

COMMENT:

Rule if Creditor Is Deceived on the Substance or Qual-

ity of the Thing Pledged
The Article explains itself.

Art. 2110. If the thing pledged is returned by the pledgee

to the pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing
is in the possession of the pledgor or owner, there is a
prima facie presumption that the same has been returned
by the pledgee. This same presumption exists if the thing
pledged is in the possession of a third person who has re-
ceived it from the pledgor or owner after the constitution
of the pledge.

COMMENT:

(1) Return of Thing Pledged

A pledged with B a diamond ring to secure a loan of
P100,000. It was agreed that after a week, B would return
the ring although the debt would be paid only after one year.
It was also agreed that although A would once more be in
possession of the ring, the pledge would continue. After a
week, B, as stipulated, returned the ring. Has the pledge
been extinguished?
ANS.: Yes. (Par. 1, Art. 2110). The stipulation about the
continuation of the pledge is VOID.

1102
CIVIL CODE OF THE PHILIPPINES Art. 2111

(2) When Thing Pledged Is Found in the Possession of the

Pledgor or Owner
A pledged with B a Mont Blanc-Meisterstuck fountain pen.
A week later, the pen was found in A’s possession. There is
presumption here that B has returned the fountain pen and
that therefore the pledge has been extinguished. May this
presumption be rebutted?
ANS.: Yes, since the presumption is merely prima facie.
For example, B may have returned the pen and asked that
it be substituted; or a stranger may have stolen the pen, and
given it to A. (1st sentence, 2nd paragraph, Art. 2110).

Art. 2111. A statement in writing by the pledgee that he

renounces or abandons the pledge is sufficient to extinguish
the pledge. For this purpose, neither the acceptance by the
pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary.

COMMENT:
(1) When Pledgee Renounces or Abandons the Pledge
Example:
A pledged with B his diamond ring. B took possession
of the ring. Later, although the principal obligation had not
been paid, B wrote on a private document that he was re-
nouncing the pledge. A did not accept this renunciation, and
the ring remained in B’s possession. Has the pledge been
extinguished.
ANS.: Yes. B in this case is no longer a pledgee, but a
depositary, with the rights and obligations of a depositary.
(Art. 2111).

(2) Form Needed — Statement in Writing

Notice that renunciation or the abandonment must be in
writing. An oral waiver is not aufficient. But if the pledgee
orally renounces the pledge, and returns the thing pledged to
the pledgor, the pledge is thereby extinguished, not because
of Art. 2111, but because of Art. 2110, first paragraph.

1103
Art. 2112 CIVIL CODE OF THE PHILIPPINES

Art. 2112. The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public
to the sale of the thing pledged. This sale shall be made at
a public auction, and with notification to the debtor and
the owner of the thing pledged in a proper case, stating
the amount for which the public sale is to be held. If at the
first auction the thing is not sold, a second one with the
same formalities shall be held; and if at the second auction
there is no sale either, the creditor may appropriate the
thing pledged. In this case he shall be obliged to give an
acquittance for his entire claim.

COMMENT:
(1) Right of Creditor to Sell if Credit is Not Satisfied
Under Art. 2087, the law says that it is of the essence
of the contract of pledge that when the principal obligation
becomes due, the things in which the pledge consists may be
alienated for the payment to the creditor.

(2) Formalities Required

(a) The debt is already due.
(b) There must be the intervention of a notary public.
(c) There must be a public auction (if at the first, it is not
sold, a second auction must be held with the same for-
malities).
(d) Notice to debtor or owner stating the amount due, that
is, the amount for which the public sale is to be held.

(3) Questions
(a) Suppose at the first auction, the thing pledged is not
sold, is the pledgee allowed to appropriate the thing for
himself.
ANS.: No, because there must be a second auction.
(b) Suppose at the second auction, the thing pledged is not
sold, may the pledgee now appropriate the thing for
himself?

1104
CIVIL CODE OF THE PHILIPPINES Art. 2112

ANS.: Yes. In this case, he shall be obliged to give an

acquittance for his entire claim?
If he believes that the pledged thing is worth much more
than the principal debt, should the pledgee give the excess?
ANS.: No. It is his right to get the whole value of the
thing. (Contrast with the rule in case it was sold.) (Art. 2115).
If the value happens to be less and the pledgee appropriates
the thing for himself, is he entitled to any deficiency judg-
ment?
ANS.: No. He is obliged to cancel the entire obligation.
After all, why did he accept a pledge of something worth less
than the principal obligation?

(4) Rule Under the Old Law

Art. 1859 of the old Civil Code (Art. 2088 of the new Civil
Code) prohibits the creditor from appropriating to himself the
things pledged or mortgaged, and from disposing of them; but
this does not mean that a stipulation is prohibited whereby
the creditor is authorized in case of non-payment within the
term fixed by the parties to sell the thing mortgaged at public
auction, or to adjudicate to himself the same, in case of failure
of said sale, nor is there any reason whatever to prevent it;
on the contrary, Art. 1872 (now Art. 2112 of the new Civil
Code) expressly authorized this procedure in connection with
pledge, even if it may not have been expressly stipulated.
(Resol. of the General Director of Registries of Jul. 12, 1901,
92 Jur. Civil 103). This power to sell does not imply an ap-
propriation thereof, but is merely a derivative of the authority
granted the contracting parties. This is not against the law,
since what the law prohibits is only the acquisition by the
creditor of the property mortgaged, merely by reason of the
non-payment of the debt, and the above-stated stipulation
simply authorizes him to sell it with the aforesaid condi-
tions, which authorization is inherent in ownership and is
not against morals and public order. (Decision of the Supreme
Court of Spain on Oct. 21, 1902, 94 Jur. Civil 364). Hence, a
stipulation in a mortgage conferring a power of sale upon the
mortgagee in default of payment is valid. (El Hogar Filipino
v. Paredes, 45 Phil. 178).

1105
Arts. 2113-2114 CIVIL CODE OF THE PHILIPPINES

(NOTE: Act 3135 allows the extrajudicial foreclosure of

mortgages, but the procedure set forth therein must be followed.
The creditor himself is not authorized to conduct the sale for the
law itself provides that the sale shall be under the direction of
the sheriff of the province, the justice or auxiliary justice of the
peace of the municipality. The El Hogar case was decided prior
to the passage of Act 3135. This Act is still in force.)

(5) Rule When Pledgee Is Expressly Authorized to Sell

Upon Default
If in the contract of pledge, the pledgee is authorized to
sell upon default, the requirements in this Article (Art. 2112)
must be complied with; if the conditions of the sale are set
forth already in the contract, Art. 2112 does not have to be
observed. (See Tan Chun Tic v. West Coast Life Ins. Co., 54
Phil. 361).

Art. 2113. At the public auction, the pledgor or owner

may bid. He shall, moreover, have a better right if he should
offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be
valid if he is the only bidder.

COMMENT:
Right of Pledgor and Pledgee to Bid at the Public Auc-
tion
Example: A pledged his diamond ring with B. The debt
was not paid on time, and a public auction took place. Can
A bid? Can B bid?
ANS.: Yes, A can bid. Furthermore, he shall have a
better right if he should offer the same terms as the highest
bidder. Reason for the preference: after all, the thing belongs
to him. Yes, B may also bid but his offer shall not be valid
if he is the only bidder.

Art. 2114. All bids at the public auction shall offer to

pay the purchase price at once. If any other bid is accepted,
the pledgee is deemed to have received the purchase price,
as far as the pledgor or owner is concerned.

1106
CIVIL CODE OF THE PHILIPPINES Art. 2115

COMMENT:
Nature of the Bids at the Public Auction
The bids must be for CASH — for said bids “shall offer
to pay the purchase price AT ONCE.” Even if a purchase on
installment is accepted by the pledgee, the sale is still for
cash — insofar as the pledgor or owner is concerned?

Art. 2115. The sale of the thing pledged shall extinguish

the principal obligation, whether or not the proceeds of
the sale are equal to the amount of the principal obliga-
tion, interest and expenses in a proper case. If the price of
the sale is more than said amount, the debtor shall not be
entitled to the excess, unless it is otherwise agreed. If the
price of the sale is less, neither shall the creditor be entitled
to recover the deficiency, notwithstanding any stipulation
to the contrary.

COMMENT:
Rules if the Price At the Sale Is More or Less Than the
Debt
(a) If the price at sale is MORE — excess goes to the creditor,
unless the contrary is provided. (This is rather unfair,
because the pledgor is the OWNER.)
(b) If the price is LESS — creditor does NOT get the defi-
ciency. A contrary stipulation is VOID.

Manila Surety and Fidelity Co., Inc. v. Velayo

L-21069, Oct. 26, 1967

FACTS: A debtor pledged to his surety piece jewelry to

indemnify the latter in case it (the surety would be obliged
to pay the creditors. The surety paid P2,800 to the creditors.
To recover the amount, it at a public auction the jewels, but
unfortunately received only P235. Issue: May the surety re-
cover the deficiency from the debtor?
HELD: There can be no more recovery of deficiency, by
express provision of Art. 2115. Reason: The surety (pledgee)

1107
Arts. 2116-2118 CIVIL CODE OF THE PHILIPPINES

decided to avail himself of the remedy of foreclosure. Had he

sued on the principal obligation (the P2,800), he could have
recovered the deficiency.

Art. 2116. After the public auction, the pledgee shall

promptly advise the pledgor or owner of the result thereof.

COMMENT:

Duty of Pledgee to Advise Pledgor or Owner of the

Result of the Public Auction
The Article explains itself.

Art. 2117. Any third person who has any right in or to

the thing pledged may satisfy the principal obligation as
soon as the latter becomes due and demandable.

COMMENT:

Right of a Third Person to Pay the Debt

Example: A promised to give B a particular diamond
ring if B should pass the bar. But because A needed money,
he pledged the ring with C to secure a loan. When the debt
becomes due and demandable, B, if he passed the bar, may
pay the debt to C and thus get the diamond ring. C cannot
refuse payment by B because B has a right in the thing
pledged.

Art. 2118. If a credit which has been pledged becomes

due before it is redeemed, the pledgee may collect and
receive the amount due. He shall apply the same to the
payment of his claim, and deliver the surplus, should there
be any, to the pledgor.

COMMENT:

Pledge of a Credit That Later on Becomes Due

Example: A borrowed from B P100,000. This was secured
by a negotiable promissory note made by X in favor of A to

1108
CIVIL CODE OF THE PHILIPPINES Arts. 2119-2121

the amount of P180,000. The negotiable promissory note was

endorsed by A in B’s favor. If the note becomes due before it
is redeemed, B can collect and receive the P180,000 from X,
B should get P100,000 and deliver the surplus of P80,000 to
A.

Art. 2119. If two or more things are pledged, the pledgee

may choose which he will cause to be sold, unless there is
a stipulation to the contrary. He may demand the sale of
only as many of the things as are necessary for the pay-
ment of the debt.

COMMENT:
Rule if Two or More Things Are Pledged
The Article explains itself. Note, however, that there can
be a stipulation to the contrary.

Art. 2120. If a third party secures an obligation by

pledging his own movable property under the provisions of
own movable property under the provisions of Article 2085
he shall have the same rights as a guarantor under articles
2066 to 2070, and Articles 2077 to 2081. He is not prejudiced
by any waiver of defense by the principal obligor.

COMMENT:
Rule if a Third Person Pledges His Own Property to
Secure the Debt of Another
The Article is self-explanatory.

Art. 2121. Pledges created by operation of law, such

as those referred to in Articles 546, 1731, and 1994, are
governed by the foregoing articles on the possession, care
and sale of the thing as well as on the termination of the
pledge. However, after payment of the debt and expenses,
the remainder of the price of the sale shall be delivered to
the obligor.

1109
Art. 2122 CIVIL CODE OF THE PHILIPPINES

COMMENT:

(1) Pledges Created by Operation of Law

(a) This Article speaking of “pledges created by operation
of law” refers to the right of retention.
(b) Note that in this legal pledge, the remainder of the price
shall be given to the debtor. This rule is different from
that in Art. 2115.

(2) Samples
(a) Art. 546 — refers to necessary and useful expenses
(b) Art. 1731 — to work on a movable
(c) Art. 1994 — refers to a depositary
(d) Art. 1914 — (also legal pledge) — refers to the right of
an agent to retain
(e) Art. 2004 — (also a legal pledge) refers to the right of
a hotel-keeper

(3) Query
If the property retained is real property, is this still a
PLEDGE by operation of law?

Art. 2122. A thing under a pledge by operation of law

may be sold only after demand of the amount for which the
thing is retained. The public auction shall take place within
one month after such demand. If, without just grounds, the
creditor does not cause the public sale to be held within such
period, the debtor may require the return of the thing.

COMMENT:

If Sale of Thing Pledged By Operation of Law

Note that there is only ONE public auction here.

1110
CIVIL CODE OF THE PHILIPPINES Art. 2123

Art. 2123. With regard to pawnshops and other estab-

lishments, which are engaged in making loans secured by
pledges, the special laws and regulations concerning them
shall be observed, and subsidiarily, the provisions of this
Title.

COMMENT:
Special Laws on Pawnshops, Etc.
The Article is self-explanatory.

1111
 CIVIL CODE OF THE PHILIPPINES

Chapter 3

MORTGAGE

Art. 2124. Only the following property may be the object

of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws,
imposed upon immovables.
Nevertheless, movables may be the object of a chattel
mortgage.

COMMENT:
(1) ‘Real Mortgage’ Defined
It is a contract in which the debtor guarantees to the
creditor the fulfillment of a principal obligation, subjecting for
the faithful compliance therewith a real property in case of
non-fulfillment of said obligation at the time stipulated. (12
Manresa, p. 460).

(2) Etymological Definition

Mortgage is derived from two French words, “mort” and
“gage.” These are equivalent to the Latin terms mortuum
uadium. The word “mort” means “dead” and the term “gage”
means “pledge.” Thus, literally, a mortgage is a dead or
unproductive pledge. (Sturpe v. Kopp, 201, No. 412, 99 S.W.
1703).

(3) Characteristics of a Real Mortgage

(a) It is a real right.
(b) It is an accessory contract.
(c) It is indivisible.

1112
CIVIL CODE OF THE PHILIPPINES Art. 2124

(d) It is inseparable.
(e) It is real property.
(f) It is a limitation on ownership.
(g) It can secure all kinds of obligations.
(h) The property cannot be appropriated.
(i) The mortgage is a lien.

(4) Real Right

A mortgage binds a purchaser who knows of its existence
or if the mortgage was registered. (McCullough v. Veloso, 46
Phil. 1).

(5) Accessory
If the principal obligation is VOID, the mortgage is also
VOID. (Reyes v. Gonzales, [C.A.] 45 O.G. No. 2, p. 831). But
if a mortgage is void because it was not made by the owner
of the property, the principal contract of loan may still be
valid. (Nat. Bank v. Rocha, 55 Phil. 496).

(6) Indivisible
A and B mortgaged their land in C’s favor. While the
mortgage debt was pending, A and B partitioned the land
between them, and A paid his share of the debt. Is the mort-
gage on A’s share of the land extinguished?
HELD: No, because a mortgage is indivisible. (Grooves
v. Senteel, 153 U.S. 465 and See Art. 123, Mortgage Law).

(7) Inseparable
The mortgage adheres to the property, regardless of who
its owner may subsequently be. (McCullough v. Veloso, 46
Phil. 1; Art. 105, Mortgage Law; Art. 126, Civil Code).

(8) Real Property

A mortgage on real property is by itself real property
also. (Art. 415, par. 10, Civil Code).

1113
Art. 2124 CIVIL CODE OF THE PHILIPPINES

(9) Limitation on Ownership

A mortgage encumbers, but does not end ownership; it
may thus be foreclosed. (McCullough v. Veloso, 46 Phil. 1).

(10) Kinds of Real Mortgages

(a) Voluntary or Conventional — created by the parties. (Art.
138, Mortgage Law).
(b) Legal Mortgage — one required by law to guarantee
performance. (Art. 169, Mortgage Law).
(c) Equitable Mortgage — one which reveals an intent to
make the property a security, even if the contract lacks
the proper formalities of a real estate mortgage. (See 41
C.J. 303).

(11) ‘Real Mortgage’ Distinguished from ‘Pledge’

REAL MORTGAGE PLEDGE

(a) constituted on real prop- (a) constituted on personal

erty. (Art. 2124). property. (Art. 2094).
(b) as a rule, mortgagor (b) pledgor must deliver the
retains the property. property to the creditor,
(Legaspi & Salcedo v. or, by common consent, to a
Celestial, supra). third person. (Art. 2093).
(c) not valid against third (c) not valid against third
persons if not registered. persons unless a descrip-
(Art. 2125). tion of the thing pledged
and the date of the pledge
appear in a public instru-
ment. (Art. 2096).

(12) ‘Real Mortgage’ Distinguished from ‘Sale A Retro’

REAL MORTGAGE A RETRO SALE

(a) made as security (a) not security

(b) no transfer of owner- (b) transfers ownership pro-
ship vided there is delivery

1114
CIVIL CODE OF THE PHILIPPINES Art. 2124

(c) no transfer of possession, (c) generally, there is trans-

generally fer of possession
(d) indivisible (d) redemption can be par-
tial. (See Arts. 1612 and
1613)
(e) applies only to real prop- (e) applies to real or personal
erty property

(13) ‘Real Mortgage’ Distinguished from ‘Chattel Mort-

gage’

REAL MORTGAGE CHATTEL MORTGAGE

(a) constituted on immova- (a) on movables

bles
(b) may guarantee future (b) cannot guarantee future
obligations obligations

(14) Non-Possession By Mortgagee of the Property Mort-

gaged
A mortgagee usually does NOT possess the land mort-
gaged; however, even if he does possess it, say, by agree-
ment, he cannot acquire the property by prescription, for
his possession is not in the concept of an owner. (Daoare v.
Aglutay, et al., CA, L-16114-R, Oct. 20, 1956). And even if
the obligation is not paid at maturity, the mortgagee cannot
appropriate the property for himself. Any stipulation to the
contrary is prohibited. (Rosa Naval, et al. v. Genaro Homeres,
CA, L-19482-R, May 30, 1959).

(15) Mortgages Given to Secure Future Advancements

Mojica v. CA
GR 94247, Sep. 11, 1991

FACTS: The real estate mortgage expressly stipulates that

it serves as guaranty “for the payment of the loan of P20,000

1115
Art. 2124 CIVIL CODE OF THE PHILIPPINES

and such other loans or other advances already obtained or

still to be obtained by the mortgagors as makers.”
HELD: Mortgages given to secure future advancements
are valid and legal contracts. The amounts named as consid-
eration in said contract do not limit the amount for which the
mortgage may stand as security if from the four corners of
the instrument the intent to secure future and other indebt-
edness can be gathered. Where the annotation on the back
of a certificate of title about a first mortgage states “that the
mortgage secured the payment of a certain sum of money plus
interest plus other obligations arising thereunder” there is no
necessity for any notation of the later loans on the mortga-
gors’ title. It is incumbent upon any subsequent mortgagee
or encumbrancee of the property in question to examine the
books and records of the bank, as first mortgage, regarding
the credit standing of the debtors.

(16) Some Cases

Prudencio v. CA
GR 34539, Jul. 14, 1986

The mortgage cannot be separated from the promissory

note for it is the latter which is the basis of determining
whether the mortgage should be cancelled. Without the promis-
sory note which determines the amount of indebtedness there
would be no basis for the mortgage.

Prudential Bank v. Panis

GR 50008, Aug. 31, 1987
FACTS: In 1971, FAM secured a loan from BANK. To
secure its payment, FAM executed in favor of BANK a real
estate mortgage over a 2-storey, semi-concrete building. The
property conveyed by way of mortgage includes the right of
occupancy on the lot where the mortgaged building is erected.
The BANK knew that FAM had already filed a sales applica-
tion patent over the lot. The mortgage was registered under
the provision of Act 3344. In May, 1973, FAM secured an
additional loan from BANK. To secure its payment, FAM
executed in favor of the BANK another deed of real estate

1116
CIVIL CODE OF THE PHILIPPINES Art. 2124

mortgage over the same properties previously mortgaged.

In Apr. 1973, the Secretary of Agriculture issued the same
patent over the land, the possessory rights over which were
mortgaged to BANK. When FAM failed to pay the debt, the
deeds of mortgage were foreclosed extrajudicially. The BANK
bought the property as the highest bidder. The trial court
declared as void the deeds of real estate mortgage in favor
of BANK.
ISSUE: May a valid real estate mortgage be constituted
on the building erected on the land belonging to another?
HELD: On petition for certiorari, the Supreme Court
modified the trial court’s judgment by declaring the mortgage
for the first loan valid, but ruling that the mortgage for the
additional loan void, without prejudice to any appropriate
action, the Government may take against FAM. While it is
true that mortgage of land necessarily includes, in the absence
of stipulation of the improvements thereon, buildings, still a
building by itself may be mortgaged apart from the land on
which it has been built. Such a mortgage would still be a real
estate mortgage, for the building would still be considered
immovable property even if dealt with separately and apart
from the land. In the same manner, possessory rights over
said properties before title is vested on the grantee, may be
validly transferred or conveyed as in a deed of mortgage.
The original mortgage was executed before the issuance of
the final patent and before the government was divested of its
title to the land, an event which takes effect only on the issu-
ance of the sales patent and its subsequent registration in the
Office of the Register of Deeds. Hence, the mortgage executed by
FAM on his own building erected on the land belonging to the
government is to all intents and purposes a valid mortgage. The
restrictions expressly mentioned on FAM’s title (Secs. 121, 122
and 124, Public Land Act) refer to land already acquired under
the Public Land Act, or any improvement thereon. Hence, they
have no application to the assailed mortgage which was executed
before such eventuality. Likewise, Section 2 of Republic Act 730,
also a restriction appearing on the face of FAM’s title has no
application, despite its reference to encumbrance or alienation
before the patent is issued because it refers specifically to en-
cumbrance or alienation on the land itself and does not mention

1117
Art. 2124 CIVIL CODE OF THE PHILIPPINES

anything regarding the improvements existing thereof. But it

is a different matter, as regards the second mortgage for addi-
tional loan, which mortgage was executed after the issuance of
the sales patent and of the original certificate of title. This falls
squarely under the prohibitions stated in Sections 121, 122 and
124 of the Public Land Act and Section 2 of Republic Act 730,
and is, therefore, void.
Pari delicto may not be invoked to defeat the policy of
the State. Neither may the doctrine of estoppel validate a void
contract. As between parties to a contract, validity cannot be
given to it by estoppel if it is prohibited by law or is against
public policy. No citizen is competent to barter away what
public policy by law seeks to preserve. This pronouncement
covers only the previous transaction already alluded to and
does not pass upon any new contract between the parties.
It should not preclude new contracts that may be entered
into between BANK and FAM that are in accordance with
the requirements of law. But any new transaction would be
subject to whatever steps the government may take for the
reversion of the land in its favor.

Serfino v. CA
GR 40868, Sep. 15, 1987
FACTS: A parcel of land patented in the name of Casa-
mayor was sold for Nemesia Baltazar. Nemesia sold the same
lot to Lopez Sugar Central. In 1956, the land was sold at
public auction by the Provincial Treasurer for tax delinquency.
Notice of the public auction was sent to Casamayor but none
to Nemesia or the Lopez Sugar Central. The land was sold
to Serfino as the highest bidder. After the transfer certificate
of title had been issued in the name of Serfino, he declared
the property in his name, continuously paid the taxes and
introduced improvements thereon. Under these circumstances,
the PNB extended a loan to Serfino secured by the land in
question on the strength of the title in the name of Serfino
and after a spot investigation by one of the fact inspectors
who made a report of his investigation. After the execution of
a real estate mortgage in favor of the PNB duly annotated on
Serfino’s certificate of title, the bank loaned Serfino P5,000.
The Bank relied on the certificate of title, the genuineness of
which is not in issue.

1118
CIVIL CODE OF THE PHILIPPINES Art. 2124

In a suit filed by the Lopez Sugar Central, the trial court

declared the tax sale void for lack of notice of the same to the
actual owner, and ordered the cancellation of Serfino’s title,
but declared the mortgage valid and ordered Lopez Sugar
Central to pay the PNB the amount secured by the mortgage.
The Court of Appeals modified the judgment by nullifying the
mortgage in favor of the PNB and exempted Lopez Sugar
Central from paying the PNB, the amount of the mortgage
loan.
HELD: The mortgagee bank had every right to rely on
the transfer certificate of title as it was a sufficient evidence
of ownership of the mortgagor. At the time the mortgage was
executed, it has no way of knowing the existence of another
genuine title covering the same land in question. The fact that
the public auction sale of the disputed property was not valid
(for lack of notice of the auction sale to the actual owner) can
not in anyway be attributed to the mortgagee’s (PNB’s) fault.
The PNB is entitled to the payment of the mortgage loan.

Danao v. CA
GR 48276, Sep. 30, 1987

For non-payment of a note secured by mortgage, the

creditor has a single cause of action against the debtor. This
single cause of action consists in the recovery of the credit
with execution of the security. The creditor in his action
may make two demands, the payment of the debt and the
foreclosure of the mortgage. But both demands arise from
the same cause, the non-payment of the debt and for that
reason, they constitute a single cause of action. Though the
debt and the mortgage constitute separate agreements, the
latter is subsidiary to the former and both refer to one and
the same obligation.
A mortgage creditor may elect to waive his security and
bring, instead, an ordinary action to recover the indebtedness
with the right to execute a judgment on all the properties of
the debtor, including the subject matter of the mortgage, sub-
ject to the qualification that if he fails in the remedy by him
elected, he cannot pursue further the remedy he has waived.
He may institute against the mortgage debtor a personal ac-

1119
Art. 2124 CIVIL CODE OF THE PHILIPPINES

tion for debt or a real action to foreclose the mortgage. He

may pursue either of the two remedies, but not both.

(17) A Mortgage Is An Accessory Contract

This is because the consideration of which is the same
for the principal contract without which it cannot exist as an
independent contract. (Ganzon, et al. v. Hon. Inserto, et al.,
208 Phil. 630 [1983]).

Philippine National Bank v. CA, Spouses Antonio

So Hu & Soledad del Rosario and Spouses
Mateo Cruz & Carlita Ronquillo
GR 126908, Jan. 16, 2003

FACTS: PNB’s application for foreclosure, filed on Jul. 15,

1985, was based on the Spouses Cruz’s third mortgage deed.
However, Spouses So Hu had already paid on Mar. 18, 1983
the principal obligation secured by the third mortgage.
HELD: Foreclosure is only valid where the debtor is in
default in the payment of his obligation. In the instant case,
PNB foreclosed the third mortgage even when the obligation,
the Third Loan, secured by the mortgage has been completely
paid prior to the foreclosure.
Obviously, the property could no longer be foreclosed to
satisfy an extinguished obligation. Since the full amount of
the Third Loan was paid as early as Mar. 18, 1983, extin-
guishing the loan obligation under the principal contract, the
mortgage obligation under the accessory contract has likewise
been extinguished.

(18) Ship Mortgage

Nordic Asia, Ltd. (now known as DNC Limited)

& Bankers Trust Co. v. CA, et al.
GR 111159, Jun. 30, 2003

FACTS: Petitioners Nordic Asia Ltd. and Bankers Trust

Co. loaned $5.3 Million to Sextant Maritime, S.A. to buy a
vessel, the M/V Fylyppa. As security for payment of the loan,

1120
CIVIL CODE OF THE PHILIPPINES Art. 2124

the borrower mortgaged the vessel and when it could not

pay, petitioners instituted extrajudicial foreclosure proceed-
ings under Sec. 14 of PD 1521, otherwise known as the Ship
Mortgage Decree of 1978.
As part of said proceedings, petitioners filed with the
Pasay RTC a petition for issuance of an arrest order against
the vessel. At the same time, crew members, herein respond-
ents, filed a case against the vessel for collection of their
unpaid wages, overtime pay, allowances, and other benefits
due them with the Manila RTC. Both trial courts (Pasay and
Manila) issued warrants against the vessel.
Petitioners subsequently filed a motion to intervene
with the Manila RTC solely for the purpose of opposing the
claim of crew members. Petitioners averred that by reason of
their mortgage lien, they are so situated as to be adversely
affected by the collection case. Notwithstanding respondents’
opposition, the motion was granted. Issue: Can the mortgagee
of a vessel intervene in a case filed by crew members of the
vessel for collection of their unpaid wages?
HELD: No, intervention is improper. Since petitioners
did not own the vessel, but merely held a mortgage lien over
it, whatever judgment rendered in the collection case against
the vessel would not be of such direct and immediate charac-
ter that petitioners would either gain or lose by direct legal
operation and effect of judgment of the Manila RTC.
Requirements for intervention are the following:
1. It must be shown that movant has legal interest in the
matter of litigation. Interest which entitles a person to
intervene in a suit between other parties must be in
the matter of litigation and of such direct and immedi-
ate character that intervenor will either gain or lose
by direct legal operation and effect of judgment. Other-
wise, if persons not parties to the action were allowed
to intervene, proceedings would become unnecessarily
complicated, expressive, and interminable — and this
would be against the policy of the law. The words, “an
interest in the subject,” mean a direct interest in the
cause of action as pleaded, one that would put inter-
venor in a legal position to litigate a fact alleged in the

1121
Art. 2125 CIVIL CODE OF THE PHILIPPINES

complaint without establishment of which plaintiff could

not recover.
2. Consideration must be given as to whether adjudication
of rights of original parties may be delayed or prejudiced,
or whether or not intervenor’s rights may be protected
in separate proceedings.

Art. 2125. In addition to the requisites stated in Article

2085, it is indispensable, in order that a mortgage may be
validly constituted, that the document in which it appears
be recorded in the Registry of Property. If the instrument
is not recorded, the mortgage is nevertheless binding be-
tween the parties.
The persons in whose favor the law establishes a mort-
gage have no other right than to demand the execution
and the recording of the document in which the mortgage
is formalized.

COMMENT:
(1) Questions Re an Unrecorded Mortgage
Is an unrecorded mortgage?
(a) effective against innocent third parties?
(b) effective, valid, and binding between the parties them-
selves?
ANS.:
(i) Under the old and new Civil Code, an unrecorded
mortgage is not effective against innocent third
parties.
(ii) Under Art. 1875 of the old Civil Code, an unrecorded
mortgage was not effective, valid, and binding even
between the contracting parties themselves. (Art.
1875, old Civil Code; Julian v. Lutero, 49 Phil. 703).
But an unrecorded mortgage on land, which were
not registered either under the Torrens system or
under the Spanish Mortgage Law, was valid, bind-
ing, and effective between the parties. (Matute v.

1122
CIVIL CODE OF THE PHILIPPINES Art. 2125

Banzali, 62 Phil. 256). Under the new Civil Code,

however, even if the mortgage is not recorded, the
mortgage (whether land is registered under the
Torrens System, Spanish Mortgage Law, or not at
all registered is nevertheless binding between the
parties. (Art. 2125, new Civil Code).

Reyes v. De Leon
GR 22331, Jun. 6, 1967
FACTS: The owner of a house sold it a retro
at a very low price with the stipulation that if not
paid or redeemed at the time stipulated, the right
to redeem would be forfeited and ownership would
automatically pass to the buyer. The period was later
extended. During this period, the owner mortgaged
the property to another person. This mortgagee
recorded the mortgage under Act 3344. The buyer
a retro brought this action for consolidation of the
a retro transaction. But the mortgagee intervened
stating that his right should prevail.
HELD: The intervenor should prevail. The
1st transaction is actually an equitable mortgage
in view of the grossly inadequate price and the
pactum commissorium (as the automatic transfer of
ownership). As between the 2 mortgages, the latter
one should prevail, for it was recorded, while the
equitable mortgage was not. Be it noted that the
second mortgagee was a mortgagee in good faith.

Tan v. Valdehueza
L-38745, Aug. 5, 1975

Even if not registered in the Registry of Prop-

erty, a mortgage is valid between the parties and the
mortgagee has the right to foreclose the mortgage, as
long as no innocent third parties are involved.

(2) Comment of the Code Commission

“An additional provision is made that if the instrument
of mortgage is not recorded, the mortgage is nevertheless

1123
Art. 2125 CIVIL CODE OF THE PHILIPPINES

binding between the parties.” (Report of the Code Commission,

p. 159).

(3) Effect of a Signed Mortgage

Once a mortgage has been signed in due form, the mort-
gagee is entitled to its registration as a matter of right. By
executing the mortgage, the mortgagor is understood to have
given his consent to its registration, and he cannot be permit-
ted to revoke it unilaterally. The validity and fulfillment of
contracts cannot be left to the will of one of the contracting
parties. (Gonzales v. Basa, et al., 73 Phil. 704). And the legal
presumption of sufficient cause or consideration supporting
a contract, even if such cause is not stated therein, cannot
be overcome by a simple assertion of lack of consideration.
(Samanilla v. Cajucom, et al., L-13683, Mar. 31, 1960).

(4) Rule in Case of Legal Mortgages

In case of legal mortgages (where the law establishes
a mortgage in favor of certain persons) the persons entitled
have no other right than to demand the execution and the
recording of the document in which the mortgage is formal-
ized. This is in conformity with the rule established under the
law on Form of Contracts which reads: “If the law requires a
document of some other special form, the contracting parties
may compel each other to observe that form, once the contract
had been perfected. This right when exercised simultaneously
with the action upon the contract is valid and enforceable.”

(5) Effect of Registration

A mortgage, whether registered or not is binding between
the parties, registration being necessary only to make the same
valid against third persons. In other words, registration only
operates as a notice of the mortgage to others, but neither
adds to its validity nor convert an invalid mortgage into a
valid one between the parties. If the purpose of registration
is merely to give notice, the question regarding the effect or
invalidity of instrument, are expected to be decided AFTER,
not before registration. It must follow as a necessary conse-
quence that registration must first be allowed and the validity

1124
CIVIL CODE OF THE PHILIPPINES Art. 2126

or the effect litigated afterwards. (Samanilla v. Cajucom, et

al., L-13683, Mar. 31, 1960).

Art. 2126. The mortgage directly and immediately sub-

jects the property upon which it is imposed, whoever the
possessor may be to the fulfillment of the obligation for
whose security it was constituted.

COMMENT:
(1) Meaning of Property Being Subjected to the Mort-
gage
The Article simply means that a mortgage is a real right
following the property. Therefore, if a mortgagor sells the
property, the buyer must respect the mortgage (if registered,
or if he knows of its existence).

(2) Non-Responsibility of Buyer for the Deficiency

If in the above example, the creditor forecloses the mort-
gage, the buyer will not be responsible for the deficiency, if
any, for the encumbrance is only on the property itself. The
exception of course would be in the case of novation, where
all the parties consent to the buyer’s assumption of personal
liability. (See McCullough and Co., Inc. v. Veloso and Serna,
46 Phil. 1).

(3) Applicability of the Article Even if the Mortgagor Is

Not the Principal Debtor
Art. 2126 applies even if the mortgagor is NOT the
principal debtor. (He, for example, mortgaged the property
to guarantee another’s debt.) (Lack v. Alonzo, 14 Phil. 630).

(4) Transfer of Property to Another

If a mortgagor, without the creditor’s consent, transfers
the property and the debt to another, the mortgagor would still
be personally liable, for the attempted novation here would
not be valid in view of the lack of consent on the part of the
creditor. On the other hand, the mortgage on the property

1125
Art. 2127 CIVIL CODE OF THE PHILIPPINES

can still be foreclosed upon, in view of the real nature of a

mortgage. (See Angelo v. Dir. of Lands, 49 Phil. 838 and Mc
Cullough & Co., Inc. v. Veloso & Serna, 46 Phil. 1).

Art. 2127. The mortgage extends to the natural acces-

sions, to the improvements, growing fruits, and the rents
or income not yet received when the obligation becomes
due, and to the amount of the indemnity granted or owing
to the proprietor from the insurers of the property mort-
gaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by
law, whether the estate remains in the possession of the
mortgagor, or it passes into the hands of a third person.

Ganzon v. Judge Sancho

GR 56450, Jul. 25, 1983
A mortgage lien is considered inseparable from the
property inasmuch as it is a right in rem.
If the mortgage be replaced by a surety bond, the lien
would be converted into a right in personam. Naturally, the
mortgagee’s rights under the mortgage would be diminished.

COMMENT:
(1) Objects to Which a Mortgage Extends
Example:
A mortgage on the land includes present and future
houses thereon, unless the houses are exempted by express
stipulation. (See Bischoff v. Pomar & Cia General de Tabacos,
12 Phil. 690; Berkenkotter v. Cu Unjieng, 61 Phil. 663).

(2) Some Doctrines

(a) “Growing fruits” naturally should exclude those already
harvested before the obligation falls due. (See Afable v.
Belando, 55 Phil. 64).
(b) If equipment on a mortgaged land is temporarily removed,
the mortgage continues on said equipment. (Serra v.
Nat’l. Bank, 45 Phil. 907).

1126
CIVIL CODE OF THE PHILIPPINES Art. 2128

(c) Land, with an old house, was mortgaged. Later, the

house was replaced by a new and more expensive one.
In the absence of a contrary stipulation, the new house
is covered by the mortgage. (Phil. Sugar Estate Dev. Co.
v. Campos, 36 Phil. 85).
(d) Under the old Code, a mortgage lien on the fruits of the
land may be defeated by the superior lien given to the
person who advanced credit for the seeds and expenses
of cultivation and harvesting. (Par. 11, Art. 2241; Serra
v. Nat’l. Bank, 45 Phil. 907). It would seem, however,
from Arts. 2246 and 2247 of the new Civil Code that
now, the preference has ceased, and the credit will have
to be apportioned pro rata.

(3) Fruits of the Land Mortgaged

Fruits, already gathered, of the land mortgaged should
NOT be applied to the payment of the principal obligation,
unless there is a stipulation to this effect. (Araniego, et al.
v. Bernardino, et al., C.A., L-20192-R, May 30, 1959). Note,
however, that under the Article, the mortgage extends to
GROWING FRUITS.

Art. 2128. The mortgage credit may be alienated or

assigned to a third person, in whole or in part, with the
formalities required by law.

COMMENT:
(1) Alienation of the Mortgage Credit
The mortgage credit (the right of the mortgagee) may
be alienated or assigned, in whole or in part. This is because
the mortgagee is the owner of said right.

(2) Effect if Alienation of the Mortgage Credit Is Not Reg-

istered
Even if the alienation is not registered, it would still be
valid as between the parties. Registration is needed only to
affect third parties. (Lopez v. Alvarez, 9 Phil. 28).

1127
Art. 2129 CIVIL CODE OF THE PHILIPPINES

Art. 2129. The creditor may claim from a third person

in possession of the mortgaged property, the payment of
the part of the credit secured by the property which said
third person possesses, in the terms and with the formali-
ties which the law establishes.

COMMENT:
(1) Right of Creditor to Go Against Possessor of Property
Mortgaged
This means that the mortgage creditor can demand from
any possessor of the mortgaged property the credit insofar as
it can be obtained from the property itself. Of course, a prior
demand must have been made on the debtor, and said debtor
failed to pay. (See McCullough & Co. v. Veloso & Serna, 46
Phil. 1).

(2) Example
Marcial mortgaged his land to Rodrigo to obtain a debt
of P100,000. Marcial then sold the land to Alfredo. When the
debt falls due, Rodrigo may demand payment from Marcial;
and if Marcial fails to pay, Rodrigo may now demand from
Alfredo. If Alfredo does not pay, the mortgage may be fore-
closed. Of course, if there is a deficiency, Alfredo cannot be
held liable for such deficiency, in the absence of a contrary
stipulation. (See Bank of the P.I. v. Concepcion & Hijos, Inc.,
53 Phil. 806).

Fernandez v. Aninias
57 Phil. 737

FACTS: Adecedent in his lifetime had mortgaged his

land in favor of Y. The estate was then distributed among
the heirs, one of which was W, who received for his part the
land subject to the mortgage. If Y decides to foreclose, does
he have to bring the action against the executor and other
heirs also, or against W alone?
HELD: Against W alone, because it was he to whom said
mortgaged property had been allotted.

1128
CIVIL CODE OF THE PHILIPPINES Art. 2130

Art. 2130. A stipulation forbidding the owner from al-

ienating the immovable mortgaged shall be void.

COMMENT:
(1) Stipulation Forbidding Owner to Alienate
The Article explains itself.

(2) Reason for the Law

“Such a prohibition would be contrary to the public good,
inasmuch as the transmission of property should not be unduly
impeded.” (Report of the Code Commission, p. 58).

(3) Bar Question

May the parties to a mortgage of a house and lot validly
stipulate that during the period of mortgage, the mortgagor
may not sell the mortgaged property? Reason.
ANS.: No, for such a stipulation is void under Art. 2130
of the Civil Code, being contrary to public policy.

(4) Stipulation Requiring Prior Consent of Mortgagee

A stipulation wherein the mortgagor is required to get
the consent of the mortgagee before subsequently mortgaging
the property is valid and binding when the land is registered
under the Torrens system. But if the property was originally
registered under the Spanish Mortgage Law, then such a
stipulation is not valid and may be disregarded by the mort-
gagor. (Philippine Industrial Co. v. El Hogar Filipino, 43 Phil.
336).

Bonnevie v. Court of Appeals

GR 49101, Oct. 24, 1983
FACTS: A mortgagor sold his mortgaged lot to a buyer
without the consent of the mortgagee (the contract required
said consent). The buyer assumed the mortgage, also without
the mortgagee’s knowledge and consent. If later, both the
mortgagor and the buyer offer to redeem the property by
paying the debt, whose offer must the mortgagee accept?

1129
Art. 2131 CIVIL CODE OF THE PHILIPPINES

HELD: The offer of the mortgagor, not the offer of the

buyer whose purchase and whose assumption of mortgage
had not been authorized by the mortgagee.

(5) Second Mortgage

If the making of a second mortgage, except with the writ-
ten consent of the mortgagee is prohibited, and the contract
states the penalty for such a violation, namely, “the violation
gives the mortgagee the right to immediately foreclose the
mortgage,” the violation does not give the first mortgagee
the right to treat the second mortgage as null and void. (Sim
Janco v. Bank of the Phil.).

Art. 2131. The form, extent and consequences of a

mortgage, both as to its constitution, modification and ex-
tinguishment, and as to other matters not included in this
Chapter, shall be governed by the provisions of the Mortgage
Law and of the Land Registration Law.

COMMENT:

(1) What Special Laws Govern

The Article explains itself.

(2) Upset Price

A stipulation in a contract which fixes a tipo or upset
price, at which the property will be sold at a foreclosure pro-
ceedings is null and void. This stipulation violates Sec. 3, Rule
70 of the Rules of Court (now Rule 68) which provides that
the property mortgaged should be sold to the highest bidder.
Hence, even if the contract contains such a stipulation, the
sale of the property must take place, and the property should
be awarded to the highest bidder. (Bank of the Philippines v.
Yulo, 31 Phil. 472).

(3) Insurance
The mortgagee and the mortgagor both have insurable
interest in the property, and therefore they may insure the

1130
CIVIL CODE OF THE PHILIPPINES Art. 2131

same. (See San Miguel Brewery v. Law Union & Rock Ins.
Co., 40 Phil. 647).

(4) ‘Equity of Redemption’ Distinguished from ‘Right of

Redemption’
(a) Equity of redemption — This is the right of the mortgagor
to redeem the mortgaged property after his default in
the performance of the conditions of the mortgage but
before the sale of the mortgaged property.
[NOTE: Under the Rules of Court, the mortgagor
may exercise his equity of redemption at any time before
the judicial sale is confirmed by the court. (Raymundo
v. Sunico, 25 Phil. 365)].
(b) Right of redemption — This is the right of the mortgagor
to purchase the property within a certain period after it
was sold for the purpose of paying the mortgage debt.

Rosales v. Yboa
GR 42282, Feb. 28, 1983
(1) If a mortgage on real property is foreclosed
but the buyer at the auction sale does not pay the real
property taxes during the period of redemption, how will
this affect the mortgage redemption? The non-payment
of the realty taxes will not affect the validity of the
mortgage redemption.
(2) The interest on the amount for redemption is
computed from the date of registration of the sale of the
property at the foreclosure proceedings, and not from the
date of the sale itself.

IFC Service Leasing and Acceptance

Corporation v. Venancio Nera
L-21720, Jan. 30, 1967

FACTS: A mortgagee (the IFC Service Leasing and

Acceptance Corporation) filed with the Sheriff’s office a
verified petition for the extrajudicial foreclosure of the
mortgage. On Oct. 27, 1961, after notice and publication,

1131
Art. 2131 CIVIL CODE OF THE PHILIPPINES

the property (consisting of a house and lot) was sold to

the Corporation as highest bidder (for P28,451.77.) One
year later (Oct. 27, 1962), the period of redemption having
expired (Oct. 27, 1962), the ownership of the property was
consolidated in the name of the Corporation, to which a
new title (Transfer Certificate of Title 65575) was issued.
If the mortgagee now wants to obtain possession of the
property, does it have to institute a regular action for
its recovery, or is it enough to ask for a writ of posses-
sion?
HELD: It is enough to ask for a writ of posses-
sion. Sec. 35 of Rule 39 of the Revised Rules of Court
expressly states that “if no redemption be made within
12 months after the sale, the purchaser, or his assignee,
is entitled to a conveyance and possession of the property.
The possession of the property shall be given to the pur-
chaser or last redemptioner by the same officer unless
a third party is actually holding the property adversely
to the judgment debtor.” In fact, there is no law in this
jurisdiction whereby the purchaser at the sheriff’s sale
of real property is obliged to bring a separate and inde-
pendent suit for possession after the one-year period of
redemption has expired and after he had obtained the
sheriff’s certificate of title. (Tan Soo Huat v. Ongwico,
63 Phil. 746). The case of Luna v. Encarnacion, 91 Phil.
531, does not apply because said case involved the ex-
trajudicial foreclosure of a chattel mortgage. Moreover,
if under Sec. 7 of Act 3135 (as amended by Act 4118),
the court has the power, on the ex parte application of
the purchaser, to issue a writ of possession during the
period of redemption, there is no reason why it should
not also have the same power after the expiration of that
period, especially where, as in this case, a new title has
already been issued in the name of the purchaser.

Lonzame v. Amores
L-53620, Jan. 31, 1985

(1) If as a result of a mortgage, the real estate is

sold at a public auction, there can be no redemption of
the property after the sale has been confirmed by the

1132
CIVIL CODE OF THE PHILIPPINES Art. 2131

court. And such confirmation retroacts to the date of the

auction sale.
(2) After the confirmation, the previous owners
lose any right they may have had over the property,
which rights are in turn vested on the purchaser of the
property.

Concha, et al. v. Hon. Divinagracia

L-27042, Sep. 30, 1981
Co-possessors of a parcel that is mortgaged must
be made parties to foreclosure proceedings; otherwise,
they cannot be deprived of possession of that portion of
the land actually possessed by them.

Pedro Dimasacat and Ernesto Robles

v. The Court of Appeals, et al.
L-26575, Feb. 27, 1969
FACTS: Rafael O. Lagdameo mortgaged with the
Philippine National Bank contiguous parcels of land with
an approximate area of 7,236 square meters situated in
Quezon Province.
Later, Lagdameo sold to Ernesto Robles 250 square
meters (undivided), and to Pedro Dimasacat 381 square
meters (also undivided) of the parcels of land involved.
The two sales were not registered. Upon Lagdameo’s
failure to pay, the PNB foreclosed the mortgage. Within
the one-year period of redemption, however, Robles and
Dimasacat wanted to redeem the ENTIRE lot (7,236
square meters) from the Bank, in view of their fear that
Lagdameo had no money with which to effectuate the
redemption. Because of the PNB’s refusal, the two buy-
ers sued both the PNB and Lagdameo. In the meantime,
Lagdameo was able to redeem the entire lot, without
prejudiced however, to the pending suit that had been
brought by the two buyers.
ISSUES:
(a) Could the two buyer (Robles and Dimasacat) redeem
the entire lot?

1133
Art. 2131 CIVIL CODE OF THE PHILIPPINES

(b) Now that Lagdameo has redeemed the property,

what are the rights of Robles and Dimasacat?
HELD:
(a) The two buyers could redeem only the shares they
had bought from Lagdameo, not the entire lot. (See
in this connection Magno v. Viola, 61 Phil. 80).
(b) Since Lagdameo has already redeemed the entire
lot (the sales in favor of Robles and Dimasacat) the
three (Lagdameo, Robles, and Dimasacat) should be
considered as CO-OWNERS, to the extent of their
respective shares, without prejudice to the right to
effectuate a physical partition eventually.

Gorospe v. Santos
L-30079, Jan. 30, 1976

FACTS: A mortgage of registered land was

extrajudicially foreclosed on Mar. 10, 1960 when
the property was purchased at the public auction
by a buyer, but the certificate of sale was registered
only on Oct. 20, 1960. From what moment does the
one-year period of redemption start — from the sale,
or from the registration of the sale?
HELD: The one-year redemption period must
be counted from the time of the registration of the
sale, in order that delinquent registered owners or
notice produced by the act of registration.

Development Bank of the Philippines

v. Mirang
L-29130, Aug. 8, 1975
If a mortgagor desires to redeem his property
after the same has been sold at public auction (ex-
trajudicial foreclosure) he should pay the amount
of the loan at the time such sale was made, and
not just the price at which the property was sold.
This is because, if the property be sold at less than

1134
CIVIL CODE OF THE PHILIPPINES Art. 2131

the amount of the indebtedness, the mortgagee is

entitled to recover the deficiency. Be it noted that a
mortgage is a security, not the satisfaction by itself
of an obligation. What is extinguished by foreclosure
is indeed not the loan (for here, there was only
partial performance), but only the mortgage lien.
Thus under the law, in the absence of a provision
in Act 3135 prohibiting recovery of the deficiency
after an extrajudicial foreclosure of a real estate
mortgage, the mortgagee is as of right, entitled to
recover the deficiency.

In Re Petition for the Cancellation

of Encumbrances Appearing in Transfer
Certificates of Title Nicanor T. Santos,
petitioner
L-27358, Feb. 20, 1981

The CFI (now RTC), acting as a land regis-

tration court, CANNOT in summary proceedings
under Sec. 112 of the Land Registration Law cancel
encumbrances on TCTs (like an attachment lien and
the first mortgage, both of which are alleged to have
prescribed). There should be adversary proceedings
in an ordinary civil action. If in this case there had
previously been such an ordinary civil action, sum-
mary proceedings under Sec. 112 can be allowed.

Bonnevie v. Court of Appeals

GR 49101, Oct. 24, 1983

Act 3135 (re extrajudicial foreclosure of a

mortgage) requires publication of the notice once
a week for three consecutive weeks. This does not
require a period of three full weeks.
Thus, a publication on Jun. 30, Jul. 7, and
Jul. 14 satisfies the requirement although only 14
days have actually elapsed from the first to the
third publication.

1135
Art. 2131 CIVIL CODE OF THE PHILIPPINES

Gravina v. CA
220 SCRA 178
1993

Section 3 of Act 3135 (Mortgage Law) requires

only the posting of the notices of sale in three public
places and publication of the same in a newspaper
of general circulation.

Hi-Yield Realty, Inc. v. CA, etc.

GR 138978, Sep. 12, 2002
FACTS: In compliance with an order, peti-
tioner submitted to the trial court a detailed com-
putation of the total redemption price as of Mar.
17, 1994. Private respondent received his copy on
Mar. 24, 1994. Private respondent received his copy
on Mar. 24, 1994 and, therefore, had until Apr.
8, 1994 to pay the redemption price in full. He,
however, failed to pay it by that date. Instead, on
Apr. 8, 1994, private respondent filed an “Urgent
Motion for Extension of Time” with the trial court
asking for an extra time of 45 days within which
to pay the redemption price. He reasoned out that
his debtor to augment his cash on hand and that
he was then waiting for a bank loan for P150,000.
Private respondent simply did not have sufficient
money to tender; he experienced difficulty in rais-
ing the money to redeem the foreclosed property.
Issue: Is financial hardship a ground to extend the
period of redemption?
HELD: No. While respondent may have elicited
the sympathy of the trial court, the Supreme Court,
on its part, ruled that it cannot, however, be blind
to the rights of petitioner. For it was serious er-
ror to make the final redemption of the foreclosed
property dependent on the financial condition of
private respondent.
After all, the opportunity to redeem the subject
property was never denied to private respondent.
His timely formal offer thru judicial action to re-

1136
CIVIL CODE OF THE PHILIPPINES Art. 2131

deem was likewise recognized. But that is where it

ends. Every succeeding motion or petition cannot
be sanctioned and granted, especially if frivolous
or unreasonable — filed by him because this would
manifestly and unreasonably delay the final resolu-
tion of ownership of the subject property.
The Supreme Court said it “cannot be clearer
on this point: as a result of the trial court’s grant
of a 45-day extended period to redeem almost 9
years have elapsed with both parties’ claims over
the property dangling in limbo, to the serious im-
pairment of petitioner’s rights,” thus, it “cannot help
but call the trial court’s attention to the prejudice it
has unwittingly caused the petitioner. It was really
all too simple. The trial court should have seen, as,
in fact, it had already initially seen, that the 45-day
extension sought by private respondent on Apr. 8,
1994 was just a play to cover up his lack of funds
to redeem the foreclosed property.”

(5) Redemption Price When DBP Is Mortgagee

Development Bank of the Phils. v.

West Negros College, Inc.
GR 152359, Oct. 28, 2002

FACTS: Redemption of properties mortgaged with the

Development Bank of the Philippines (DBP) and foreclosed
either judicially or extrajudicially is governed by special laws
which provide for payment of all amount owed by debtor. This
special protection given to DBP is not accorded to judgment
creditors in ordinary civil actions. Issues: (1) How much should
a mortgagor pay to redeem a real property mortgaged to and
subsequently foreclosed by DBP?; and (2) Must he pay the
bank the entire amount he owed the latter on date of sale
with interest on total indebtedness at agreed rate on the ob-
ligation, or is it enough for purposes of redemption that he
reimburse the amount of purchase with 1% monthly interest
thereon, including other expenses defrayed by purchases at
the extrajudicial sale?

1137
Art. 2131 CIVIL CODE OF THE PHILIPPINES

HELD: (1) Where real property is mortgaged to and

foreclosed judicially or extrajudicially by DBP, the right of
redemption may be exercised only by paying to DBP all the
amount owed by borrower on date of sale, with interest on
total indebtedness at rate agreed upon in the obligation from
said date unless bidder has taken material possession of the
property or unless this has been delivered to him, in which
case proceeds of the property shall compensate interest. This
rule applies whether the foreclosed property is sold to DBP
or another person at public auction, provided, of course, the
property was mortgaged to DBP.
(2) Where property is sold to persons other than mortga-
gee, the procedure is for DBP in case of redemption to return
to bidder the amount it received from him as a result of the
auction sale with corresponding interest by the debtor.
The foregoing rule is embodied consistently in the charter
of DBP (RA 2081) and its predecessor agencies — Agricul-
tural and Industrial Bank (AIB) (RA 459) and Rehabilitation
Finance Corp. (RFC) (RA 85).

1138
CIVIL CODE OF THE PHILIPPINES

Chapter 4

ANTICHRESIS

Art. 2132. By the contract of antichresis the creditor

acquires the right to receive the fruits of an immovable of
his debtor, with the obligation to apply them to the payment
of the interest, if owing, and thereafter to the principal of
his credit.

COMMENT:
(1) ‘Antichresis’ Defined
The Article defines “antichresis.”

(2) Characteristics
(a) Antichresis is an accessory contract and gives a real
right. (Santa Rosa v. Noble, 35 O.G. 2724).
(b) It is a formal contract because it must be in writing;
otherwise, it is VOID. (Art. 2134).

(3) Distinguished from ‘Pledge’ and ‘Mortgage’

(a) It differs from a pledge because the latter refers only to
personal property, whereas antichresis deals only with
immovable property.
(b) It differs from mortgage because in the latter, there is
NO RIGHT to the FRUITS.
[NOTE: While the creditor in antichresis is enti-
tled to the fruits, still the fruits must be applied to the
interest, if owing. (Art. 2132).]
[NOTE: In both antichresis and mortgage, the
property may or may not be delivered to the creditor.

1139
Art. 2132 CIVIL CODE OF THE PHILIPPINES

In general, however, in mortgage, the property is NOT

DELIVERED whereas in antichresis, the property is
DELIVERED.]

(4) Problem
A borrower obtained a loan, delivered the property as
security so that the creditor may use the fruits. But no interest
was mentioned; and it was not stated that the fruits would be
applied to the interest first and then to the principal. What
kind of a contract is this?
ANS.: This is a real mortgage, not an antichresis.
(Salcedo v. Celestila, 66 Phil. 372). What characterizes a
contract of antichresis is that the creditor acquires the right
to receive the fruits of the property of his debtor, with the
obligation to apply them to the payment of interest, if any is
due, and then to the principal of his credit — and when such
a covenant is not made in the contract, the contract cannot
be an antichresis. (Alojada v. Lim Siongco, 51 Phil. 339; see
Adrid, et al. v. Morga, et al., L-13299, Jul. 25, 1960, where
the Court held that the mere taking of land products in lieu
of the receipt of interest originally stipulated upon does not
necessarily convert the contract into one of an antichresis
in view of the lack of provision in the contract specifically
authorizing the receipt of the fruits.)

(5) Jurisprudence

Samonte v. CA
GR 44841, Jan. 27, 1986
The claim that an instrument of antichresis had been
executed by the parties’ predecessors-in-interest in the lat-
ter part of 1930, based on testimonial evidence, cannot be
considered legally sufficient. On or about 1930, an express
contract of antichresis would have been unusual.

Ramirez v. CA
GR 38185, Sep. 24, 1986
An antichretic creditor cannot acquired by prescription
the land surrendered to him by the debtor. The creditor is

1140
CIVIL CODE OF THE PHILIPPINES Arts. 2133-2135

not a possessor in the concept of owner but a mere holder

placed in possession of the land by the owner. Hence, their
possession cannot serve as a title for acquiring dominion.

Art. 2133. The actual market value of the fruits at the

time of the application thereof to the interest and principal
shall be the measure of such application.

COMMENT:
(1) Use of “Actual Market Value”
“The foregoing rule will forestall the use of antichresis
for purposes of USURY.” (Report of the Code Commission, p.
158).

(2) Interest Must Not Be Usurious

The interest in antichresis must not violate the Usury
law. (Santa Rosa v. Noble, 35 O.G. 2724; see Art. 2138).

Art. 2134. The amount of the principal and of the inter-

est shall be specified in writing; otherwise, the contract of
antichresis shall be void.

COMMENT:
(1) Form
The amount of the PRINCIPAL and the INTEREST
must be in WRITING. This is mandatory; therefore, if not
in writing, the contract of antichresis is VOID.

(2) Principal Obligation

Even if the antichresis is VOID, the principal obligation
may still be VALID.

Art. 2135. The creditor, unless there is a stipulation to

the contrary, is obliged to pay the taxes the charges upon
the estate.
He is also bound to bear the expenses necessary for
the preservation and repair.

1141
Art. 2136 CIVIL CODE OF THE PHILIPPINES

The sums spent for the purposes stated in this article

shall be deducted from the fruits.

COMMENT:
(1) Obligations of the Creditor
(a) To pay the taxes and charges upon the estate — unless
there is a contrary stipulation.
(b) To pay expenses for necessary repairs.

(2) Effects if Creditor Does Not Pay the Proper Taxes

If the creditor does not pay the taxes, the debtor is
prejudiced; hence, the creditor is liable for damages. (Rosales
v. Tanseco, et al., 90 Phil. 496).

(3) Rule if the Fruit Are Insufficient

Since the first paragraph provides for responsibility on
the part of the creditor, it follows that he has to pay for the
taxes and charges, even if the fruits be insufficient. This
duty is implied also from the second paragraph of Art. 2136.
However, insofar as they can be deducted from the fruits, it
is as if the debtor is really paying for such taxes and neces-
sary repairs.

Art. 2136. The debtor cannot reacquire the enjoyment

of the immovable without first having totally paid what he
owes the creditor.
But the latter, in order to exempt himself from the ob-
ligations imposed upon him by the preceding article, may
always compel the debtor to enter again upon the enjoy-
ment of the property, except when there is a stipulation
to the contrary.

COMMENT:
(1) When Debtor Can Reacquire the Enjoyment of the Im-
movable
After he has paid TOTALLY what he owes the creditor.

1142
CIVIL CODE OF THE PHILIPPINES Arts. 2137-2138

(2) What Creditor Can Do to Exempt Himself from the

Payment of Taxes and Necessary Repairs
He can avail himself of the second paragraph of the
Article.

(3) Reimbursement in Favor of Creditor

An antichretic creditor is entitled to be reimbursed for
his expenses for machinery and other improvements on the
land, and for the sums paid as land taxes. (Magdangal v.
Lichauco, 51 Phil. 894). Said reimbursement may of course
come from the fruits.

Art. 2137. The creditor does not acquire the ownership

of the real estate for non-payment of the debt within the
period agreed upon.
Every stipulation to the contrary shall be void. But the
creditor may petition the court for the payment of the debt
or the sale of the real property. In this case, the Rules of
Court on the foreclosure of mortgages shall apply.

COMMENT:

Prohibition Against Pactum Commmissorium Applica-

ble
(a) The evils of pactum commissorium may arise in the
contract of antichresis — hence, the prohibition.
(b) The parties may validly agree on an extrajudicial fore-
closure. (El Hogar Filipino v. Paredes, 45 Phil. 178).

Art. 2138. The contracting parties may stipulate that

the interest upon the debt be compensated with the fruits of
the property which is the object of the antichresis, provided
that if the value of the fruits should exceed the amount of
interest allowed by the laws against usury, the excess shall
be applied to the principal.

1143
Art. 2139 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Usurious Rates Prohibited
In case of excessive interest, the excess shall be applied
to the principal.

Art. 2139. The last paragraph of Article 2085, and Arti-

cles 2089 to 2091 are applicable to this contract.

COMMENT:
Applicability of Other Articles
(a) Art. 2085. The following requisites are essential to the
contracts of pledge and mortgage:
1) That they be constituted to secure the fulfillment
of the principal obligation;
2) That the pledgor or mortgagor be the absolute owner
of the thing pledged or mortgaged;
3) That the persons constituting the pledge or mortgage
have the free disposal of their property, and in the
absence thereof, that they be legally authorized for
the purposes.
Third persons who are not parties to the prin-
cipal obligation may secure the latter by pledging
or mortgaging their own property.
(b) Art. 2089. A pledge or mortgage is indivisible, even
though the debt may be divided among the successors
in interest of the debtor of the creditor.
Therefore, the debtor’s heir who has paid a part
of the debt cannot ask for the proportionate extinguish-
ments of the pledge or mortgage as long as the debt is
not completely satisfied.
Neither can the creditor’s heir who received his
share of the debt return the pledge or cancel the mort-
gage, to the prejudice of the other heirs who have not
been paid.

1144
CIVIL CODE OF THE PHILIPPINES Art. 2139

From these provisions is excepted the case in which,

there being several things given in mortgage or pledge
each one of them guarantees only a determinate portion
of the credit.
The debtor, in this case, shall have a right to the
extinguishments of the pledge or mortgage as the portion
of the debt for which each thing is specially answerable
is satisfied.
(c) Art. 2090. The indivisibility of a pledge or mortgage is
not affected by the fact that the debtors are not solidar-
ily liable.
(d) Art. 2091. The contract of pledge or mortgage may se-
cure all kinds of obligations, be they pure or subject to
a suspensive or resolutory condition.

1145
 CIVIL CODE OF THE PHILIPPINES
Art. 2136

Chapter 5

CHATTEL MORTGAGE

Art. 2140. By a chattel mortgage, personal property is

recorded in the Chattel Mortgage Register as a security for
the performance of an obligation. If the movable, instead of
being recorded, is delivered to the creditor or a third person,
the contract is a pledge and not a chattel mortgage.

COMMENT:

(1) Requisites for the Form of a Chattel Mortgage

(a) Validity between the Parties:
The personal property must be RECORDED or
REGISTERED in the Chattel Mortgage Register. (Art.
2140).
(NOTE: Registration in the Day Book is NOT
enough; it must be in the Chattel Mortgage Register.
(See Associated Insurance and Surety Co., Inc. v. Lim
Ang, et al. [C.A.] 52 O.G. 5218; BUT SEE ALSO Salcedo
v. Lim Ang, et al., 54 O.G. 5153.)
[NOTE: To be valid between the parties, is recording
or registration in the Chattel Mortgage Register required?
According to one school of thought, YES because of the
wording of Art. 2140; according to another school, NO,
for after all Sec. 4 of the Chattel Mortgage Law states
that the recording or registration is only for effectivity as
against third persons, and there is nothing incompatible
between this Sec. 4 and Art. 2140 UNLESS the latter
(Art. 2140) will be regarded as a DEFINITION. (See
Standard Oil Co. v. Jaramillo, 44 Phil. 630). The author
is inclined to answer that the registration is required even
for validity between the parties because of the express

1146
CIVIL CODE OF THE PHILIPPINES Art. 2140

wording of Art. 2140 and because such article may be

regarded as the DEFINITION of a Chattel Mortgage.]
(b) Validity as against Third Persons:
The same as (a). Moreover, the registration must be
accompanied by an affidavit of good faith. (Secs. 4 and 5,
Chattel Mortgage Law, Act No. 5108). A mortgage con-
stituted on a car, in order to affect third persons should
be registered not only in the Chattel Mortgage Registry
but also in the Motor Vehicles Office as required by
Sec. 5(e) of the Revised Motor Vehicles Law. (Borlough
v. Fortune Enterprises, Inc., L-9451, Mar. 29, 1957 and
Aleman, et al. v. De Catera, et al., L-13693-94, Mar. 5,
1961). Thus, as between a chattel mortgagee, whose
mortgage is not recorded in the MVO, and an innocent
purchaser for value of a car who registers the car in his
name, it is obvious that the latter is entitled to prefer-
ence. (Montano v. Lim Ang, L-13057, Feb. 27, 1963).

(2) Definition
A chattel mortgage is an accessory contract by virtue of
which personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an obligation.
(Art. 2140).
[NOTE: Under the old law, it was considered a condi-
tional sale. The Code Commission considered the old definition
defective. (Report of the Code Commission, p. 158).]

(3) When Mortgage Must Be Registered in Two Regis-

tries
If under the Chattel Mortgage Law, the mortgage must be
registered in two registries (as when the mortgagor resides in
one province, but the property is in another), the registration
must be in BOTH; otherwise, the chattel mortgage is VOID.
(See Malonzo v. Luneta Motor Co., et al., C.A., 52 O.G. 5566).

(4) House as the Subject Matter of a Chattel Mortgage

May a house constructed on rented land be the subject
of a chattel mortgage? State your reasons. (BAR).

1147
Art. 2140 CIVIL CODE OF THE PHILIPPINES

ANS.: Generally no, because the house is real property.

(Art. 415, Civil Code and Leung Yee v. Strong Machinery Co.,
37 Phil. 644). This is so even if the house belongs to a person
other than the owner of the land.
However, in the following instances there may be such
a chattel mortgage:
(a) If the parties to the contract agree and no third persons
are prejudiced. (Evangelista v. Abad, [C.A.] 36 O.G. 291,
Tomines v. San Juan, [C.A.] 45 O.G. 2935). This is re-
ally because one who has so agreed is ESTOPPED from
denying the existence of the chattel mortgage.
[NOTE: Insofar as third persons are concerned, the
chattel mortgage on the building even if registered is
VOID. (Leung Yee v. Strong Machinery Co., 37 Phil. 644;
Evangelista v. Alto Surety and Ins. Co., Inc., L-11139,
Apr. 23, 1958).]
(b) If what is mortgaged is a house intended to be demolished
or removed –– for here, what are really mortgaged are
the MATERIALS thereof, hence, mere personal property.
(3 Manresa, p. 19).

Navarro v. Pineda
L-18456, Nov. 30, 1963

FACTS: Pineda executed a chattel mortgage on his

2-story residential house erected on a lot belonging to
another, to secure an indebtedness. The debt was not
paid on the date due, hence, the plaintiff sought to fore-
close the chattel mortgage on the house. Pineda argued
however that since only movables can be the subject of
a chattel mortgage (Sec. 1, Act 3952), the mortgage in
question which is the basis of the present action, can-
not give rise to an action for foreclosure, because it is
a nullity. He cited Art. 415, which classifies a house as
immovable property whether the owner of the land is
or is not the owner of the building. He further invoked
the ruling in the case of Lopez v. Oroza (L-10817-8, Feb.
8, 1958) which held that “a building is an immovable
property, irrespective of whether or not said structure

1148
CIVIL CODE OF THE PHILIPPINES Art. 2140

and the land on which it is adhered to belong to the

same owner.” (See Leung Yee v. Strong Machinery Co.,
37 Phil. 644).
HELD: The house in question was treated as per-
sonal property by the parties to the contract themselves.
Hence, as to them, the chattel mortgage is VALID. Be-
sides, the Court, speaking of the size of the house, said
“The house was small and made of light material, sawali,
and wooden posts; and built on the land of another.”
[NOTE: The Court distinguished this case from pre-
vious ones. In the Iya case (Associated Insurance v. Iya,
L-10837, May 30, 1958), the Court said that the house
was build of strong materials, permanently adhered on
the owner’s own land. In the Lopez case, the building
was a theater. In said cases, third persons assailed the
validity of the mortgage; in this Navarro case, it was a
party attacking it.]

(5) If Executed by a Wife

If the wife alone, without the prior consent or authority
of the husband, enters into a contract of chattel mortgage
respecting conjugal property, said contract is of doubtful va-
lidity. (Serra v. Rodriguez, 56 SCRA 538).

(6) Cases

Servicewide Specialists, Inc. v. CA

70 SCAD 529, 256 SCRA 649
1996
Where the Chattel Mortgage does not authorize the
mortgagee to apply previous payments for the car to the in-
surance, the mortgagee has to send notice to the mortgagor
it is decides to convert any of the installments made by the
latter for the renewal of the insurance.

Development Bank of the Phils. v.

CA & Emerald Resort Hotel Corp.
GR 125838, Jun. 10, 2003
FACTS: DBP complied with the mandatory posting of
the notices of the auction sale of the personal properties.

1149
Art. 2141 CIVIL CODE OF THE PHILIPPINES

There was no postponement of the auction sale of the personal

properties and the foreclosure took place as scheduled.
HELD: Under the Chattel Mortgage Law (Act 1508, as
amended), the only requirement is posting of the notice of
auction sale. Thus, the extrajudicial foreclosure of the chat-
tel mortgage in the instant case suffers from no procedural
infirmity.

Art. 2141. The provisions of this Code on pledge, insofar

as they are not in conflict with the Chattel Mortgage Law,
shall be applicable to chattel mortgages.

COMMENT:
(1) Applicability of the Provisions on Pledge
In case of conflict between the Chattel Mortgage Law
and the Civil Code provisions on pledge, the former must
prevail. The latter will have suppletory effect.

(2) Deficiency Judgments

Where the proceeds from the sale of mortgaged prop-
erty (chattel mortgage) do not fully satisfy the secured debt,
is the mortgagee entitled to recover the deficiency from the
mortgagor? State the rule, and the exception, if any. (BAR).
ANS.:
(a) Generally YES, the mortgagee is entitled to recover the
deficiency from the mortgagor.
REASON: Although the Chattel Mortgage Law
contains no provision on this point, still previous court
decision have held that there can be a recovery. The
Chattel Mortgage Law therefore read in the light of these
decisions, allows such a recovery. Therefore, the new Civil
Code provisions on pledge prohibiting recovery do NOT
apply. (Ablaza v. Ignacio, L-11460, May 23, 1958).
(b) An exception to the aforementioned rule may be found
in Art. 1484, which speaks of a chattel mortgage as se-

1150
CIVIL CODE OF THE PHILIPPINES Art. 2141

curity for the purchase of personal property payable in

installments. Here, no deficiency judgment can be asked.
Any agreement to the contrary shall be VOID.

(3) No Registry of Buildings

There is no legal compulsion to register, as notice to
third persons, transactions over buildings that do not belong
to the owners of the lands on which they stand. There is no
registry of buildings in this jurisdiction apart from the land.
(Manalansan v. Manalang, et al., L-13646, Jul. 26, 1960).

(4) No Necessity of Very Detailed Description of the Chat-

tel Mortgage
Very detailed descriptions of a chattel mortgage are not
required. All that is needed is a description which would en-
able both parties and strangers, after reasonable inquiry and
investigation to identify the property mortgaged. (Saldaña v.
Guaranty Co., et al., L-13194, Jan. 29, 1960).

(5) Ownership of Rentals Accrued During Period of Re-

demption

Tumalad v. Vicencio
41 SCRA 143

FACTS: Under Sec. 6 of Act 3135 as amended, after the

auction sale of the property involved in a chattel mortgage,
the debtor-mortgagor has a period of one year within which
to redeem the property sold at the extrajudicial foreclosure
sale. During this period, if the property should produce rent-
als, who is entitled to them?
HELD: They should go to the debtor-mortgagor, because
it is the latter who as owner of the property is entitled to
said rents. This is so even if the rentals had been collected
by the purchaser.

1151
Art. 2141 CIVIL CODE OF THE PHILIPPINES

(6) Chattel Mortgagee Preferred Over Judgment Creditor

of Mortgagor

Northern Motors, Inc. v. Hon. Jorge Coquia

L-40018, Aug. 29, 1975
FACTS: As security for the payment of installments of
a number of taxicabs, the Manila Yellow Taxicab Company
executed chattel mortgages on the vehicles in favor of the
seller, Northern Motors. In the meantime, a judgment credi-
tor (the Tropical Commercial Co.) of the taxicab company was
able thru the sheriff to levy on the vehicles. Northern Motors,
being the chattel mortgagee, filed a third-party claim with the
sheriff, alleging it has preferential rights over the vehicles.
Issue: Who has a preferential lien over the vehicles — the
chattel mortgagee or the judgment creditor who has levied
on the cars?
HELD: The chattel mortgagee (Northern Motors) has
the preferential lien. As long as the mortgage debt is not yet
paid, the judgment creditor of the mortgagor can only levy
on the debtor’s equity or right of redemption. Unless the pur-
chaser at the levy-on-execution sale pays the mortgage debt,
he cannot obtain possession over the properties, nor can he
obtain delivery thereof. The levy by the sheriff is therefore
wrong in taking possession of the vehicles. Because the chat-
tel mortgages were registered, we can say that the mortgagee
(Northern Motors) has the symbolical possession of the taxes.
Thus, the chattel mortgagee’s lien can be asserted in the same
case where a judgment has been rendered resulting in the levy
of the mortgaged property, instead of ventilating its lien in
an independent action. (Note: The decision of Mar. 21, 1975,
which did not prohibit the sheriff from going ahead with the
execution sale, was reconsidered and set aside.)

(7) When a Third Person Becomes Solidarily Bound With

Debtor
A third person who constitutes chattel mortgage on his
own property as security to another’s obligation not solely by
reason thereof becomes solidarily bound with principal debtor.
(Cerna v. Court of Appeals, 220 SCRA 517 [1993].)

1152
CIVIL CODE OF THE PHILIPPINES

TITLE XVII
EXTRA-CONTRACTUAL
OBLIGATIONS
Chapter 1

QUASI-CONTRACTS

Art. 2142. Certain lawful, voluntary and unilateral acts

give rise to the juridical relation of quasi-contract to the
end that no one shall be unjustly enriched or benefited at
the expense of another.

COMMENT:

(1) Definition of ‘Quasi-Contracts’

Quasi-contracts are lawful, voluntary, and unilateral acts
which generally require a person to reimburse or compensate
another in accordance with the principle that no one shall be
unjustly enriched or benefited at the expense of another. (See
Art. 2142).

Union Insurance Society of Canton v. CA

73 SCAD 163
1996

To order private respondent to pay petitioner the value

of the vessels is one without legal basis and could result in
unjust enrichment of petitioner. For it is error to make pri-
vate respondent pay petitioner the value of three vessels or
to order the return of the vessels to petitioner without the
sale first being rescinded.

1153
Art. 2142 CIVIL CODE OF THE PHILIPPINES

MC Engineering v. CA
GR 104047, Apr. 3, 2002
Every person who thru an act or performance by another,
or by any other means, acquires or comes into possession of
something at the expense of the latter without just or legal
ground, shall return the same to him. (Art. 22, Civil Code).
Two (2) conditions must generally concur before the rule
on unjust enrichment can apply, namely: (1) a person is un-
justly benefited; and (2) such benefit is derived at another’s
expense or damage.

(2) Bases for Quasi-Contracts

(a) no one must unjustly enrich himself at another’s ex-
pense
(b) if one benefits, he must reimburse
(c) justice and equity

(3) Examples of Quasi-Contracts

(a) negotiorum gestio
(b) solutio indebiti

(4) Example of a Situation When There is No Quasi-Con-

tract
A person who makes constructions on another’s property
by virtue of a contract entered into between him and the
lessee (NOT the lessor-owner) of the property cannot, despite
the lesse’s insolvency, recover the value of said constructions
from the lessor-owner on the ground of “undue enrichment” on
the part of such lessor-owner. This is NOT a quasi-contract.
Firstly, the construction was not a “purely voluntary act” or
a “unilateral act” on the part of the builder, for he had con-
structed them in compliance with a bilateral obligation he had
undertaken with the lessee. Secondly, having become privy to
the lessee’s rights under the lease contract, his rights as builder
will be governed by the provisions of said lease contract, under
whose terms, the improvements made on the property would
be given to the lessor. Thirdly, if ever there was enrichment
on the part of the lessor-owner, it was not “undue.” For the

1154
CIVIL CODE OF THE PHILIPPINES Art. 2143

builder can blame no one except himself. What he should have

done at the beginning was to obtain a bond from the lessee.
He did not. Now that the lessee cannot pay, he should not be
allowed to proceed against the lessor. (Lao Chit v. Security
Bank and Trust Co., et al., L-11028, Apr. 17, 1959).

(5) Case Where There Was No Unjust Enrichment

Permanent Concrete Products v.

Donato Teodoro, et al.
L-29766, Nov. 29, 1968

FACTS: Clementina Vda. de Guison hired Teodoro and

Associates to construct a building for her for the lump sum
of P44,000. The contractor explicitly agreed in the written
contract between them that “all of the labor and materials
shall be supplied by me.” During the construction, hollow
blocks were supplied by a company, the Permanent Concrete
Products, Inc. When no payment was received, the supplier
sued both Guison (as owner) and Teodoro (as contractor) for
the purchase price. Teodoro alleges, among other things, that
it should be the owner who should pay for the hollow blocks
since the same redounded to her benefit, otherwise she would
be unjustly enriched at the expense of the supplier. Issue:
Who should pay for the hollow blocks?
HELD: The contractor, Teodoro, must pay for in the
contract he expressly assumed the cost of all materials.
While the owner got the benefit of the hollow blocks, it does
not necessarily follow that she was enriched at the expense
of the Permanent Concrete Products, Inc. After all, she paid
the P44,000 agreed upon as the lump sum.

Art. 2143. The provisions for quasi-contracts in this

Chapter do no exclude other quasi-contracts which may
come within the purview of the preceding article.

COMMENT:
Enumeration in the Civil Code Not Exclusive
The Article explains itself.

1155
Art. 2144 CIVIL CODE OF THE PHILIPPINES

Section 1
NEGOTIORUM GESTIO

Art. 2144. Whoever voluntarily takes charge of the

agency or management of the business or property of
another, without any power from the latter, is obliged to
continue the same until the termination of the affair and its
incidents, or to require the person concerned to substitute
him, if the owner is in a position to do so. This juridical
relation does not arise in either of these instances:
(1) When the property or business is not neglected or
abandoned;
(2) If in fact the manager has been tacitly authorized
by the owner.
In the first case, the provisions of Articles 1317, 1403,
No. 1 and 1404 regarding unauthorized contracts shall
govern.
In the second case, the rules on agency in Title X of
this Book shall be applicable.

COMMENT:

(1) Essential Requisites for “Negotiorum Gestio”

(a) no meeting of the minds
(b) taking charge of another’s business or property
(c) the property or business must have been ABANDONED
OR NEGLECTED (otherwise, the rule on unauthorized
contracts would apply)
(d) the officious manager must NOT have been expressly or
implicitly authorized (otherwise, the rules on AGENCY
would apply)
(e) the officious manager (gestor) must have VOLUNTARILY
taken charge (that is, there must be no vitiated consent,
such as error in thinking that he owned the property or
the business). (TS, Nov. 26, 1926).

1156
CIVIL CODE OF THE PHILIPPINES Arts. 2145-2146

(2) Examples
(a) If an attorney in fact continues to manage the princi-
pal’s estate after the principal’s death, the former agent
becomes a gestor. (Julian, et al. v. De Antonio [C.A.] 2
O.G. 966, Oct. 14, 1943).
(b) If a co-ownership is illegally partitioned, the possessors
become gestors with the duty to render an accounting.
(De Gala v. De Gala & Alabastro, 60 Phil. 311).

Art. 2145. The officious manager shall perform his du-

ties with the diligence of a good father of a family, and pay
the damages which through his fault or negligence may be
suffered by the owner of the property or business under
management.
The courts may, however, increase or moderate the
indemnity according to the circumstances of each case.

COMMENT:
Diligence Required of the Officious Manager
(a) Diligence of a good father of the family.
(b) Hence a gestor is liable for the acts or negligence of his
employees. (MRR Co. v. Compania Transatlantica, 38
Phil. 875).
(c) Note the liability for damages, which however, in certain
cases, may be mitigated.

Art. 2146. If the officious manager delegates to another

person all or some of his duties, he shall be liable for the
acts of the delegate, without prejudice to the direct obliga-
tion of the latter toward the owner of the business.
The responsibility of two or more officious managers
shall be solidary, unless the management was assumed to
save the thing or business from imminent danger.

COMMENT:
(1) Delegation of Duties of Officious Manager
The first paragraph is self-explanatory.

1157
Arts. 2147-2149 CIVIL CODE OF THE PHILIPPINES

(2) Solidary Liability of the Gestors

Note the solidary liability of two or more gestors. Note
also the exception.

Art. 2147. The officious manager shall be liable for any

fortuitous event:
(1) If he undertakes risky operations which the owner
was not accustomed to embark upon;
(2) If he has preferred his own interest to that of the
owner;
(3) If he fails to return the property or business after
demand by the owner;
(4) If he assumed the management in bad faith.

COMMENT:
Liability for Fortuitous Events
The Article explains itself.

Art. 2148. Except when the management was assumed

to save the property or business from imminent danger, the
officious manager shall be liable for fortuitous events:
(1) If he is manifestly unfit to carry on the manage-
ment;
(2) If by his intervention he prevented a more com-
petent person from taking up the management.

COMMENT:
Other Instances of Liability for Fortuitous Events
The Articles explains itself.

Art. 2149. The ratification of the management by the

owner of the business produces the effects of an express
agency, even if the business may not have been successful.

1158
CIVIL CODE OF THE PHILIPPINES Arts. 2150-2151

COMMENT:
Effect of Ratification By the Owner of the Business
(a) Note that ratification produces the effects of an EXPRESS
AGENCY.
(b) This is true even if the business is not successful.

Art. 2150. Although the officious management may not

have been expressly ratified, the owner of the property or
business who enjoys the advantages of the same shall be
liable for obligations incurred in his interest, and shall re-
imburse the officious manager for the necessary and useful
expenses and for the damages which the latter may have
suffered in the performance of his duties.
The same obligation shall be incumbent upon him when
the management had for its purpose the prevention of an
imminent and manifest loss, although no benefit may have
been derived.

COMMENT:
(1) Specific Liabilities of the Owner Even if There Is No
Ratification
(a) Liability for obligation incurred in his interest.
(b) Liability for necessary and useful expenses and for dam-
ages.

(2) Rule if the Owner Is a Minor

Even if the owner is a minor, he is still liable under the
article for he should not be unjustly enriched at another’s
expense. (Rotea v. Delupio, 67 Phil. 330).

Art. 2151. Even though the owner did not derive any
benefit and there has been no imminent and manifest danger
to the property or business, the owner is liable as under
the first paragraph of the preceding article, provided:
(1) The officious manager has acted in good faith, and
(2) The property or business is intact, ready to be
returned to the owner.

1159
Arts. 2152-2153 CIVIL CODE OF THE PHILIPPINES

COMMENT:

Liability Even if No Benefit or Danger

Note that here the owner is liable even if there had
been NO benefit to him, for after all the gestor acted with
an honest intent.

Art. 2152. The officious manager is personally liable

for contracts which he has entered into with third persons,
even though he acted in the name of the owner, and there
shall be no right of action between the owner and third
persons. These provisions shall not apply:
(1) If the owner has expressly or tacitly ratified the
management, or
(2) When the contract refers to things pertaining to
the owner of the business.

COMMENT:

Personal Liability of the Officious Manager Towards

Third Persons
The Article explains itself.

Art. 2153. The management is extinguished:

(1) When the owner repudiates it or puts an end
thereto;
(2) When the officious manager withdraws from the
management, subject to the provisions of Article 2144;
(3) By the death, civil interdiction, insanity or insol-
vency of the owner or the officious manager.

COMMENT:
Cause for the Extinguishment of the Officious Manage-
ment
(a) The causes are enumerated in the Article.

1160
CIVIL CODE OF THE PHILIPPINES Art. 2154

(b) Note the effect of DICI (death, insanity, civil interdiction,

or insolvency) of EITHER the OWNER or the OFFICIOUS
MANAGER.

Section 2
SOLUTIO INDEBITI

Art. 2154. If something is received when there is no

right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.

COMMENT:
(1) ‘Solutio Indebiti’ Defined
Solutio indebiti is the quasi-contract that arises when
a person is obliged to return whatever was received by him
through error or mistake or received by him although there
was NO RIGHT to demand it.

(2) Requisites for Solutio Indebiti

(a) Receipt (not mere acknowledgment) of something. (Art.
2154).
(b) There was no right to demand it (because the giver had
no obligation). (Hoskyn & Co., Inc. v. Goodyear Tire &
Rubber Export Co., CA., 40 O.G. No. 15 [IIs], p. 245).
(c) The undue delivery was because of mistake (either of
FACT [Hoskyn and Co. v. Goodyear, Ibid.], or of law,
which may be doubtful or difficult). (Art. 2155).
[NOTE: When the payment was not by mistake or
voluntary, but was made because of the coercive process
of the writ of execution, solutio indebiti does NOT apply.
(Manila Surety & Fidelity Co., Inc. v. Lim, L-9343, Dec.
29, 1959).]

(3) Examples of Solutio Indebiti

(a) Erroneous payment of interest not due. (The interest
must be returned.) (Velez v. Balzarza, 73 Phil. 630).

1161
Art. 2155 CIVIL CODE OF THE PHILIPPINES

(b) Erroneous payment of rental not called for in view of the

expiration of the lease contract. (Yanson v. Sing, C.A.,
38 O.G. 2438).
(c) Taxes erroneously given. (Aquiñena and Co. v. Muertequi,
32 Phil. 261).

Puyat and Sons v. Sarmiento

L-17447, Apr. 30, 1963

FACTS: Plaintiff held an action for the refund of

retail dealer’s taxes paid by it WITHOUT PROTEST to
the City of Manila. May such a tax (which should not
have been paid at all) be recovered although no protest
had been made?
HELD: Yes. The taxes collected from the plaintiff by
the City of Manila were paid through error or mistake.
This is manifest from the reply of the defendant that
the sales of manufactured products at the factory site
are not taxable either under the Wholesaler’s Ordinance
or under the Retailer’s Ordinance. This makes the act
of payment under the category of solutio indebiti. Being
such a case, protest is not requires as a conditio sine
qua non for its application.
[NOTE: Payment by a joint co-debtor for the benefit
of another co-debtor or co-surety is NOT solutio indebiti
but a payment by a person interested in the fulfillment
of the obligation under Art. 1236. (Monte de Piedad v.
Rodrigo, 63 Phil. 312).]

Art. 2155. Payment by reason of a mistake in the con-

struction or application of a doubtful or difficult question of
law may come within the scope of the preceding article.

COMMENT:
Payment Because of Doubtful or Difficult Question of
Law
Are there questions of law which are NOT difficult or
doubtful? It would seem that all are hard and susceptible or

1162
CIVIL CODE OF THE PHILIPPINES Art. 2155

both liberal and strict interpretations. Please note, however,

that under the law, payment because of “doubtful or difficult
question of law” may lead to solutio indebiti because of the
mistake committed.

Globe Mackay Cable and Radio Corp., et al.

v. NLRC, et al.
GR 74156, Jun. 29, 1988
FACTS: Globe Mackay used to compute and pay its
monthly cost-of-living allowance (COLA) on the basis of 30
days a month ever since the law mandated the payment of
COLA. Upon the effectivity of Wage Order 6, which increased
the COLA by P3 a day, starting Oct. 3, 1984, the company
complied. However, in computing said allowance, management
multiplied the P3 additional COLA by 22 days, which is the
number of working days a month in the company. This was
a departure from the company’s long-standing practice of
multiplying the daily COLA by 30 days.
The union objected to management’s unilateral act of
using this new multiplier as it clearly diminishes the monthly
allowance accruing to each employee. It is the union’s position
that what the company did was tantamount to a unilateral
withdrawal of benefits which is supposedly contrary to law.
The union raised this issue in the grievance system. A series
of grievance proceedings proved futile.
The union filed a complaint against the company and
its president and vice-president who were sought to be held
personally liable for alleged illegal deduction, underpayment,
unpaid allowance, supposed violations of Wage Order 6. The
arbiter decided in favor of management, saying there are 22
working days, and “to compel the respondent company to use 30
days in a month to compute the allowance and retain 22 days
for vacation and sick leave, overtime pay and other benefits
is inconsistent and palpably unjust…” The arbiter likewise
held that since the president and vice-president acted in their
corporate capacity, they could not be impleaded, much less
held personally liable.
The union appealed to the National Labor Relations Com-
mission (NLRC), which reversed the arbiter and ruled that

1163
Arts. 2156-2157 CIVIL CODE OF THE PHILIPPINES

the company was indeed guilty of illegal deduction based on

the following considerations: First, the NLRC held that the
P3 daily COLA under Wage Order 6 should be computed and
paid based on 30 days instead of 22, since employees paid on
monthly basis are entitled to COLA on Saturdays, Sundays,
and legal holidays “even if unworked.” Second, the NLRC
pointed out that the full allowance enjoyed by the employees
before the CBA constituted a voluntary employer practice
which supposedly can not be unilaterally withdrawn. Third,
the NLRC deemed it proper that the president and the vice-
president were impleaded.
Management raised the case to the Supreme Court. The
court reversed the NLRC and reinstated the arbiter’s ruling.
The court called attention to the uniform provisions in Wage
Orders 2, 3, 5, and 6 which declared that “all covered employ-
ees shall be entitled to their daily living allowance during the
days that they are paid their basic wage even if unworked.”
It was therefore clarified that “… the payment of COLA is
mandated only for the days that the employees are paid their
basic wage.”
HELD: Petitioner corporation can not be faulted for er-
roneous application of the law. Payment may be said to have
been made by reason of a mistake in the construction or ap-
plication of “doubtful or difficult question of law.” (Art. 2155
of the Civil Code, in relation to Art. 2154). Since it is a past
error that is being corrected, no vested right may be said to
have arisen nor any diminution of benefit under Article 100
of the Labor Code, may be said to have resulted by virtue of
the correction.

Art. 2156. If the payer was in doubt whether the debt

was due, he may recover if he proves that it was not due.

COMMENT:
Payment Made Because of Doubt
The Article explains itself.

Art. 2157. The responsibility of two or more payees, when

there has been payment of what is not due, is solidary.

1164
CIVIL CODE OF THE PHILIPPINES Arts. 2158-2159

COMMENT:
Solidary Liability of the Payees
In general, obligations are joint. Art. 2157 gives one of
the exceptions.

Art. 2158. When the property delivered or money paid

belongs to a third person, the payee shall comply with the
provisions of Article 1984.

COMMENT:
Rule When Property Belongs to a Third Person
(a) The Article explains itself.
(b) Art. 1984. The depositary cannot demand that the de-
positor prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has
been stolen and who its true owner is, he must advise
the latter of the deposit.
If the owner in spite of such information, does not
claim it within the period of one month, the depositary
shall be relieved of all responsibility by returning the
thing deposited to the depositor.
If the depositary has reasonable grounds to believe
that the thing has not been lawfully acquired by the
depositor, the former may return the same.

Art. 2159. Whoever in bad faith accepts an undue pay-

ment, shall pay legal interest if a sum of money is involved,
or shall be liable for fruits received or which should have
been received if the thing produces fruits.
He shall furthermore be answerable for any loss or im-
pairment of the thing from any cause, and for damages to
the person who delivered the thing, until it is recovered.

COMMENT:
Rule if Payee Is in Bad Faith

1165
Arts. 2160-2162 CIVIL CODE OF THE PHILIPPINES

(a) Payee is liable for interests or fruits and for fortuitous

events (damages).
(b) Reason — The payee here assumes all risks having
acted fraudulently, though of course the damages may
be mitigated under Art. 2215, No. 4. (Report of the Code
Commission, p. 161).

Art. 2160. He who in good faith accepts an undue

payment of a thing certain and determinate shall only be
responsible for the impairment or loss of the same or its
accessories and accessions insofar as he has thereby been
benefited. If he has alienated it, she shall return the price
or assign the action to collect the sum.

COMMENT:
Liability of a Payee in Good Faith
(a) In case of impairment or loss, liability is only to the
extent of benefit.
(b) In case of alienation, price is to be reimbursed, or in
case of credit, the same should be assigned.

Art. 2161. As regards the reimbursement for improve-

ments and expenses incurred by him who unduly received
the thing, the provisions of Title V of Book II shall govern.

COMMENT:
Reimbursement for Improvement and Expenses
(a) The Article is self-explanatory.
(b) The rules for possessors in good faith or bad faith are
applicable.

Art. 2162. He shall be exempt from the obligation to

restore who, believing in good faith that the payment was
being made of a legitimate and subsisting claim, destroyed
the document, or allowed the action to prescribe, or gave up
the pledges, or cancelled the guaranties for his right. He who

1166
CIVIL CODE OF THE PHILIPPINES Arts. 2163-2164

paid unduly may proceed only against the true debtor or the
guarantors with regard to whom the action is still effective.

COMMENT:
Right of a Payee Who Destroys the Evidences or Proofs
of His Right
Example:
Jose in indebted to Liwayway for P1,000,000. The debt
is evidenced by a promissory note. Jose’s brother, Ricardo,
thinking that it was he who was the true debtor paid the
P1,000,000 to Liwayway. The latter thinking in good faith
that Ricardo was the true debtor received the P1,000,000.
She then destroyed the promissory note. If it should turn out
later that the payment by Ricardo was a mistake, is Liwayway
obliged to return the P1,000,000 to Ricardo?
ANS.: No, she will not be so obliged, by express provi-
sion of the instant article. The remedy of Ricardo will be to
get reimbursement from Jose, the true debtor.

Art. 2163. It is presumed that there was a mistake in

the payment if something which had never been due or had
already been paid was delivered; but he from whom the
return is claimed may prove that the delivery was made
out of liberality or for any other just cause.

COMMENT:
When Mistake Is Presumed
The Article explains itself.

Section 3
OTHER QUASI-CONTRACTS
(New, except Articles 2164 and 2165.)

Art. 2164. When, without the knowledge of the person

obliged to give support, it is given by a stranger, the lat-
ter shall have a right to claim the same from the former,
unless it appears that he gave it out of piety and without
intention of being repaid.

1167
Arts. 2165-2166 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Support Given by a Stranger
(a) Here, the support was given WITHOUT the knowledge
of the person obliged to give support.
(b) Before a wife’s relatives who give support to the wife
can recover from the husband, the husband should first
be given a chance to support the wife. (See Ramirez &
De Marcaida v. Redfern, 49 Phil. 849).

Art. 2165. When funeral expenses are borne by a third

person, without the knowledge of those relatives who were
obliged to give support to the deceased, said relatives shall
reimburse the third person, should the latter claim reim-
bursement.

COMMENT:
Funeral Expenses Borne By a Third Person
The Article is self-explanatory.

Art. 2166. When the person obliged to support an orphan,

or an insane or other indigent person unjustly refuses to give
support to the latter, any third person may furnish support to
the needy individual, with right of reimbursement from the
person obliged to give support. The provisions of this article
apply when the father or mother of a child under eighteen
years of age unjustly refuses to support him.

COMMENT:

Rule if Support is Unjustly Refused

Under this Article, as distinguished from Art. 2164,
“the obligor unduly refuses to support the persons referred
to therein. The law creates a promise of reimbursement on
the part of the person obliged to furnish support, in spite of
the deliberate disregard of his legal and moral duty. The new
provision is demanded by justice and public policy.” (Report
of the Code Com., pp. 70-71).

1168
CIVIL CODE OF THE PHILIPPINES Arts. 2167-2169

Art. 2167. When through an accident or other cause a

person is injured or becomes seriously ill, and he is treated
or helped while he is not in a condition to give consent to
a contract, he shall be liable to pay for the services of the
physician or other person aiding him, unless the service
has been rendered out of pure generosity.

COMMENT:
Services Rendered By a Physician or Other Persons
“The law also creates a promise on behalf of the sick or
injured person, who, on account of his physical condition, can-
not express his desire to be treated, and his promise to pay.
It is presumed that the patient would request the services if
he were able to do so, and would promise to pay.” (Report of
the Code Commission, p. 71).

Art. 2168. When during a fire, flood, storm, or other

calamity, property is saved from destruction by another
person without the knowledge of the owner, the latter is
bound to pay the former just compensation.

COMMENT:
Rule When Property Is Saved During a Calamity
The Article explains itself but note that here PROPERTY
(not persons) is saved.

Art. 2169. When the government, upon the failure of any

person to comply with health or safety regulations concern-
ing property, undertakes to do the necessary work, even
over his objection, he shall be liable to pay the expenses.

COMMENT:
Rule When Government Undertakes Necessary Work
“The law creates a promise on the part of the neglectful
or recalcitrant individual. The common welfare requires that
a quasi-contract be imposed upon him.” (Report of the Code
Commission, p. 71).

1169
Arts. 2170-2171 CIVIL CODE OF THE PHILIPPINES

Art. 2170. When by accident or other fortuitous event,

movable separately pertaining to two or more persons are
commingled or confused, the rules on co-ownership shall
be applicable.

COMMENT:

Rule When Movables are Commingled or Confused

The Article explains itself.

Art. 2171. The rights and obligations of the finder of

lost personal property shall be governed by Articles 719
and 720.

COMMENT:

When Lost Personal Property is Found

(a) Art. 719. Whoever finds a movable, which is not treasure,
must return it to its previous possessor. If the latter is
unknown, the finder shall immediately deposit it with
the mayor of the city or municipality where the finding
has taken place.
The finding shall be publicly announced by the
mayor for two consecutive weeks in the way he deems
best.
If the movable cannot be kept without deteriora-
tion, or without expenses which considerably diminish
its value it shall be sold at public auction eight days
after the publication.
Six months from the publication having elapsed
without the owner having appeared, the thing found,
or its value, shall be awarded to the finder. The finder
and the owner shall be obliged, as the case may be to
reimburse the expenses.
(b) Art. 720. If the owner should appear in time, he shall
be obliged to pay, as a reward to the finder, one-tenth
of the sum or of the price of the thing found.

1170
CIVIL CODE OF THE PHILIPPINES Arts. 2172-2174

Art. 2172. The right of every possessor in good faith

to reimbursement for necessary and useful expenses is
governed by Article 546.

COMMENT:
Reimbursement for Necessary and Useful Expenses
Art. 546. Necessary expenses shall be refunded to every
possessor; but only the possessor in good faith may retain the
thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in
good faith with the same right of retention, the person who has
defeated him in the possession having the option of refunding
the amount of the expenses or of paying the increase in value
which the thing may have acquired by reason thereof.

Art. 2173. When a third person, without the knowledge

of the debtor, pays the debt, the rights of the former are
governed by Articles 1236 and 1237.

COMMENT:
Payment Made By a Third Person
(a) Art. 1236. The creditor is not bound to accept payment
or performance by a third person who has no interest
in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the
debtor what he has paid, except that if he paid without
the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial
to the debtor.
(b) Art. 1237. Whoever pays on behalf of the debtor without
the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as
those arising from a mortgage, guaranty, or penalty.

Art. 2174. When in a small community a majority of the

inhabitants of age decide upon a measure for protection

1171
Art. 2175 CIVIL CODE OF THE PHILIPPINES

against lawlessness, fire, flood, storm or other calamity,

any one who objects to the plan and refuses to contribute
to the expenses but is benefited by the project as executed
shall be liable to pay his share of said expenses.

COMMENT:
Measure for Protection Decided Upon By a Community
“It is unjust for the person receiving the benefit of the
method of protection to refuse to pay his share of the expense.
The law therefore makes a promise for him to contribute to
the plan.” (Report of the Code Commission, p. 71).

Art. 2175. Any person who is constrained to pay the

taxes of another shall be entitled to reimbursement from
the latter.

COMMENT:
When Someone is Constrained to Pay Another’s Taxes
(a) “This situation frequently arises when the possessor of
land, under a contract of lease or otherwise, has to pay
the taxes to prevent a seizure of the property by the
government, the owner having become delinquent in the
payment of the land tax.” (Report of the Code Commis-
sion, p. 72).
(b) The payment by a person other than the delinquent
taxpayer of the overdue taxes on a parcel of land which
had been forfeited by the Government for delinquency in
the payment of said taxes, MERELY SUBROGATES the
payor into the rights of the Government as creditor for
said delinquent taxes. (See Art. 1236). The payor does
not thereby acquire the rights of the landowner to the
property. (Villorta v. Cutamona Vda. de Cuyno, et al.,
L-20682, May 19, 1966).

1172
CIVIL CODE OF THE PHILIPPINES

Chapter 2

QUASI-DELICTS

Art. 2176. Whoever by act or omission causes damage

to another, there being fault or negligence, is obliged to
pay for the damage done. Such fault or negligence, if there
is no pre-existing contractual relation between the parties,
is called a quasi-delict and is governed by the provision of
this Chapter.

COMMENT:
(1) Requisites for a Quasi-Delict (Culpa Aquiliana)
(a) Act or omission.
(b) Presence of fault or negligence (lack of due care).
[NOTE: In the absence of fault or negligence, there
can be NO award for damages. Mere suspicion or specula-
tion without proof cannot be the basis of such an award.
(Rebullida v. Estrella, C.A., L-15256-R, Jun. 24, 1959).]

LRT v. Navidad
GR 145804, Feb. 6, 2003

ISSUE: Once fault is established, can on employer

be made liable on the basis of the presumption juris
tantum that the employer failed to exercise diligentis-
simi patris families in the selection and supervision of
its employees?
HELD: Yes. The premise for the employer’s liability
is negligence or fault on the part of the employee. The
liability is primary and can only be negated by show-
ing due diligence in the selection and supervision of the
employee, a factual matter that must be shown.

1173
Art. 2176 CIVIL CODE OF THE PHILIPPINES

Absent such a showing, one might ask further, how

then must the liability of the common carrier, on the one
hand, and independent contractor, upon the other hand,
be described? It would be solidary.
(c) Damage to another.
(d) Causal connection between the fault or negligence and
the damage.

Phoenix Construction, Inc. v. IAC

GR 65295, Mar. 10, 1987
Courts distinguish between the active “cause” of
the harm and the existing “conditions” upon which the
cause operated. If the defendant has created only a pas-
sive static condition which made the damage possible,
the defendant is said not to be liable. But so far as the
fact of causation is concerned, in the sense of necessary
antecedents which have played an important part in
producing results, it is quite impossible to distinguished
between active forces and passive situations, particularly
since, as is invariably the case, the latter are the result
of the other active forces which have gone before.
Example:
The defendant who spills gasoline about the premises
creates “a condition; but the act may be culpable because
of the danger of fire. When a spark ignites the gasoline,
the condition has gone quite as much as to bring about
the fire as the spark. Since that is the very risk which
the defendant has created, the defendant will not escape
responsibility. Even the lapse of a considerable time
during which the “condition” remains static will not
necessarily affect liability: one who digs a trench on the
highway may still be liable to another who falls into it
a month afterward.
“Cause” and “condition” still find occasional men-
tion in the decisions. But the distinction is now almost
entirely discredited. So far as it has any validity at all,
it must refer to the type of case where the forces set in
operation by the defendant have come to rest in a posi-
tion of apparent safety, and some new force intervenes.

1174
CIVIL CODE OF THE PHILIPPINES Art. 2176

But even in such cases, it is not the distinction between

“cause” and “condition” which is important, but the nature
of the risk and the character of the intervening cause.
(e) No pre-existing contractual relation. (12 Manresa 613-614;
Algara v. Sandejas, 27 Phil. 284). Indeed, quasi-delict or
culpa aquiliana is an independent source of obligation
between two persons not so formerly bound by juridical
tie. (Batangas Laguna Tayabas Co., Inc., et al. v. Court
of Appeals, et al., L-33138-39, Jun. 27, 1975). Of course,
it has been ruled that tort liability can exist even if
there are already contractual relations (Air France v.
Carrascoso, L-21438, Sep. 28, 1966), BUT this should
be interpreted to mean that the tort liability itself does
not arise because of the contract, but because of some
other fact.
[NOTE: The person responsible (tortfeasor) is li-
able even if he does not know the identity of the victim.
(Gilchrist v. Cuddy, 29 Phil. 542).]

Teague v. Fernandez
51 SCRA 181

If an ordinance requires certain building to provide

two stairways, failure to comply with the same consti-
tutes an act of negligence. Even if another agency had
intervened, the negligent entity would still be liable if
the occurrence of the accident, in the manner in which
it happened, was the very thing sought to be prevented
by the statute or ordinance.

People’s Bank and Trust Co. v.

Dahican Lumber Co.
L-17500, May 16, 1967

FACTS: A person induced another to violate the

latter’s contract with a third person. Is the inducer liable
for the commission of a tort (quasi-delict)?
HELD: Yes, because a quasi-delict or tort can arise
because of negligence OR fault. In this case, we have

1175
Art. 2176 CIVIL CODE OF THE PHILIPPINES

more or less the tort referred to as “interference with

contractual relations.”

Penullar v. Philippine National Bank

GR 32762, Jan. 27, 1983
If one of two innocent parties has to suffer thru the
act of a third person, he who made possible the injury
(or was negligent) should bear the loss.

Prima Malipol v. Lily Lim Tan, et al.

L-27730, Jan. 21, 1974
FACTS: Defendants were not able to file their an-
swer in civil case against them for a quasi-delict because
of the error or negligence of their original counsel. Are
said defendants bound by said error or negligence?
HELD: Yes. Clients are generally bound by the er-
ror or negligence of their counsel, who failed to file their
ANSWER to the complaint within the time given by the
Rules. Thus, the order of the trial court declaring in default
is proper.

People v. Capillas
L-38756, Nov. 13, 1984
In delicts and quasi-delicts, not only actual dam-
ages may be recovered but also moral and exemplary
damages.

Phoenix Construction, Inc. v. IAC

GR 65295, Mar. 10, 1987
Our law on quasi-delicts seeks to reduce the risks
and burdens of living in society and to allocate them
among the members of society.

Valenzuela v. CA
68 SCAD 113
1996
The liability of an employer for the negligence of
his employee is not based on the principal of respondeat

1176
CIVIL CODE OF THE PHILIPPINES Art. 2176

superior but that of pater familias. Where no allegations

were made as to whether or not the company took the
steps necessary to determine or ascertain the driving
proficiency and history of its employee to whom it gave
full and unlimited use of a company car, said company,
based on the principle of bonus pater familias, ought to
be jointly and severally liable with the former for the
injuries caused to third persons.
Once evidence is introduced showing that the em-
ployer exercised the required amount of care in selecting
its employees, half of the employer’s burden is overcome,
but the question of diligent supervision depends on
the circumstances of employment. Ordinarily, evidence
demonstrating that the employer has exercised diligent
supervision of its employee during the performance of
the latter’s assigned tasks would be enough to relieve
him of the liability imposed by Art. 2180 in relation to
Art. 2176 of the Civil Code.

(2) ‘Culpa Aquiliana’ Distinguished from ‘Culpa Contractual’

and ‘Culpa Criminal’

CULPA CULPA CULPA

CONTRACTUAL AQUILIANA CRIMINAL

(a) Negligence is (a) Negligence here (a) Negligence here

merely inci- is direct substan- is direct, substan-
dental to the tive, independent. tive, independent
performance of (Rakes v. Atlantic of a contract.
an obligation Gulf & Pacific, 7
already exist- Phil. 395).
ing because of a
contract. (Rakes
v. Atlantic Gulf
& Pacific Co., 7
Phil. 395).
(b) There is a pre- (b) No pre-existing ob- (b) No pre-existing
existing obliga- ligation (except of obligation (except
tion (a contract, course the duty to the duty never to
either express or be careful in all hu- harm others.)
implied). (Rakes man actuations).
Case) (Rakes Case).

1177
Art. 2176 CIVIL CODE OF THE PHILIPPINES

(c) Proof needed — (c) Proof needed — (c) Proof needed in a

preponderance preponderance of crime — proof of
of evidence. (Bar- evidence. (Barre- guilt beyond rea-
redo v. Garcia, do v. Garcia, 73 sonable doubt.
73 Phil. 607). Phil. 607). (Barredo v. Gar-
cia, 73 Phil. 607).
(d) D e f e n s e o f (d) Defense of “good (d) T h i s i s n o t a
“good father of father, etc.,” is a proper defense in
a family” in the proper and com- culpa criminal.
selection and plete defense (in- Here the employ-
supervision of sofar as employ- ee’s guilt is auto-
employees is ers or guardians matically the em-
n o t a p r o per are concerned) in ployer’s civil guilt,
complete defense culpa aquiliana. if the former is
in culpa con- (Cangco and De insolvent. (See M.
tractual (though Guia Cases). Luisa Martinez v.
this may MITI- Barredo).
GATE damages.)
[Cangco v. MRR,
38 Phil. 769 and
De Guia v. Me-
ralco, 40 Phil.
769]. Here we
follow the rule of
RESPONDEAT
SUPERIOR or
COMMAND
RESPONSIBIL-
ITY or the MAS-
TER AND SER-
VANT RULE.)
(e) As long as it is (e) Ordinarily, the (e) Accused is pre-
proved that there victim has to sumed innocent
was a contract prove the negli- until the contrary
and that it was gence of the de- is proved, so pros-
not carried out, it fendant. This is ecution has the
is presumed that because his action burden of proving
the debtor is at is based on al- the negligence of
fault, and it is his leged negligence the accused.
duty to prove that on the part of the
there was no neg- defendant.
ligence in carry- (Cangco Case; 8
ing out the terms Manresa 71).
of the contract.
(Cangco Case; 8
Manresa 71).

1178
CIVIL CODE OF THE PHILIPPINES Art. 2176

Syquia, et al. v. CA and Manila

Memorial Park Cemetery, Inc.
GR 98695, Jan. 27, 1993

In the case at bar, it has been established that the Syquias

and the Manila Memorial Park Cemetery, Inc., entered into
a contract entitled “Deed of Sale and Certificate of Perpetual
Care.” That agreement governed the relations of the parties
and defined their respective rights and obligations.
Hence, has there been actual negligence on the part of
the Manila Memorial Park Cemetery, Inc., it would be held
liable not for a quasi-delict or culpa aquiliana, but for culpa
contractual.

(3) Necessity of Proving Negligence

Negligence must be proved in a suit on a quasi-delict, so
that the plaintiff may recover. However, since negligence may
in some cases be hard to prove, we may apply the doctrine of
RES IPSA LOQUITOR (the thing speaks for itself). This means
that in certain instances, the presence of facts or circumstances
surrounding the injury clearly indicate negligence on the part of
the defendant — as when the defendants was on the WRONG
side of the street. (See U.S. v. Crame, 30 Phil. 2). The presump-
tion is however rebuttable. (See U.S. v. Bonifacio, 34 Phil. 65).

Bernabe Africa, et al. v. Caltex, et al.

L-12986, Mar. 31, 1966
FACTS: A fire broke out at a Caltex service station. It
started while gasoline was being hosed from a tank trunk into
the underground storage, right at the opening of the receiv-
ing tank where the nozzle of the hose had been inserted. The
fire destroyed several houses. Caltex and the station manager
were sued. Issue: Without proof as to the cause and origin
of the fire, would the doctrine of res ipsa loquitor apply such
that the defendants can be presumed negligent?
HELD: Yes, for the gasoline station was under the care
of the defendant, who gave no explanation at all regarding
the fire. It is fair to reasonably infer that the incident hap-
pened because of their want of care.

1179
Art. 2176 CIVIL CODE OF THE PHILIPPINES

Republic v. Luzon Stevedoring Corporation

L-21749, Sep. 29, 1967
FACTS: A barge belonging to the Luzon Stevedoring
Company rammed against one of the wooden supports of the
old Nagtahan Bridge (a stationary object). What presumption
arises?
HELD: There arises the presumption that the barge was
negligent (doctrine of res ipsa loquitor, meaning the thing
speaks for itself). This is evident because the bridge (at that
time) was an immovable, stationary object, adequately provided
with openings for the passage of watercraft). The doctrine can
indeed be applied, for in the ordinary course of events, such
a ramming would not occur if proper care is used.

NIA, et al. v. IAC, et al.

GR 73919, Sep. 18, 1992
On the issue of negligence, plaintiffs thru the testimonies
of Andres Ventura, Florentino Ventura, and Prudencio Martin
showed that the NIA constructed irrigation canals on the
landholding[s] of the plaintiffs by scraping away the surface
of the landholding[s] to raise the embankment of the canal. As
a result of the said construction, in 1967, the landholdings of
the plaintiffs were inundated with water. Although it cannot
be denied that the irrigation canal of the NIA is a boon to the
plaintiffs, the delay of almost 7 years in installing the safety
measures such as the check gates, drainage[s], ditches, and
paddy drains has caused substantial damage to the annual
harvest of the plaintiffs. In fact, Engineer Carlitos, witness
for the defendant declared that these improvements were
made only after the settlement of the claim of Mrs. Virginia
Tecson, which was sometime in 1976 or 1977, while the ir-
rigation canal was constructed in 1976.
The testimonies of the plaintiffs essentially corrobo-
rated by a disinterested witness in the person of Barangay
Captain Prudencio Martin, proved that the landholdings of
the complainants were inundated when the NIA irrigation
canal was constructed without safety devices thereby reduc-
ing their annual harvest of 30 cavans per hectare (portions
flooded). The failure, therefore, of the NIA to provide the

1180
CIVIL CODE OF THE PHILIPPINES Art. 2176

necessary safeguards to prevent the inundation of plaintiffs’

land-holding[s] is the proximate cause of the damages to the
poor farmers.
Upon the other hand, the defendant maintains that the
cause of inundation of plaintiffs’ landholdings was the check
gate of the Cinco-cinco creek, known as Tombo check gate.
However, evidence showed that this check gate existed long
before the NIA irrigation canal was constructed and there
were no complaints from the plaintiffs until the canal of the
NIA was built. The uncontested testimony of barrio captain
Prudencio Martin that the former name of the sitio where the
plaintiffs’ landholdings were located was “Hilerang Duhat” but
was changed to Sitio Dagat-dagatan because of the inundation
was not without justification.

Leah Alesna Reyes, et al. v.

Sisters of Mercy Hospital, et al.
GR 130547, Oct. 3, 2000

FACTS: Petitioner’s husband died while undergoing

treatment for typhoid fever at respondent hospital. Petitioner,
thus, filed a complaint for negligence and damages against
respondents on account of the wrongful administration of the
drug chloromycetis. The trial court rendered a decision in favor
of respondents, which was affirmed by the Court of Appeals
(CA). On appeal, the Supreme Court affirmed the CA.
HELD: Respondents were not guilty of medical malprac-
tice as they were able to establish thru expert testimony that
the physicians who attended to petitioner’s husband exercised
the necessary care, within the reasonable average merit among
ordinarily good physicians, in treating him under circumstances
pertaining at that time.
Further, the doctrine of res ipsa loquitur does not apply
in a suit against a physician or surgeon which involves the
merit of diagnosis or a scientific treatment. It is generally
restricted to situations in malpractice cases where a layman
is able to say, as a matter of common knowledge and observa-
tion, that the consequences of professional care were not as
such as would ordinarily have followed if due care had been
exercised. (Ramos v. CA, 321 SCRA 584 [1999]).

1181
Art. 2176 CIVIL CODE OF THE PHILIPPINES

(4) Damnum Absque Injuria

This means that “although there was physical damage,
there was no legal injury.” Hence, if a carefully driven car
hurts a pedestrian because lightning temporarily blinded the
driver, the pedestrian cannot recover damages, for legally
while he has been DAMAGED, there was NO INJURY or
NO FAULT in view of the fortuitous event. (See Board of
Liquidators v. Kalaw, GR 18805, Aug. 14, 1967, where the
Court ruled that while the National Coconut Corporation was
not able to deliver the copra it had promised to deliver, and
therefore caused damage to the buyers, still nobody can legally
be blamed because the non-delivery was caused by typhoon.
This is a case of damnum absque injuria.)

Farolan v. Solmac Marketing Corp.

GR 83589, Mar. 13, 1991

FACTS: Farolan was then the Acting Commissioner of

Customs, while Parayno was then the Acting Chief, Customs
Intelligence and Investigation Division. They were sued in their
official capacities as officers in the government. Nevertheless,
they were both held personally liable for the awarded dam-
ages “since the detention of the goods by defendants (Farolan
and Parayno) was irregular and devoid of legal basis, hence,
not done in the regular performance of official duty.” Solmac
Marketing was the assignee and owner of an importation
of Clojus Recycling Plastic Products of 202,204 kilograms of
what is technically known as polypropylene film, valued at
US$69,250.05. The importation, consisting of 17 containers,
arrived in December 1981. Upon application for entry, the
Bureau of Customs asked Solmac for its authority from any
government agency to import the goods described in the Bill
of Lading. Solmac presented a Board of Investment Authority
for polypropylene film scrap. However, upon examination of
the shipment by the National Institute of Science and Tech-
nology, it turned out that the fibers of the importation were
oriented in such a way that the materials were stronger than
OPP film scrap. The Clojus shipment was not OPP film scrap,
as declared by Solmac to the Bureau of Customs and BOI
Governor Bautista, but oriented polypropylene the importa-

1182
CIVIL CODE OF THE PHILIPPINES Art. 2176

tion of which is restricted, if not prohibited, under Letter of

Instruction 658-B. Considering the shipment was different from
what had been authorized by the BOI and by law, Parayno
and Farolan withheld the release of the importation. Parayno
wrote the BOI asking for the latter’s advice on whether or
not the importation may be released. Thereafter, Solmac filed
the action for mandamus and injunction with the trial court,
which ordered Farolan and Parayno to release the importation.
Solmac appealed only insofar as the denial of the award of
damages is concerned. Parayno and Farolan did not appeal.
The Court of Appeals ordered Farolan and Parayno solidar-
ily liable in their personal capacity to pay Solmac temperate
damages in the sum of P100,000, exemplary damages in the
sum of the P100,000 and P50,000 as attorney’s fees and ex-
penses of litigation.
HELD: The Supreme Court set aside and annulled the
decision of the Court of Appeals, and held that there is no
convincing proof showing the alleged bad faith of Farolan
and Parayno. On the contrary, the evidence bolstered their
claim of good faith. First, there was the report of the NIST
that, contrary to what Solmac claimed, the importation was
not OPP film scraps but oriented polypropylene, a plastic
product of stronger material, whose importation to the Philip-
pines was restricted, if not prohibited. It was on the strength
of this finding that they withheld release of the importation
for being contrary to law. Second, on many occasions, the
Bureau of Customs sought the advice of the BOI on whether
the subject importation might be released. Third, up to the
time of the trial there was no clear-cut policy on the part of
the BOI regarding the entry into the Philippines of oriented
polypropylene. Even the highest officers of the BOI were not
in agreement as to what proper course to take on the subject
of the various importations of Oriented Polypropylene (OPP)
and Polypropylene (PP) withheld by the Bureau of Customs.
The conflicting recommendations of the BOI prompted pe-
titioners to seek final clarification from the former with
regard of its policy on the importations. The confusion over
the disposition of the importation obviates bad faith. When
a public officer takes his oath of office, he binds himself to
perform the duties of his office faithfully and to use reason-
able skill and diligence, and to act primarily for the benefit of

1183
Art. 2176 CIVIL CODE OF THE PHILIPPINES

the public. Thus, in the discharge of his duties, he is to use

that prudence, caution, and attention which careful men use
in the management of their affairs. That petitioners acted in
good faith in not immediately releasing the imported goods
is supported by substantial evidence, independent of the pre-
sumption of good faith, which was not successfully rebutted.
Here, prudence dictated that petitioners first obtain from the
BOI the latter’s definite guidelines regarding the disposition
of the various importations of oriented polypropylene and
polypropylene then being withheld at the Bureau of Customs.
These cellophane film products were competing with locally
manufactured polypropylene and oriented polypropylene as
raw materials which were then already sufficient to meet lo-
cal demands. Hence, their importation were restricted, if not
prohibited. Thus, petitioners could not be said to have acted
in bad faith in not immediately releasing the imported goods
without obtaining the necessary clarificatory guidelines from
the BOI. As public officers, petitioners had the duty to see
to it that the law they were tasked to implement, i.e., LOI
658-B, was faithfully complied with. But even if petitioners
committed a mistake in withholding the release of the impor-
tation because it was composed of film scraps, nonetheless,
it is the duty of the Court to see it that public officers are
not hampered in the performance of their duties or in mak-
ing decisions for fear of personal liability for damages due to
honest mistake. Whatever damages they may have caused as
a result of such an erroneous interpretation, if any at all, is
in the nature of a damnum absque injuria.

(5) Last Clear Chance

The doctrine of “last clear chance” is to the effect that
even if the injured party was originally at fault (as when
he was on the wrong side of a street) still if the person who
finally caused the accident had the “last clear opportunity” to
avoid striking him, he who could have prevented the injury is
still liable if he did not take advantage of such opportunity
or chance.
Other names for the doctrine of “last clear chance” in-
clude “doctrine of discovered peril”; “doctrine of supervening
negligence”; “the humanitarian doctrine.”

1184
CIVIL CODE OF THE PHILIPPINES Art. 2176

In the case of Ong v. Metropolitan Water District (104

Phil. 398), the Court applying 38 Am. Jur. 900, said that ac-
cording to third doctrine “the negligence of the plaintiff does
not preclude (or prevent) a recovery for the negligence of the
defendant where it appears that the defendant by exercising
reasonable care and prudence might have avoided injurious
consequences to the plaintiff notwithstanding the plaintiff’s
negligence.”

Ong v. Metropolitan Water District

104 Phil. 398
FACTS: A visitor was drowned in a swimming resort
due to his own negligence and despite measures on the part
of the resort authorities to save him. Is the resort liable?
HELD: No, the resort is NOT liable. While it is duty
bound to provide for safety measures, still it is not an absolute
insurer of the safety of its customers or visitors. The doctrine
of “last clear chance” cannot apply if the:
(a) negligence of the plaintiff is concurrent with the negli-
gence of the defendant;
(b) party charged is required to act instantaneously;
(c) injury cannot be avoided despite the application at all
times of all the means to avoid the injury (after the
peril is or should have been discovered), at least in all
instances where the previous negligence of the party
charged can not be said to have contributed to the injury
at all.

Picart v. Smith
37 Phil. 809
FACTS: A person driving an automobile on a bridge saw
a man on horseback riding towards him but on the wrong
side of the bridge. The driver sounded his horn several times;
the horse-rider made no move to go to the correct side; the
driver continued in his original direction until it was too late
to avoid a collision. Is the auto driver liable?
HELD: Yes, for although the horse-rider was originally at
fault, it was the auto driver who had the last clear chance to

1185
Art. 2176 CIVIL CODE OF THE PHILIPPINES

avoid the injury by merely swerving, while still some distance

away, to the other part of the bridge. “Where both parties are
guilty of negligence, but the negligent act of one succeeds that
of the other by an appreciable interval of time, the one who
has the last reasonable opportunity to avoid the impending
harm and fails to do so, is chargeable with the consequences,
without reference to the prior negligence of the other party.”
That is the doctrine known as the “last clear chance.”
[NOTE: The contributory negligence of the victim may of
course be considered as a circumstance to mitigate the other’s
liability. (Del Prado v. Manila Electric Co., 53 Phil. 906).]

Phoenix Construction, Inc. v. IAC

GR 65295, Mar. 10, 1987

The last clear chance doctrine of the common law was

imported into our jurisdiction, but it is a matter for debate
whether, or to what extent, if has found its way into the
Civil Code of the Philippines. The historical function of that
doctrine in the common law was to mitigate the harshness of
another common law doctrine or rule — that of contributory
negligence.
The common-law rule of contributory negligence prevented
any recovery at all by the plaintiff who was also negligent, even
if the plaintiff’s negligence was relatively minor as compared
with the wrongful act or omission of the defendant. The com-
mon-law notion of last clear chance permitted courts to grant
recovery to a plaintiff who had also been negligent, provided,
that the defendant had the last clear chance to avoid the
casualty and failed to do so. It is difficult to see what role, if
any, the common-law has clear chance doctrine has to play in
a jurisdiction where the common-law concept of contributory
negligence as an absolute bar to recover by the plaintiffs, has
itself been rejected, as it has been in Art. 2179.
In a civil law jurisdiction like ours, there is no general
concept of “last clear chance” that may be extracted from its
common-law matrix and used as a general rule in negligence
cases. Under Art. 2179, the task of a court, in technical terms,
is to determine whose negligence — the plaintiff’s or defend-

1186
CIVIL CODE OF THE PHILIPPINES Art. 2176

ant’s — was the legal or proximate cause of the injury. The

task is not simply or even primarily an exercise in chronology
or physics, as one may imply by the use of terms like “last”
or “intervening.” The relative location in the continuum of
time of the plaintiff’s and the defendant’s negligent acts or
omissions, is only one of the relevant factors that may be
taken into account. Of more fundamental importance are the
nature of the negligent act or omission of each party and
the character and gravity of the risks created by such act or
omission for the rest of the community.

(6) Tort Liability May Still Exist Despite Presence of Con-

tractual Relations

Air France v. Carrascoso

L-21438, Sep. 28, 1966

FACTS: An airplane passenger despite his first class

ticket, was illegally ousted from his first-class accommodation,
and was compelled to take a seat in the tourist compartment.
Issue: May he recover damages from the carrier on the ground
of tort?
HELD: Yes, because although the relation between a
passenger and a carrier is contractual both in origin and
nature, the act that breaks the contract may also be a tort.
[NOTE: It would seem here that the Court has in a sense
modified somehow Art. 2176 which defines “quasi-delict,” for
under said article, it is important that “there is no pre-existing
contractual relation between the parties.” Be it noted however
that in this case, the Court referred to the liability as one aris-
ing from tort, and not one arising from a contract.]

Julian C. Singson and Ramona del Castillo v.

Bank of the Philippine Islands
and Santiago Freixas
L-24837, Jun. 27, 1968
FACTS: Because of a mistake committed by a clerk in
the Bank of the Philippine Islands, the current or checking
account of Julian Singson was frozen by said Bank, and the
depositor’s checks were dishonored. Singson complained. When

1187
Art. 2176 CIVIL CODE OF THE PHILIPPINES

the Bank realized it had committed a mistake, it apologized

to Singson, and restored the checking account. Singson,
however, sued for damages. It was alleged by the Bank that
there would be no liability for the negligence or quasi-delict
in view of the existence of contractual relations between the
Bank and Singson; that moreover, the Bank had immediately
corrected its error. Issue: Can Singson recover?
HELD: Yes, damages may be recovered by Singson,
despite the existence of contractual relations because the act
that breaks the contract may also be a tort or a quasi-delict,
as in this case. However, considering the rectification im-
mediately made by the Bank, an award of nominal damages
— the amount of which need not be proved — in the amount
of P1,000 in addition of attorney’s fees in the sum of P500,
will suffice to vindicate plaintiff’s rights. (See Arts. 2208 and
2221, Civil Code).

(7) Non-Liability

Ng v. Republic
L-31935, Jan. 24, 1980

If a person’s registered name is “Baby Ng (Ng Kong Ding)”

he cannot be said to have violated the Anti-Alias Law, for
the registered name already contains the supposed alias.

(8) An Unregistered Deed of Sale

Equitable Leasing Corp v. Lucita Suyom, et al.

GR 143360, Sep. 5, 2002

ISSUE: Can the petitioner, a registered owner of a motor

vehicle be held liable for the acts of the driver employed by
its former lessee who has become the owner of that vehicle
by virtue of an unregistered Deed of Sale?
HELD: Yes. In an action based on quasi-delict, the regis-
tered owner of a motor vehicle is solidarily liable for injuries
and damages caused by the negligence of the driver, inspite
of the fact that the vehicle may have already been the subject
of an unregistered Deed of Sale in favor of another person.

1188
CIVIL CODE OF THE PHILIPPINES Art. 2177

Unless registered with the Land Transportation Office

(LTO), the sale, while valid and binding between the parties,
does not affect third parties, especially the victims of accidents
involving the said transport equipment.

Art. 2177. Responsibility for fault or negligence under

the preceding article is entirely separate and distinct from
the civil liability arising from negligence under the Penal
Code. But the plaintiff cannot recover damages twice for
the same act or omission of the defendant.

COMMENT:
(1) Culpa Aquiliana Distinguished From Civil Liability
Arising From a Crime
See Table under the preceding Article.

(2) Effect of Acquittal in a Criminal Case

Acquittal from an accusation of criminal negligence
whether on reasonable doubt or not, shall not be a bar to a
subsequent civil action. (Report of the Code Com., p. 62 and
Chan v. Yatco, L-11163, Apr. 30, 1958). (Reason: The evidence
in the criminal case may not be sufficient for a conviction,
but sufficient for a civil liability, where mere preponderance
of evidence is sufficient. Moreover, the basis of liability is
different in the two cases: in a criminal case, the liability is
subsidiary to the criminal case, the liability is subsidiary to
the criminal punishment; in a case of culpa aquiliana, the
liability is primary. (TS, Nov. 22, 1940 and See Calo, et al. v.
Peggy, L-10756, Mar. 29, 1958].) However, under the Revised
Rules of Court, the civil action must have been RESERVED,
otherwise the civil case will NOT prosper. (Rule 111).

Marcia v. Court of Appeals

GR 34529, Jan. 27, 1983

If in a criminal case for reckless imprudence resulting in

physical injuries, the accused is acquitted because he was not
negligent and the incident was a “pure accident,” a separate
civil action should be dismissed.

1189
Art. 2177 CIVIL CODE OF THE PHILIPPINES

[NOTE: Here, the court said that Art. 33 of the Civil

Code speaks only of intentional or malicious acts. It forgot
that Art. 2177 read together with Art. 2176 provides for an
independent civil action for negligent acts. However, the con-
clusions reached by the court may be justified on the ground
that there was also no negligence in this present case.]

(3) Query
If a hurt pedestrian files a criminal case against the
driver of a common carrier, is he allowed at the same time
(or at any stage during the pendency of the criminal case) to
bring a civil action based on culpa aquiliana?
ANS.: It would seem that the correct answer to this
problem is YES provided that a RESERVATION to bring the
civil case had been set up in the criminal case. (See Rule 111,
Revised Rules of Court). In other words, in a case like this it
is not essential to first terminate the criminal case before the
civil case of quasi-delict is brought. Indeed, the civil liability
that may arise from culpa aquiliana was never intended by
the law to be merged in the criminal action. The criminal
prosecution is not a condition precedent to the enforcement
of the civil right. (Batangas, Laguna, Tayabas Bus Co., Inc.,
et al. v. Court of Appeals, et al., L-33138-9, Jun. 27, 1975).

Batangas, Laguna, Tayabas, Bus Co., Inc. v.

Court of Appeals, et al.
L-33138-39, Jun. 27, 1975
FACTS: As a result of the recklessness of a driver (Ila-
gan) of a bus of BLTB Company in overtaking a cargo truck,
the bus crashed into an automobile coming from the opposite
direction, resulting to death and physical injuries to the pas-
sengers of the automobile. A criminal case was brought, but
during its pendency, a civil case based on culpa aquiliana
under Art. 2177 of the Civil Code was filed. Issue: Can the
civil action of culpa aquiliana proceeds independently of the
pending criminal case, or must the judgment in the criminal
case be first awaited before proceeding with the civil case?
HELD: The civil case of culpa aquiliana can proceed
independently of the pending criminal case. This is expressly
allowed under Art. 2176 and Art. 2177 of the Civil Code, be-

1190
CIVIL CODE OF THE PHILIPPINES Art. 2177

cause culpa aquiliana is an independent source of obligations.

The case of Corpus v. Paje, L-26737, Jul. 31, 1969 does not
apply because the statement therein that no independent civil
action lies in a case of culpa aquiliana or reckless imprudence
(because Art. 33 of the Civil Code does not mention reckless
imprudence) is really not doctrinal in character, lacking as it
does, one vote to make it an expression of the court opinion.
[NOTE: In fact, while it is true that Art. 33 makes no
mention of negligence, Art. 2177 refers to negligence or culpa
aquiliana and makes the suit an independent civil action.]

(4) Rule under the 1985 Rule of Court, as Amended in

1988
While Art. 2177 gives an independent civil action, still
the Revised Rules of Court required that if a criminal case
be instituted first, the independent civil action is also auto-
matically instituted unless there is an express reservation or
waiver. (Rule 111). If, on the other hand, the civil case of
culpa aquiliana is first brought, the subsequent institution of
the criminal case will NOT SUSPEND the civil action — oth-
erwise, it cannot then be called independent. Moreover, the
very institution of the civil case ahead of the criminal action
satisfied the requirement of “reservation.”

Garcia v. Florido
L-35095, Aug. 31, 1973
FACTS: After a vehicular accident, the victims were
brought to the hospital for treatment. In the meantime, the
police authorities filed a criminal case of reckless imprudence
resulting in physical injuries, WITHOUT making a reservation
as to the civil aspect. When the victims became well enough
to go to court, they decided to file a civil case despite the
pendency of the criminal case.
ISSUE: Should the civil case be allowed, despite the
pendency of the criminal proceedings?
HELD: Yes, for while it is true that a reservation should
have been made under Rule 111 of the Revised Rules of Court
(through such rule has been assailed by SOME in this respect
as virtually eliminating or amending the “substantive” right

1191
Art. 2177 CIVIL CODE OF THE PHILIPPINES

of allowing an “independent civil action,” as ordained by the

Civil Code) still the Rule does not state when the reservation
is supposed to be made. Here, the victims had no chance to
make the reservation (for they were still at the hospital);
moreover, the trial has not even begun. It is therefore not yet
too late to make the reservation; in fact, the actual filing of
the civil case, though at this stage, is even better than the
making of the reservation.

Crispin Abellana and Francisco Abellana v.

Hon. Geronimo R. Maraue
and Geronimo Companer, et al.
L-27760, May 29, 1974
FACTS: Francisco Abellana was driving a cargo truck
when he hit a motorized pedicab. Four of the passengers of
the pedicab were injured. He was accused in the City Court
of Ozamis for his reckless imprudence (no reservation was
made as to any civil action that might be instituted); he was
convicted. He then appealed to the Court of First Instance
(Regional Trial Court). During the pendency of the appeal (and
in fact, before trial in the CFI [RTC]) the victims decided to
make a waiver re claim for damages in the criminal case, and
RESERVATION with respect to the civil aspects. The victims
then in another Branch of the CFI (RTC) allowed the FILING
of the civil case. The accused objected to the allowance on
the theory that in the City Court (original court), no reserva-
tion had been made, thus the civil aspect should be deemed
included in the criminal suit, conformably with Rule 111 of
the Revised Rules of Court. The CFI (RTC) maintained that
the civil case should be allowed, because with the appeal the
judgment of the City Court had become vacated (said court
was then not a court of record) and in the CFI (RTC) the case
was to be tried anew (trial de novo). This ruling of the CFI
(RTC) was elevated to the Supreme Court on certiorari.
ISSUE: May a civil case still be brought despite the
appeal in the criminal case?
HELD: Yes, for three reasons.
(a) Firstly, with the appeal, the original judgment of con-
viction was VACATED; there will be a trial de novo in

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CIVIL CODE OF THE PHILIPPINES Art. 2177

the CFI. A trial that has not even began, therefore, a

reservation can still be made and a civil action can still
be allowed.
(b) Secondly, to say that the civil action is barred because
no reservation (pursuant to Rule 111) had been made
in the City Court when the criminal suit was filed is to
present a grave constitutional question, namely, can the
Supreme Court, in Rule 111 amend or restrict a SUB-
STANTIVE right granted by the Civil Code? This cannot
be done. The apparent literal import of the Rule cannot
prevail. A judge “is not to fall prey,” as admonished by
Justice Frankfurter, “to the vice of literalness.”
(c) Thirdly, it would be UNFAIR, under the circumstances
if the victims would not be allowed to recover any civil
liability, considering the damage done to them.

Escueta v. Fandialan
L-39675, Nov. 29, 1974

ISSUE: One of the questions presented in this case

was — when a criminal case is filed, is there a need of
making a reservation if it is desired to sue later on an
independent civil action?
HELD: There is NO NEED, because the civil case
is one considered as an “independent civil action.”
[NOTE: How about Rule 111, Revised Rules of Court,
which requires the reservation, even if an independent
civil action is involved?]

(5) No Double Recovery

Padua, et al. v. Robles, et al.

L-40486, Aug. 29, 1975

FACTS: Because of the recklessness of a taxi-driver, a

boy (Padua) was killed. A criminal case was instituted against
Punzalan, the taxi-driver. At the same time, a civil action for
damages was filed against both the driver and the owner of
the taxi (Robles). The two cases were raffled off to the same

1193
Art. 2177 CIVIL CODE OF THE PHILIPPINES

judge for decision. In the civil case, the taxi-cab owner (com-
pany) was not made to pay anything (ostensibly because it was
able to prove due diligence in the selection and supervision of
employees) but the taxi-driver, who was found negligent, was
held liable for damages (P12,000 for actual damages, P5,000
for moral and exemplary damages, and P10,000 for attorney’s
fees). In the criminal case, the judge convicted the taxi-driver,
but with reference to his civil liability, the court did not fix
any sum, stating only that the “civil liability of the accused
is already determined and assessed in the civil case.” When
the judgment in the civil case became final and executory,
the parents of the victim sought its execution, but the writ
issued against the driver was returned unsatisfied because of
his insolvency. The parents now sued the employer to enforce
his subsidiary liability under the Revised Penal Code because
of the driver’s conviction. Robles, the employer pleaded res
judicata. Issue: Can the employer still be held liable?
HELD: Yes, the employer can still be held liable be-
cause the judgment in the criminal case, in talking of the
driver’s civil liability, made reference to the decision in the
civil case, relative to the driver’s financial accountability. It
is this amount for which the employer is subsidiarily liable
under Art. 103 of the Revised Penal Code. Further, there is
no res judicata because the responsibility of an employer in
culpa aquiliana (the civil case) is different from his liability
in culpa criminal (the subsidiary civil liability in the criminal
case). The only limitation is that while it is possible that in
both cases the employer can be held liable, actual recovery
for damages can be availed of only once.

(6) Dec. 1, 2000 Amended Rules

Avelino Casupanan & Roberto Capitulo v.

Mario Llavore Laroya
GR 145391, Aug. 26, 2002

FACTS: The petition premises the legal controversy in

this wise: “In a certain vehicular accident involving two par-
ties, each one of them may think and believe that the accident
was caused by the fault of the other. The first party, believ-
ing himself to be the aggrieved party, opted to file a criminal

1194
CIVIL CODE OF THE PHILIPPINES Art. 2177

case for reckless imprudence against the second party. Upon

the other hand, the second party, together with the operator,
believing themselves to be the real aggrieved parties, opted in
turn to file a civil case for quasi-delict against the first party
who is the very private complainant in the criminal case.”
ISSUE: Whether or not an accused in a pending criminal
case for reckless imprudence can validly filed, simultaneously
and independently, a separate civil action for quasi-delict
against private complainant in the criminal case.
HELD: Par. 6, Sec. 1 of the present Rule III of the
Rules of Court was incorporated in the Dec. 1, 2000 Amended
Rules precisely to address the issue. Under this provision,
the accused is barred from filing a counterclaim, cross-claim,
or third-party complaint in the criminal case. However, the
same provision states that “any cause of action which could
have been the subject (of the counterclaim, cross-claim, or
third party complaint) may be litigated in a separate civil
action.” The present Rule III mandates the accused to file his
counterclaim in a separate civil action which shall proceed
independently of the criminal action, even as the civil action
of the offended party is litigated in the criminal action.
The accused can file a civil action for quasi-delict for the
same act or omission he is accused of in the criminal case. This is
expressly allowed in par. 6, Sec. 1 of the present Rule III which
states that the counterclaim of the accused “may be litigated in
a separate civil action.” This is only fair for two (2) reasons:
1. The accused is prohibited from setting up any counter-
claim in the civil aspect that is deemed instituted in the
criminal case. The accused is, therefore, forced to litigant
separately his counterclaim against the offended party.
If the accused does not file a separate civil action for
quasi-delict, the prescriptive period may set in since the
period continues to run until the civil action for quasi-
delict is filed.
2. The accused, who is presumed innocent, has a right to
invoke Art. 2177, in the same way that the offended
party can avail of this remedy which is independent of
the criminal action. To disallow the accused from filing
a separate civil action for quasi-delict, while refusing

1195
Art. 2178 CIVIL CODE OF THE PHILIPPINES

to recognize his counterclaim in the criminal case, is to

deny him due process of law, access to the courts, and
equal protection of the law.
The civil action based on quasi-delict filed separately,
is, thus, proper.
[NOTE: More than half-a-century has passed since
the Civil Code introduced the concept of a civil action
separate and independent from the criminal action
although arising from the same act or omission. The
Supreme Court, however, has yet to encounter a case of
conflicting and irreconcilable decisions of trial courts, one
hearing the criminal case and the other the civil action
for quasi-delict. The fear of conflicting and irreconcilable
decisions may be more apparent than real. In any event,
there are sufficient remedies under the Rules of Court to
deal with such remote possibilities. (Avelino Casupanan
& Roberto Capitulo v. Marioi Llavore Laroya, supra).].
[NOTE: The Revised Rules on Criminal Procedure
took effect on December 1, 2000 while the Municipal
Circuit Trial Court (MCTC) in the Casupanan & Capitulo
case (supra) issued the order of dismissal on Dec. 28,
1999 or before the amendment of the rules. The Revised
Rules on Criminal Procedure must be given retroactive
effect considering the well-settled rule that “statutes
regulating the procedure of the court will be construed
as applicable to actions pending and undetermined at
the time of their passage. Procedural laws are retroactive
in that sense and to that extent.” (People v. Arrojado,
350 SCRA 679 [2001], citing Ocampo v. CA, 180 SCRA
27 [1989], Alday v. Camilon, 120 SCRA 521 [1983], and
People v. Sumilong, 77 Phil. 764 [1946]).]

Art. 2178. The provisions of Articles 1172 to 1174 are

also applicable to a quasi-delict.

COMMENT:
(1) Applicability of Some Provisions on Negligence
(a) Art. 1172 — Responsibility arising from negligence in the
performance of every kind of obligation is also demand-

1196
CIVIL CODE OF THE PHILIPPINES Art. 2178

able, but such liability may be regulated by the courts,

according to the circumstances.
(b) Art. 1173 — The fault or negligence of the obligor con-
sists 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. When negligence shows bad faith, the provisions
of articles 1171 and 2201, paragraph 2 shall apply.
If the law or contract does not state the diligence
which is to be observed in the performance, that which is
expected of a good father of a family shall be required.
(c) Art. 1174 — Except in cases expressly specified by the
law, or when it is otherwise declared by stipulation, or
when the nature of the obligation requires the assumption
of risk, no person shall be responsible for those events
which could not be foreseen, or which, though foreseen
were inevitable.

(2) Cases

Ronquillo, et al. v. Singson

(C.A.) L-22612-R, Apr. 22, 1959

FACTS: A man ordered a ten-year-old boy, Jose Ron-

quillo, to climb a high and rather slippery santol tree, with a
promise to give him part of the fruits. The boy was killed in
the act of climbing. Is the person who ordered him liable?
HELD: Yes, in view of his negligent act in making the
order. He did not take due care to avoid a reasonably fore-
seeable injury to the 10-year-old boy. The tree was a treach-
erous one, a veritable trap. His act was clearly a departure
from the standard of conduct required of a prudent man. He
should have desisted from making the order. Since he failed
to appreciate the predictable danger and aggravated such
negligence by offering part of the fruits as a reward, it is
clear that he should be made to respond in damages for the
actionable wrong committed by him.

1197
Art. 2179 CIVIL CODE OF THE PHILIPPINES

Vda. de Imperial, et al. v. Herald Lumber Co.

L-14088-89, L-14112, Sep. 30, 1961
Undertaking an airplane or helicopter flight without
sufficient fuel is a clear case of negligence. Moreover, the
piloting of a helicopter by an unlicensed individual violates
Civil Aviation Regulations.

Art. 2179. When the plaintiff’s own negligence was the

immediate and proximate cause of his injury, he cannot
recover damages. But if his negligence was only contribu-
tory, the immediate and proximate cause of the injury being
the defendant’s lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be
awarded.

COMMENT:
(1) Effect of Sole Cause of Injury is a Person’s Own Neg-
ligence
It is understood that if the sole cause is the plaintiff’s
own fault, there can be no recovery. (TS, May 31, 1932).

(2) Effect of Contributory Negligence of Plaintiff

(a) If this was the PROXIMATE cause of the accident, there
can be no recovery. (Taylor v. Manila Electric Co., 16
Phil. 8).
(b) If the PROXIMATE cause was still the negligence of the
defendant, the plaintiff can still recover damages, BUT
the amount of damages will be mitigated due to his con-
tributory negligence. (Art. 2179). Thus, if he contributes
to the aggravation of the injury, damages in his favor
will be reduced. (Rakes v. Antlantic Gulf and Pacific
Co., 7 Phil. 359; Bernal v. House, 54 Phil. 327 and Del
Rosario v. Manila Electric Co., 57 Phil. 478).
[NOTE: The courts have held that in CRIMES com-
mitted thru reckless imprudence, the defense of contribu-
tory negligence does NOT apply. One cannot allege the
negligence of another to evade the effects of his own negli-

1198
CIVIL CODE OF THE PHILIPPINES Art. 2179

gence. (People v. Orbeta, 43 O.G. 3175; People v. Quiñones,

44 O.G. 1520 and People v. Cabusao, C.A., L-20191-R, Sep.
7, 1958).]

(3) Proximate Cause

It is that adequate and efficient cause which in the natu-
ral order of events, and under the particular circumstances
surrounding the case, would naturally produce the event. (3
Bouvier’s Law Dictionary 434).

Saturnino Bayasen v. Court of Appeals

L-25785, Feb. 28, 1981

While being driven at a moderate speed, a passenger

jeep skidded and fell into a precipice. It was proved that the
proximate cause of the tragedy was the skidding of the rear
wheels of the jeep. Is the driver guilty of negligence?
HELD: No, for there was no negligence. Cars may skid
on greasy or slippery roads without the driver’s fault. Skid-
ding means partial or complete loss of control of the car under
circumstances not necessarily implying negligence. It may
occur without fault.

Phoenix Construction, Inc. v. IAC

GR 65295, Mar. 10, 1987
If the intervening cause is one which in ordinary hu-
man experience is reasonably to be anticipated, or one which
the defendant has reason to anticipate under the particular
circumstances, the defendant may be negligent, among other
reasons, because of failure to guard against it; or the defend-
ant may be negligent only for that reason.
Example:
One who sets a fire may be required to foresee that an
ordinary, usual and customary wind arising later will spread
it beyond the defendant’s own property, and therefore to take
precautions to prevent that event. The person who leaves
combustible or explosive material exposed in a public place
may foresee the risk of fire from some independent source.
In all of these cases there is an intervening cause combin-

1199
Art. 2179 CIVIL CODE OF THE PHILIPPINES

ing with the defendant’s conduct to produce the result, and

in each case the defendant’s negligence consists in failure to
protect the plaintiff against that very risk.
The defendant cannot be relieved from liability by the
fact that the risk or a substantial and important part of the
risk, to which the defendant has subjected the plaintiff has
indeed come to pass. Foreseeable intervening forces are within
the scope of the original risk, and hence of the defendant’s
agreed negligence. The courts are quite, generally, agreed
the intervening causes which fall fairly in this category will
not supersede defendant’s responsibility. A defendant will
be required to anticipate the usual weather of the vicinity,
including all ordinary forces of nature such as usual wind
or rain, or snow or frost or fog or even lightning. One who
leaves an obstruction on the road or a railroad track should
foresee that a vehicle or a train will run into it.
The risk created by the defendant may include the inter-
vention of the foreseeable negligence of others. The standard
of reasonable conduct may require the defendant to protect
the plaintiff against “that occasional negligence which is one
of the ordinary incidents of human life, and therefore to be
anticipated.”
Example:
A defendant who blocks the sidewalk and forces the
plaintiff to walk in a street where the plaintiff will be exposed
to the risks of heavy traffic becomes liable when the plain-
tiff is run down by a car, even though the car is negligently
driven. One who parks an automobile on the highway without
lights at night is not relieved of responsibility when another
negligently drives into it.

Phoenix Construction, Inc. v. IAC

GR 65295, Mar. 10, 1987

FACTS: At about 1:30 a.m., LD was on his way home

from a cocktails-and-dinner meeting with his boss. During
the cocktails, LD had taken a “shot or two” of liquor. LD
was driving his car and had just crossed the intersection, not
far from his home when his headlights suddenly failed. He

1200
CIVIL CODE OF THE PHILIPPINES Art. 2179

switched his headlights on “bright” and thereupon he saw a

Ford dump truck looming some 2-1/2 meters away from his
car. The dump truck, owned by Phoenix Construction, Inc. was
parked on the right hand side of the street (i.e., on the right
hand side of a person facing in the same direction toward
which LD’s car was proceeding), facing the oncoming traffic.
The dump truck was parked askew (not parallel to the street
curb) in such manner as to stick out onto the street, partly
blocking the way of oncoming traffic. There were no lights nor
any so-called “early warning” reflector devices set anywhere
near the dump truck, front or rear. LD tried to avoid a col-
lision by swerving his car to the left but it was too late and
his car smashed into the dump truck. LD suffered physical
injuries including some permanent facial scars, a “nervous
breakdown” and loss of two gold bridge dentures.
LD sued Phoenix and its driver claiming that the legal
and proximate cause of his injuries was the negligent man-
ner in which phoenix’s driver had parked the dump truck.
Phoenix and its driver countered that the proximate cause
of LD’s injuries was his own recklessness in driving fast at
the time of the accident, while under the influence of liquor,
without his headlights on and without a curfew pass. Phoenix
also sought to establish that it had exercised due care in the
selection and supervision of the driver. The trial court rendered
judgment in favor of LD. The Court of Appeals affirmed the
decision but modified the award of damages.
On petition for review, the Supreme Court found that
LD was negligent the night of the accident. He was hurry-
ing home that night and driving faster than he should have
been. Worse, he extinguished his headlights at or near the
intersection, as he approached his residence, and thus did not
see the dump truck that was parked askew and sticking out
onto the road lane. Nevertheless, the Supreme Court agreed
with the trial court and the appellate court that the legal
and proximate cause of the accident and of LD’s injuries was
the wrongful and negligent manner in which the truck was
parked. The Supreme Court —
HELD: There was a reasonable relationship between
the dump truck driver’s negligence on the one hand and the
accident and LD’s injuries on the other hand. The collision of

1201
Art. 2179 CIVIL CODE OF THE PHILIPPINES

LD’s car with the dump truck was a natural and foreseeable
consequence of the truck driver’s negligence. The truck driver’s
negligence far from being a “passive and static condition” was
an indispensable and efficient cause. The collision between the
dump truck and LD’s car would in all probability not have
occurred had the dump truck not been parked askew without
any warning lights or reflector devices. The improper parking
of the dump truck created an unreasonable risk of injury for
anyone driving and for having so created this risk the truck
driver must be held responsible. LD’s negligence, although
later in point of time than the truck driver’s negligence, and
therefore closer to the accident, was not an efficient intervening
or independent cause. What Phoenix and its driver describe
as an “intervening cause” was no more than a foreseeable
consequence of the risk created by the negligent manner in
which the truck driver had parked the dump truck. LD’s neg-
ligence was not of an independent and overpowering nature
as to cut, as it were, the chain of causation in fact between
the improper parking of the dump truck and the accident,
nor to sever the juris vinculum of liability. LD’s negligence
was “only contributory.” The immediate and proximate cause
of the injury remained the truck driver’s “lack of due care.”
Hence, LD may recover damages though such damages are
subject to mitigation by the Courts.
The last clear chance doctrine of the common law, imported
into our jurisdiction, has no role to play in a jurisdiction where
the common law concept of contributory negligence as an abso-
lute bar to recovery by the plaintiffs has itself been rejected in
Art. 2179. Our law on quasi-delicts seeks to reduce the risks
and burdens of living in society and to allocate them among
the members of society. The truck driver’s proven negligence
creates a presumption of negligence on the part of his employer
in supervising its employees properly and adequately.

(4) Examples of Proximate Cause

(a) If a passenger boxes a bus driver who subsequently
loses control of the vehicle, the act of the passenger is
the proximate cause.
(b) If the Meralco leaves an exposed live wire, and subse-
quent electrocution follows because somebody touches

1202
CIVIL CODE OF THE PHILIPPINES Art. 2179

the wire, the negligence of the Meralco is the proximate

cause. (TS, Feb. 24, 1928).
(c) If somebody neglects to cover his ditch (filled with hot
water) and a child carelessly falls into it, the negligence
is the proximate cause, though the contributory negligence
of the child would reduce the amount of recoverable dam-
ages. (Bernal and Enverso v. House & Tacloban Electric
and Ice Plant, 54 Phil. 327).
(d) If the damaged vehicle was driven by a reckless driver
who made the vehicle travel at a very high rate of speed
and on the wrong side of the road, it is clear that this
negligence was the proximate cause of the collision.
(Tuason v. Luzon Stevedoring Co., et al., L-13514, Jan.
28, 1961).

(5) Case

Metro Manila Transit Corp. & Apolinario Ajoc

v. CA, etc.
GR 141089, Aug. 1, 2002

FACTS: Petitioners were found liable for the death of

Florentina Sabalburo by the trial court in a vehicular accident
involving a passenger bus owned by petitioner. Metro Manila
Transit Corp. (MMTC) and driven by petitioner Apolinario
Ajoc. Accordingly, petitioners were ordered to pay damages
to private respondents.
Petitioners reasonably appealed to the Court of Appeals
(CA), insisting that the accident was solely the fault of the
victim since she suddenly crossed a very busy street with
complete disregard for her safety and in violation of traffic
rules and regulations designed to protect pedestrians. The CA
affirmed the trial court’s decisions. Petitioners then moved
for reconsideration, but the CA denied their motion in its
resolution of Dec. 10, 1999. Hence, the present petition.
ISSUE: Whether or not Art. 2179 as an exception to
Art. 2176 is applicable in the instant case.
HELD: Records support private respondents’ claim that
the MMTC bus was being driven carelessly. As found by the

1203
Art. 2180 CIVIL CODE OF THE PHILIPPINES

trial court and affirmed by the CA, the victim and her com-
panions were standing on the island of Andrew Ave., waiting
for the traffic light to change so they could cross. Upon seeing
the red light, the victim and her companions started to cross.
It was then when petitioner Ajoc, who was trying to beat the
red light, hit the victim. As the court a quo noted, Ajoc’s claim
that “he failed to see the victim and her companions proves
his recklessness and lack of caution in driving his vehicle.”
Findings of fact of the trial court, especially when af-
firmed by the CA, are binding and conclusive on the Supreme
Court. (Austria v. CA, 327 SCRA 668 [2000]). Moreso, as in
the case at bar, where petitioners have not adequately shown
that the courts below overlooked or disregarded certain facts
or circumstances of such import as would have altered the
outcome of the case. Contrary to petitioners’ insistence, the
applicable law in this case is Art. 2176 and not Art. 2179.

Art. 2180. The obligation imposed by Article 2176 is

demandable not only for one’s own act or omissions, but
also for those of persons for whom one is responsible.
The father, and, in case of his death or incapacity,
the mother, are responsible for the damages caused by the
minor children who live in their company.
Guardians are liable for damages caused by the minors
or incapacitated persons who are under their authority and
live in their company.
The owners and managers of an establishment or en-
terprises are likewise responsible for damages caused by
their employees in the service of the branches in which the
latter are employed or on the occasion of their functions.
Employers shall be liable for the damages caused by
their employees and household helpers acting within the
scope of their assigned tasks, even though the former are
not engaged in any business or industry.
The State is responsible in like manner when it acts
through a special agent; but not when the damage has been
caused by the official to whom the task done properly per-

1204
CIVIL CODE OF THE PHILIPPINES Art. 2180

tains, in which case what is provided in article 2176 shall

be applicable.
Lastly, teachers or heads of establishments of arts and
trades shall be liable for damages caused by their pupils
and students or apprentices, so long as they remain in
their custody.
The responsibility treated of in this article shall cease
when the person herein mentioned prove that they observed
all the diligence of a good father of a family to prevent dam-
age.

COMMENT:
(1) Liability for the Acts and Omissions of Another
This Article deals with liability for the acts and omis-
sions of another.

(2) Reason for the Liability

Negligence in supervision. (See Bahia v. Litonjua, 30
Phil. 624).
[NOTE: This negligence is PRESUMED but may be rebut-
ted by proof of diligence. (See last paragraph, Art. 2180).]

(3) Solidarily Liability

The person responsible for the act (like the minor), and
the person exercising supervision (like the parents) are soli-
darily liable. (Art. 2194; Araneta, et al. v. Arreglado, et al.,
104 Phil. 529). Indeed, the liability of the guardian or master
is primary and direct, NOT subsidiary. (Barredo v. Soriano,
73 Phil. 607).
[NOTE: The mother is liable only if the father is dead
or incapacitated, hence, if the father is alive and all right, the
mother should not be joined as party defendant. (Romano, et
al. v. Pariñas, et al., 101 Phil. 140).]
[NOTE: If a minor child negligently operates the family
car, the head of the family and owner of the car can be sued
for liability. (Gutierrez v. Gutierrez, 56 Phil. 177).]

1205
Art. 2180 CIVIL CODE OF THE PHILIPPINES

Maria Teresa Cuadra v. Alfonso Monfort

L-24101, Sep. 30, 1970

FACTS: While playing inside a shoolyard, a 13-year-old

girl playfully tossed as a joke a girl’s headband at her 12-year-
old girl classmate. The latter, who was surprised by the act,
turned around only to have her eyes hit. One eye eventually
became blind after unsuccessful surgical operations thereon.
The victim then sued the culprit’s father for damages. Is the
defendant liable.
HELD: No, the culprit’s father is not liable, for he could
not have prevented the damage in any way. The child was at
school, where she ought to be under the supervision of the
school authorities.
(DISSENTING OPINION of Justice Antonio Barredo:
The culprit’s father should be held liable for no proof
was presented that he even warned the child not to play
dangerous jokes on her classmates; the burden of proof of
non-negligence must be on the part of the culprit’s parents
or guardians.)
[NOTE: In the said case, no suit was brought against the
school authorities, the teacher in charge, or the school itself.]

Libi, et al. v. IAC, et al.

GR 70890, Sep. 18, 1992

The civil liability of parents for quasi-delicts of their

minor children, as contemplated in Art. 2180 of the Civil
Code, is primary and not subsidiary. In fact, if we apply Art.
2194 of said code which provides for solidary liability of joint
tortfeasors, the persons responsible for the act or omission,
in this case, the minor and the father and, in case of his
death or incapacity, the mother, are solidarily liable. Accord-
ingly, such parental liability is primary and not subsidiary;
hence, the last paragraph of Art. 2180 provides that “[t]he
responsibility treated of in this article shall cease when the
persons herein mentioned prove that they observed all the
diligence of a good father of a family to prevent damage.” To
hold that the civil liability under Art. 2180 would apply only
to quasi-delicts and not to criminal offenses would result in

1206
CIVIL CODE OF THE PHILIPPINES Art. 2180

the absurdity that in an act involving mere diligence, the

parents would be liable but not where the damage is caused
with criminal intent. The liability of the parents for felonies
committed by their minor children is likewise primary, not
subsidiary. (See Art. 101 of the Revised Penal Code). It bears
stressing, however, that the Revised Penal Code provides for
subsidiary liability only for persons causing damages under
the compulsion of irresistible force or under the impulse of an
uncontrollable fear; innkeepers, tavernkeepers, and proprietors
of establishments; employers, teachers, persons, and corpora-
tions engaged in industry; and principals, accomplices, and
accessories for the unpaid civil liability of their co-accused in
the other classes.
Under the foregoing considerations, therefore, it is hereby
ruled that the parents are and should be held primarily liable
for the civil liability arising from criminal offenses committed
by their minor children under their legal authority or control,
or who live in their company, unless it is proven that the
former acted with the diligence of a good father of a family to
prevent such damages. In the case at bar, whether the death
of the hapless Julie Ann Gotiong was caused by a felony or
a quasi-delict committed by Wendell Libi, respondent court
did not err in holding petitioners liable for damages arising
therefrom. Subject to the preceding modifications relied upon
by it, therefore, and on the bases of the legal imperatives
herein explained, the Court is conjoined in its findings that
said petitioners failed to duly exercise the requisite diligentis-
simi patris familias to prevent such damages.

(4) Owners and Managers

Phil. Rabbit Bus Lines, Inc., et al. v.

Phil. Am. Forwarders, Inc., et al.
L-25142, Mar. 25, 1975

FACTS: An action for damages was brought against the

Phil. Am. Forwarders, Inc. because of the alleged negligence of
the driver. Included as defendants were the corporation, and
a certain Balingit, the manager of the corporation. A motion
was filed to dismiss the case against the manager Balingit

1207
Art. 2180 CIVIL CODE OF THE PHILIPPINES

on the ground that while indeed he was the manager, he was

also a mere employee of the company. Now then, under the
fourth paragraph of Art. 2180, the law speaks of “owners and
managers” as being liable. Issue: Should Balingit be released
from the complaint?
HELD: Yes, because the term ‘manager’ in Art. 2180
(fourth paragraph) is used in the sense of employer, not em-
ployee. Hence, there is no cause of action against Balingit.

(5) Employers
(a) In paragraph 5, note that the employers can be liable
even if “not engaged in any business or industry.” If a
complaint, therefore, makes no reference to such busi-
ness or industry, there is still a cause of action, and the
complaint should NOT be dismissed. (Ortaliz v. Echarri,
101 Phil. 947).
(b) It should be noted, too, that paragraph 5 refers to “em-
ployees and household helpers,” not to strangers. So if a
stranger should drive another’s car without the latter’s
consent, the owner is NOT liable, even if he is engaged
in an industry. (Duquillo v. Bayot, 67 Phil. 131).
(c) One who hires an “independent contractor” but controls
the latter’s work, is responsible also for the latter’s
negligence. (See Cuison v. Norton and Harrison Co., 55
Phil. 18).
(d) The registered owner of a public utility vehicle continues
to be its owner if he leases it to another without the
permission of the Public Service Commission. Therefore,
even if the driver of the lessee is negligent, the registered
owner can still be held liable. (Timbol v. Osias, et al.,
96 Phil. 989; Montoya v. Ignacio, L-5868, Dec. 29, 1953).
Indeed, to exempt from liability the owner of a public
vehicle who operates it under the “boundary system” on
the ground that he merely leases it to the driver would
not only be to abet a flagrant violation of the Public
Service Law but also to place the riding public at the
mercy of reckless and irresponsible drivers: “reckless”
because the measure of their earnings would depend

1208
CIVIL CODE OF THE PHILIPPINES Art. 2180

largely upon the number of trips they make and hence,

the speed at which they drive; and “irresponsible” because
most, if not all of them, are in no position to pay dam-
ages they might cause. (Magboo v. Bernardo, L-16790,
Apr. 30, 1963).

Vinluan v. Court of Appeals

L-21477-81, Apr. 29, 1966

FACTS: A passenger of a bus was hurt because of

the negligence of the driver of the bus as well as the
negligence of the driver of another vehicle. Who should
be liable?
HELD: According to the court, four persons are
liable: the owner of the bus, the driver of the bus, the
owner of the other vehicle, and the driver of said other
vehicle — and their liability is SOLIDARY — notwith-
standing the fact that the liability of the bus company
is predicated on a CONTRACT, while the liability of
the owner and driver of the other vehicle is based on
a QUASI-DELICT. (Observation: The bus driver can be
excused on the basis of culpa contractual for the contract
of common carriage was not with him, but with the bus
company; nonetheless, he can be held liable on the basis
of culpa aquiliana, there being no pre-existing contract
between him and the passenger. Note also that the owner
of the other vehicle can be excused if he can prove due
diligence in the selection and supervision of his driver,
under Art. 2180, last paragraph, unless at the time of
the collision, said owner was also in his vehicle, in which
case, notwithstanding due care in selection and supervi-
sion, he would still be liable, if he could have, by use of
diligence prevented the misfortune. (See Art. 2184).

Ramos v. Pepsi-Cola
L-22533, Feb. 9, 1967

FACTS: A driver of Pepsi-Cola is admittedly neg-

ligent in a vehicular collision. Suit was brought by the
other car owner against both the driver and Pepsi-Cola.
But Pepsi-Cola was able to prove diligence in selection

1209
Art. 2180 CIVIL CODE OF THE PHILIPPINES

(no culpa in eligiendo) and supervision (no culpa in

vigilando) of the driver. For instance, it was proved
that Pepsi-Cola had carefully previously examined the
erring driver as to his qualifications, record of service,
and experience. Is Pepsi-Cola still liable?
HELD: No, otherwise it would have been liable
solidarily with the driver. In Philippine torts, we do
not follow the doctrine of respondeat superior (where
the negligence of the servant is the negligence of the
master). Instead, we follow the rule of bonus pater fa-
milias (good father of a family). The negligence of the
employer here indicated in the last paragraph of Art.
2180, is only presumptive; it can therefore be rebutted,
as in this case.

Bernardo Jocson and Maria D. Jocson v.

Redencion Glorioso
L-22686, Jan. 30, 1968
FACTS: For the death of a three-year-old boy who
was run over by a passenger jeepney, two actions were filed
by the parents: the first, against the owner and the driver
for culpa aquiliana, and the other, against the driver for
homicide through reckless imprudence, the criminal action
having been instituted while the civil case was pending
trial. The civil case was dismissed; but the criminal case
resulted in a conviction for homicide through reckless
imprudence. Aside from the prison sentence imposed, the
driver was also ordered to indemnify the heirs of the de-
ceased the sum of P6,000 with subsidiary imprisonment
in case of insolvency. A writ for the execution of the civil
liability was returned unsatisfied due to the insolvency of
the accused. The parents of the victim then sued the owner
of the jeepney, pursuant to Art. 103 of the Revised Penal
Code. The owner claims that the previous dismissal of the
culpa aquiliana case should now prevent the application
of the subsidiary liability of an owner under the Revised
Penal Code. Is this claim correct?
HELD: The claim is not correct. After all, the culpa
aquiliana case had a different cause of action from this
case involving the subsidiary liability of an employer

1210
CIVIL CODE OF THE PHILIPPINES Art. 2180

for an employee’s criminal act. In other words, we have

the controlling rule that once there is a conviction for a
felony, final in character, the employer, according to the
plain and explicit command of Art. 103 of the Revised
Penal Code, is subsidiarily liable, if it be shown that
commission thereof was in the discharge of the duties
of such employee.

Malipol v. Tan
L-27730, Jan. 21, 1974
54 SCRA 202
(1974)
FACTS: Labsan, a driver of a gasoline tanker used
in the business of his employer, Tan, hit a pedestrian,
causing the latter’s death. In the civil action filed by the
heirs of the victim against both Labsan and Tan, no al-
legation was made that a crime had been committed. The
trial court found the driver reckless, and so it held Tan
primarily liable on the basis of a quasi-delict, without
prejudice to the right of Tan to demand reimbursement
from the driver. Issue: Is the imposition of primary li-
ability on Tan proper?
HELD: Yes, the imposition of primary liability on
an employer in the case of a quasi-delict is proper in the
absence of an allegation that a crime had been committed
in which latter case, the liability of the employer would
only be subsidiary.
[NOTE: In a quasi-delict, both employer and em-
ployee are solidarily liable, unless employer is able to
prove due diligence in the selection and supervision of
employees. Here Tan did not present any such defense
since he was declared in default.]

St. Francis High School v. CA

GR 82465, Feb. 25, 1991
FACTS: Ferdinand Castillo, a freshman student
at the St. Francis High School wanted to join a school
picnic at the beach. Ferdinand’s parents, because of short
notice, did not allow their son to join but merely allowed
him to bring food to the teachers for the picnic, with

1211
Art. 2180 CIVIL CODE OF THE PHILIPPINES

the directive that he should go back home after doing

so. However, because of the persuasion of the teachers,
Ferdinand went on with them to the beach. During the
picnic and while the students, including Ferdinand, were
in the water, one of the female teachers was apparently
drowning. Some of the students, including Ferdinand,
came to her rescue, but in the process, it was Ferdinand
himself who drowned. Ferdinand’s parents sued the school
and the teachers for damages allegedly incurred from
the death of their 13-year-old son. Contending that the
death of their son was due to the failure of defendants
to exercise the proper diligence of a good father of the
family in preventing their son’s drowning, they (Ferdi-
nand’s parents) prayed for actual moral and exemplary
damages, attorney’s fees and expenses for litigation. The
trial court found in favor of plaintiffs and against the
teachers, ordering all of them to pay plaintiffs P30,000
as actual damages, P20,000 as moral damages, P15,000
as attorney’s fees and to pay the costs. However, the
court dismissed the case against the school. The Court of
Appeals (CA) ruled that the school and the teachers are
guilty of negligence and liable for Ferdinand’s death.
ISSUES:
(1) Whether there was negligence attributable to
the defendants which will warrant the award of damages
to the plaintiffs.
(2) Whether or not Art. 2180, in relation to Art.
2176 of the new Civil Code, is applicable to the case at
bar.
(3) Whether the award of exemplary and moral dam-
ages is proper under the circumstances of the case.
HELD: The Supreme Court set aside the decision
of the Court of Appeals insofar as the school and teach-
ers are concerned, but the portion of the said decision
dismissing their counterclaim there being no merit, is
affirmed. It then held that if at all petitioners are liable
for negligence, this is because of their own negligence or
the negligence of people under them. Here, petitioners
are neither guilty of their own negligence or guilty of

1212
CIVIL CODE OF THE PHILIPPINES Art. 2180

the negligence of those under them. Hence, they cannot

be said that they are guilty at all of any negligence.
Consequently, they cannot be held liable for damages of
any kind. At the outset, Ferdinand’s parents allowed him
to join the excursion. The fact that his father gave him
money to buy food for the picnic even without knowing
where it will be held, is a sign of consent for Ferdinand
to join the same. The CA committed an error in apply-
ing Art. 2180 of the Civil Code in rendering the school
liable for the death of Ferdinand. In the case at bar, the
teachers/petitioners were not in the actual performance of
their assigned tasks. The incident happened not within
the school premises, not on a school day and most im-
portantly while the teachers and students were holding
a purely private affair, a picnic. The incident happened
while some members of the class of the school were
having a picnic at the beach. This picnic had no permit
from the school head or its principal because this picnic
was not a school sanctioned activity, neither is it consid-
ered as an extra-curricular activity. Mere knowledge by
petitioner/principal of the planning of the picnic by the
students and planning of the picnic by the students and
their teachers does not in any way show acquiescence
or consent to the holding of the same. The application,
therefore, of Article 2180 has no basis in law and nei-
ther is it supported by any jurisprudence. If we were to
affirm the findings of the appellate court on this score,
employers will forever be exposed to the risk and danger
of being hailed to court to answer for the misdeeds or
omissions of the employees even if such act or omission
be committed while they were not in the performance of
their duties. No negligence could be attributable to the
teachers to warrant the award of damages to Ferdinand’s
parents. The class adviser of the class where Ferdinand
belonged did her best and exercised diligence of a good
father of a family to prevent any untoward incident or
damages to all the students who joined the picnic. In
fact, she invited the P.E. instructors and scout masters
who have knowledge in first aid application and swim-
ming. Moreover, the petitioners brought life savers in
case of emergency. Petitioners did all what is humanly

1213
Art. 2180 CIVIL CODE OF THE PHILIPPINES

possible to save the child. No moral or exemplary dam-

ages may be awarded in favor of Ferdinand’s parents.
The case does not fall under any of the grounds to grant
moral damages. Petitioners are not guilty of any fault
or negligence. Hence, no moral damages can be assessed
against them. While it is true that Ferdinand’s parents
did give their consent to their son to join the picnic, this
does not mean that petitioners were already relieved of
their duty to observe the required diligence of a good
father of a family in ensuring the safety of the children.
But here, petitioners were able to prove that they had
exercised that required diligence. Hence, the claim for
moral or exemplary damages becomes baseless.

Figuracion Vda. de Maglana, et al. v.

Judge Francisco Z. Consolacion &
Afisco Insurance Corp.
GR 60506, Aug. 6, 1992
The liability of AFISCO based on the insurance
contract is direct, but not solidary with that of Destrajo
which is based on Art. 2180 of the Civil Code. As such,
petitioners have the option either to claim the P15,000
from AFISCO and the balance from Destrajo or enforce the
entire judgment from Destrajo, subject to reimbursement
from AFISCO to the extent of the insurance coverage.
While the petition seeks a definitive ruling only on
the nature of AFISCO’s liability, this Court noticed that
the lower court erred in the computation of the prob-
able loss of income. Using the formula: 2/3 of (80-56) x
P12,000, it awarded P28,800. Upon recomputation, the
correct amount is P192,000. Being a “plain error,” this
Court opt to correct the same. (Sec. 7, Rule 51, Rules
of Court). Furthermore, in accordance with prevailing
jurisprudence, the death indemnity is hereby increased
to P50,000.

Go v. IAC
GR 68138, May 13, 1991
FACTS: Floverto Jazmin, an American citizen and
retired employee of the U.S. Federal Government, had

1214
CIVIL CODE OF THE PHILIPPINES Art. 2180

been a visitor in the Philippines since 1972 residing in

Mangatarem, Pangasinan. As a pensionado of the U.S.
Government, he received annuity checks in the amounts
of $67 for disability and $620 for retirement through the
Mangatarem Post Office. On Aug. 22, 1975, Agustin Go,
as branch manager of Solidbank in Baguio City, allowed a
person named “Floverto Jazmin” to open Savings Account
No. BG5206 by depositing two U.S. treasury checks in
the amounts of $1810 and $910 respectively equivalent
to the total amount of P20,565.69 both payable to the
order of Floverto Jazmin of Mangatarem, Pangasinan
and drawn on the First National City Bank, Manila. The
Savings Account was opened in the ordinary course of
business. The bank, thru Go, required the depositor to fill
up the information sheet for new accounts to reflect his
personal circumstances. The depositor indicated therein
that he was Floverto Jazmin with mailing address at
Mangatarem, that he was a Filipino citizen and a security
officer of the US army; that he was married to Milagros
Bautista; and that his initial deposit was P3,565. He
wrote CSA 138134 under remarks or instructions and
left blank the spaces under telephone number, resi-
dence certificate, passport, bank and trade performance
as to who introduced him to the bank. The depositor’s
signature specimens were also taken. Thereafter, the
deposited checks were sent to the drawee bank for clear-
ance. Inasmuch as Solidbank did not receive any word
from the drawee bank, after three (3) weeks it allowed
the depositor to withdraw the amount indicated in the
checks. On Jun. 29, 1976, or more than a year later,
the two dollar checks were returned with notation that
the amounts were altered. So Go reported the matter
to the Philippine Constabulary in Baguio City. On Aug.
3, 1976, Jazmin received radio messages requiring him
to appear before the PC headquarters in Benguet for
investigation regarding the complaint filed by Go against
him for estafa. Initially, Jazmin was investigated by
the constabulary officers in Lingayen, and later in La
Trinidad. Eventually, the investigators found that the
person named “Floverto Jazmin” who made the deposit
and withdrawal with Solidbank was an impostor. Floverto

1215
Art. 2180 CIVIL CODE OF THE PHILIPPINES

Jazmin’s name was used by a syndicate to encash the

checks. On Sep. 23, 1976, Jazmin sued Agustin Go and
the Solidbank for moral and exemplary damages in the
amount of P90,000 plus attorney’s fees. The trial court
ordered Go and CBTC to pay Jazmin P6,000 as moral
damages, P3,000 as exemplary damages and P1,000
as attorney’s fees. The appellate court disallowed the
moral and exemplary damages and granted nominal
damages.
HELD: The Supreme Court affirmed the decision of
the Court of Appeals and held that here, the damages
in the form of mental anguish, moral shock and social
humiliation were suffered by Jazmin only after the filing
of Go’s complaint with the PC. It was only then that he
had to bear the incovenience of traveling to Benguet and
Lingayen for the investigation as it was only then that
he was subjected to embarrassment for being a suspect in
the unauthorized alteration of the treasury checks. Hence,
it is understandable why Go appears to have overlooked
the factors antecedent to the filing of the complaint to
the Constabulary authorities and to have to put undue
emphasis on the appellate court’s statement that “denounc-
ing a crime is not negligence.” Although there should be
no penalty on the right to litigate and error alone in
the filing of a case be it before the courts or the proper
police authorities, is not a ground for moral damages,
under the peculiar circumstances of this case, Jazmin is
entitled to an award of damages. It would be unjust to
overlook the fact that Go’s negligence was the root of all
the inconvenience and embarrassment experienced by Jaz-
min, albeit they happened after the filing of the complaint
with the Constabulary authorities. Go’s negligence in fact
led to the swindling of his employer. Had Go exercised
the diligence expected of him as a bank officer he would
have noticed the disparity between the payee’s name and
address on the treasury checks involved and the name of
the depositor appearing in the bank’s records. The situ-
ation would have been different if the treasury checks
were tampered with only as to their amounts because
the alteration would have been unnoticeable and hard
to detect as the herein altered check bearing the amount

1216
CIVIL CODE OF THE PHILIPPINES Art. 2180

of $913 shows. But the error in the name and address

of the payee was patent and could not have escaped the
trained eyes of bank officers and employees. Hence, the
bank thru its employees was grossly negligent in handling
the business transaction herein.
In crimes and quasi-delicts, the defendant shall be
liable for all damages which are the natural and probable
consequences of the act or omission complained of. It is
not necessary that such damages have been foreseen or
could have reasonably been foreseen by the defendant.
As Go’s negligence was the root of the complained in-
convenience and embarrassment, Go is liable to Jazmin
for damages. Under the 5th paragraph of Art. 2180 of
the Civil Code, “employers shall be liable for the dam-
ages caused by their employees acting within the scope
of their assigned tasks. Pursuant to this provision, the
bank is responsible for the acts of its employee, unless
there is proof that it exercised the diligence of a good
father of a family to prevent the damage. Hence, the
burden of proof lies upon the bank and it cannot disclaim
liability in view of its own failure to prove not only that
it exercised due diligence to prevent damage but that it
was not negligent in the selection and supervision of its
employees.

George Mckee & Ararelo Koh Mckee v.

IAC, Jaime Tayag & Rosalinda Manalo
GR 68102, Jul. 16, 1992
In the case at bar, as employers of the truck driver,
the private respondents are, under Art. 2180 of the Civil
Code, directly and primarily liable for the resulting dam-
ages. The presumption that they are negligent flows from
the negligence of their employee. That presumption, how-
ever, is only juris tantum, not juris et de jure. Their only
possible defense is that they exercised all the diligence of
a good father of a family to prevent the damage.
The diligence of a good father referred to means that
diligence in the selection and supervision of employees.
The answers of the private respondents in Civil Cases
Nos. 4477 and 4478 did not interpose this defense. Nei-
ther did they attempt to prove it.

1217
Art. 2180 CIVIL CODE OF THE PHILIPPINES

San Miguel Corp. v. Heirs of Sabiano

Inguito & Julius Ouano
GR 141716, Jul. 4, 2002

FACTS: San Miguel Corp. (SMC) entered into a Time

Charter Party Agreement with Julius Ouano, doing busi-
ness under the name and style J. Ouano Marine Services.
Under the terms of the agreement, SMC chartered the
M/V Doña Roberta owned by Julius Ouano for a period
of two years, from Jul. 1, 1989 to May 31, 1991, for the
purpose of transporting SMC’s beverage products from
its Mandaue City plant to various points in Visayas and
Mindanao.
On Nov. 11, 1990, during the term of the charter,
SMC issued sailing orders to the Master of the M/V Doña
Roberta, Capt. Sabiano Inguito. In accordance thereto,
Inguito obtained the necessary sailing clearance from
the Philippine Coast Guard. Loading of the cargo on the
M/V Doña Roberta was completed at 8:30 p.m. of Nov.
11, 1990. However, the vessel did not leave Mandaue
City until 6 a.m. of the following day, Nov. 12, 1990.
Meanwhile at 4 a.m. of Nov. 12, 1990, typhoon Ruping
was spotted mowing in the general direction of Eastern
Visayas. At 7 a.m., Nov. 12, 1990, one hour after the
M/V Doña Roberta departed from Mandaue City, SMC
Radio Operator Rogelio P. Moreno contacted Inguito
thru radio and advised him to take shelter. The latter
replied that the ship will proceed since the typhoon was
far away anyway. At 2 p.m. that same day, while the
vessel was two kms. Abeam Boljoon Pt., Moreno again
communicated with Inguito and advised him to take
shelter. The captain responded that the ship can man-
age. Hearing this, Moreno immediately tried to get in
touch with Rico Ouano to tell him that Inguito did not
heed their advice. Rico was out of his office, however,
so Moreno left the message with the secretary.
Again Moreno contacted Inguito at 4 p.m. of Nov. 12,
1990. By then the vessel was already 9.5 miles southeast
of Balicasag Island heading towards Sulauan Pt. Moreno
reiterated the advice and pointed out it will be difficult
to take shelter after passing Balicasag Island as the ship

1218
CIVIL CODE OF THE PHILIPPINES Art. 2180

was approaching an open sea. Still, the captain refused

to heed his advice. At 8 p.m., the vessel was 38 miles
southeast of Balicasag Island, and Westsouth winds were
now prevailing. At 10 p.m., the M/V Doña Roberta was
25 miles approaching Sulauan Pt. Moments later, power
went out in Moreno’s office and resumed at 11:40 p.m.
He immediately made a series of calls to the M/V Doña
Roberta but he failed to get in touch with anyone in the
vessel.
At 1:15 a.m., Nov. 13, 1990, Inguito called Moreno
over the radio and requested him to contact Rico, son of
Julius Ouano, because a helicopter is needed to provide
rescue. The vessel was about 20 miles west of Sulauan
Pt. Upon being told by SMC’s radio operator, Rico turned
on his radio and read the distress signal from Inguito.
When he talked to the captain, the latter requested for
a helicopter to provide rescue. Rico talked to the Chief
Engineer who informed him that the crew can no longer
stop the water from coming into the vessel because the
crew members were feeling dizzy from petroleum fumes.
At 2:30 a.m. of Nov. 13, 1990, M/V Doña Roberta sank.
Out of the 25 officers and crew on board the vessel, only
5 survived. On Nov. 24, 1990, shipowner Julius Ouano, in
lieu of the captain who perished in the sea tragedy, filed
a Marine Protest. Heirs of the deceased captain and crew,
as well as survivors of the ill-fated M/V Doña Roberta
filed a complaint for tort against SMC and Julius Ouano
at the RTC of Lapu-Lapu City, Br. 27. Julius Ouano filed
an answer with crossclaim, alleging that the proximate
cause of the loss of the vessel and its officers and crew
was the fault and negligence of SMC, which had complete
control and disposal of the vessel as charterer and which
issued the sailing order for its departure despite being
forewarned of the impending typhoon. Thus, he prayed
that SMC indemnify him for the cost of the vessel and
the unrealized rentals and earnings thereof.
SMC countered that it was Ouano who had the
control, supervision, and responsibilities over the vessel’s
navigation. This notwithstanding, and despite knowledge
of the incoming typhoon, Ouano never bothered to initi-
ate contact with his vessel. Contrary to his allegation,

1219
Art. 2180 CIVIL CODE OF THE PHILIPPINES

SMC argued that the proximate cause of the sinking

was Ouano’s breach of his obligation to provide SMC
with a seaworthy vessel duly manned by competent crew
members. SMC interposed counterclaims against Ouano
for the value of the cargo lost in the sea tragedy. After
trial, the court a quo rendered judgment finding that the
proximate cause of the loss of the M/V Doña Roberta was
attributable to SMC. Both SMC and Ouano appealed to
the Court of Appeals (CA). SMC argued that as mere
charterer, it did not have control of the vessel and that
the proximate cause of the loss of the vessel and its cargo
was the negligence of the ship captain. For his part, Ouano
complained of the reduced damages awarded to him by
the trial court. On Dec. 10, 1998, the CA modified the
decision appealed from, declaring defendant-appellants
SMC and Julian C. Ouano jointly and severally liable to
plaintiff-appellees, except to the heirs of Inguito. SMC and
Ouano filed separate motions for reconsideration, which
were denied by the CA for lack of merit.
ISSUE: Under Arts. 1176 and 2180, owners and
managers are responsible for damages caused by negli-
gence of a servant or an employee, the master or employer
is presumed to be negligent either in the selection or in
the supervision of that employee. May this presumption
be overcome? If so, how?
HELD: Yes. This presumption may be overcome only
by satisfactorily showing that the employer exercised
the care and diligence of a good father of a family in
the selection and supervision of its employee. (Pestaño
v. Sumayang, 346 SCRA 870 [2000]).
In the instant case, the Supreme Court does not find
the SMC liable for the losses incurred. The contention that
it was the issuance of the sailing order by SMC which was
the proximate cause of the sinking is untenable.
The fact that there was an approaching typhoon is
of no moment. It appears that for one previous occasion,
SMC issued a sailing order to the captain of the M/V
Doña Roberta, but the vessel cancelled its voyage due
to a typhoon. Likewise, it appears from the records that

1220
CIVIL CODE OF THE PHILIPPINES Art. 2180

SMC issued the sailing order on Nov. 12, 1990, before the
typhoon, “Ruping’’ was first spotted at 4 a.m. of Nov. 12,
1990. Consequently, Ouano should answer for the loss of
lives and damages suffered by heirs of the officers and crew
members who perished on board the M/V Doña Roberta,
except Capt. Inguito. The award of damages granted by
the CA is affirmed only against Ouano, who should also
indemnify SMC for the cost of the lost cargo, in the total
amount of P10,278,542.40.

‘Charter Party’ Distinguished from ‘Affreightment’

A charter party is a contract by virtue of which the
owner or agent of a vessel binds himself to transport
merchandise or persons for a fixed price. It has also
been defined as a contract by virtue of which the owner
or the agent of the vessel leases for a certain price the
whole or a portion of the vessel for the transportation
of goods or persons from one port to another. (SMC v.
Heirs of S. Inguito & J. Ouano, supra.)
It may either be a: (1) bareboat or demise charter
or (2) contract of affreightment. Under a demise or bare-
boat charter, the charterer mans the vessel with his own
people and becomes, in effect, the owner of the ship for
the voyage or service stipulated, subject to liability for
damages caused by negligence. (Caltex [Phils.], Inc. v.
Sulpicio Lines, Inc., 315 SCRA 709 [1999]).
In a contract of affreightment, upon the other hand,
the owner of the vessel leases part or all of its space to
haul goods for others. It is a contract for special service
to be rendered by the owner of the vessel. Under such
contract the ship owner retains the possession, command
and navigation of the ship, the charterer or freighter
merely having use of the space in the vessel in return
for his payment of the charter hire. (National Food Au-
thority v. CA, 311 SCRA 700 [1999]). Otherwise put, a
contract of affreightment is one by which the owner of
a ship or other vessel lets the whole or part of her to a
merchant or other person for the conveyance of goods,
on a particular voyage, in consideration of the payment
of freight. (SMC v. Heirs of Inguito & Ouano, supra).

1221
Art. 2180 CIVIL CODE OF THE PHILIPPINES

A contract of affreightment may be either time

charter, wherein the leased vessel is leased to the
charter for a fixed period of time, or voyage charter,
wherein the ship is leased for a single voyage. In both
cases, the charterer provides for the hire of the vessel
only, either for a determinate period of time or for a
simple or consecutive voyage, the ship owner to supply
the ship’s store, pay for the wages of the master of the
crew, and defray the expenses for the maintenance of
the ship. (Ibid.)
If the charter is a contract of affreightment, which
leaves the general owners is possession of the ship as
owner for the voyage, the rights and responsibilities of
ownership rest on the owner. The charterer is free from
liability to third persons in respect of the ship. (Caltex
[Phils.], Inc. v. Sulpicio Lines, Inc., supra.).
‘Emergency Rule’

George Mckee, et al. v.

IAC, et al.
GR 68102, Jul. 16, 1992
Under what is known as the emergency rule, one
who suddenly finds himself in a place of danger, and is
required to act without time to consider the best means
that may be adopted to avoid the impending danger, is
not guilty of negligence, if he fails to adopt what subse-
quently and upon reflection may appear to have been a
better method, unless the emergency in which he finds
himself is brought about by his own negligence.

‘Labor-Only’ Contracting

Napocor v. CA
GR 119121, Aug. 14, 1998

FACTS: A vehicle owned by a company and driven by

a driver supplied by the “labor-only” contractor figured in
an accident and both were sued by the heirs of the victims.
Petitioner Napocor insists that the responsibilities of the
employer contemplated in a “labor-only” contract should

1222
CIVIL CODE OF THE PHILIPPINES Art. 2180

be restricted to the workers and cannot be expanded to

cover liabilities for damages to third persons resulting
from the employee’s tortious acts under Art. 2180 of the
Civil Code that provides that employers are liable for
the damages caused by their employees and household
helpers acting within the scope of their assigned tasks.
Petitioner theorizes that its liability is limited only to
compliance with the substantive labor provisions on
working conditions, rest periods, wages — and does not
extend to liabilities suffered by third persons.
HELD: Napocor’s position is incorrect since the ac-
tion brought by the heirs of the victims of the vehicular
accident was premised on the recovery of damages as a
result of a quasi-delict against both Napocor and Phesco.
Hence, it is the Civil Code and not the Labor Code that
is the applicable law. The present controversy is not a
labor dispute on conditions of employment between an
employee and an employer. It is a claim for damages for
injury caused by the negligent acts of an employee and
his employer.
Under the factual milieu of the case, respondent
Phesco, Inc. was engaged in “labor-only” contracting
vis-á-vis petitioner Napocor and as such, it is consid-
ered merely an agent of the latter. Hence, Napocor is
deemed liable. “Labor-only” contracting, as defined un-
der Sec. 9(b), Rule VII, Book III of the Omnibus Rules
Implementing the Labor Code, is prohibited and the
person acting as contractor shall be considered merely
as an agent or intermediary of the employer who shall
be responsible to the workers in the same manner and
extent as if the latter were directly employed by him.
Nonetheless, petitioner Napocor could have disclaimed
liability had it raised the defense of due diligence in the
selection or supervision of respondent Phesco and the
truck driver. In the same Art. 2180 of the Civil Code,
the responsibility of the employer ceases when it can
proved that it observed all the diligence of a good father
of a family to prevent damages. For unknown reasons,
however, petitioner Napocor did not invoke said defense.
By opting not to present any evidence that it exercised

1223
Art. 2180 CIVIL CODE OF THE PHILIPPINES

due diligence in the supervision of the activities of re-

spondent Phesco and the driver, it foreclosed its right
to interpose the same on appeal in conformity with the
rule that points of laws, theories, issues of facts, and
arguments not raised in lower court cannot be raised
for the first time on appeal.

FGU Insurance Corp. v. CA, Filcar

Transport, Inc. & Fortune Insurance Corp.
GR 118889, Mar. 23, 1998

ISSUE: For damages suffered by a third party, may

an action based on quasi-delict prosper against Filcar,
a rent-a-car company, and, consequently, its insurer,
for fault or negligence of the car lessee in driving the
rented vehicle?
HELD: No. Filcar being engaged in a rent-a-car
business was only the owner of the car leased to Dahl-
Jensen. As such, there was no vinculum juris between
then employer and employee. Filcar cannot in any way
be responsible for the negligent act of Dahl-Jensen, the
former not being an employer of the latter.

(6) Liability of Teachers and Heads of Establishment (of

Arts and Trades)

Palisoc v. Brillantes
41 SCRA 548

FACTS: During recess-time, one student of a techni-

cal, (trade, vocational) school fatally injured another at the
school’s laboratory room. Are the president of the school and
the instructor concerned liable for the death of the student?
HELD: Yes, they are liable under the provisions of Art.
2180 of the Civil Code. The clause used in said article “so
long as they remain in their custody” does not necessarily
refer to the custody over students boarding in dormitories of
the school (as erroneously referred to in a previous case) but
to the protective and supervisory custody that the school and
its heads or teachers exercise over the pupils and students

1224
CIVIL CODE OF THE PHILIPPINES Art. 2180

for as long as they are at attendance in school and includes

recess-time. To avoid liability, the school officials concerned
should have proved “that they observed all the diligence of a
good father of a family to prevent damage.” Said school offi-
cials and teachers incidentally are liable even if the students
or pupils are no longer minors.

Magtibay v. Garcia
GR 28971, Jan. 28, 1983

While a school is obliged to afford its students a fair

opportunity to complete the courses they seek to pursue,
this opportunity is forfeited if the students commit a serious
breach of discipline. Courts should not review the discretion
of university authorities in failing students for disciplinary
reasons or academic deficiencies. The requisite academic
standard must be maintained.

Pasco v. CFI
GR 54357, Apr. 25, 1987

FACTS: Reynaldo, together with two companions, while

walking inside the campus of Araneta University, after at-
tending classes in said University, was accosted and mauled
by a group of Muslim students led by Teng. The Muslim
group were also students of the Araneta University. Reynaldo
was stabbed by Teng and as a consequence, he was hospital-
ized and he underwent surgery to save his life. In a suit by
Reynaldo against Teng for damages, the Araneta University
was impleaded as a party defendant based on Art. 2180. The
trial court, on motion of Araneta University, dismissed the
complaint as to said defendant.
ISSUE: Is the provision of the penultimate par. of Art.
2180 which states that “teachers or heads of establishment of
arts and trades shall be liable for damages caused by their
pupils and students or apprentices, so long as they remain in
their custody” — equally applicable to academic institutions?
HELD: The answer is in the negative. The provision
concerned speaks only of “teachers or heads.”

1225
Art. 2180 CIVIL CODE OF THE PHILIPPINES

(7) Liability of the State

A State’s liability has two aspects:
(a) Its public or government aspects (here it is liable for the
tortious acts of special agents only.)
(b) Its private or business aspects (as when it engages in
private enterprises — here it is liable as an ORDINARY
EMPLOYER). (See Palma v. Garciano, et al., L-7240,
May 16, 1956).

MMTC & Apolinario Ajoc v. CA, Etc.

GR 141089, Aug. 1, 2002

FACTS: Petitioner MMTC contends that the Court

of Appeals (CA) erred in finding it solidarily liable for
damages with its driver/employee, Ajoc, pursuant to Art.
2180. It argues that Ajoc’s act in bringing the victim to
a hospital reflects MMTC’s diligence in the selection and
supervision of its drivers, particularly with regard to
safety measures. Hence, having exercised the diligence
of a good father of a family in the selection and supervi-
sion of its employees to prevent damage, MMTC should
not be held vicariously liable.
HELD: The claim that Ajoc’s act of bringing the
victim to the nearest medical facility shows adequate
supervision by MMTC over its employees deserves but
scant consideration. For one, the act was after the fact
of negligence on Ajoc’s part. For another, evidence on
record shows that Ajoc’s act was neither voluntary nor
spontaneous; he had to be prevailed upon by the victim’s
companions to render assistance to his victim.
Suffice it to say, owners of public utilities fall within
the scope of Art. 2180. MMTC is a public utility, organ-
ized and owned by the government for public transport
service. Hence, its liability to private respondents, for
the negligent and reckless acts of its driver, Ajoc, under
Art. 2180 is both manifest and clear.

1226
CIVIL CODE OF THE PHILIPPINES Art. 2180

Victor Orquiola & Honorata Orquiola v. CA, Etc.

GR 141463, Aug. 6, 2002

FACTS: Petitioner-spouses purchased the subject

land in 1964 from Mariano Lising. The spouses acquired
the land in question without knowledge of any defect in
the title of Lising. Shortly afterwards, they built their
conjugal home on said land. It was only in 1998, when
the sheriff of Quezon City tried to execute the judgment
in Civil Case Q-12918, that they had notice to private
respondent’s adverse claim.
ISSUE: Can the institution of Civil Case Q-12918
serve as notice of such adverse claim to petitioners?
HELD: No. It cannot since petitioner-spouses were
not impleaded therein as parties. As builders in good faith
and innocent purchases for value, petitioners have rights
over the subject property and, hence, are proper parties
in interest in any case thereon. (Sec. 2, Rule 3, Rules of
Court). Consequently, private respondents should have
impleaded them in Civil Case Q-12918. Since they failed
to do so, petitioners cannot be reached by the decision in
said case. No man shall be affected by any proceeding
to which he is a stranger, and strangers to a case are
not bound by any judgment rendered by the court.
In the same manner, a writ of execution can be is-
sued only against a party and not against one who did
not have his day in court. Only real parties in interest
in an action are bound by the judgment therein and by
writs of execution and demolition issued pursuant thereto.
Thus, spouses Victor and Honorata Orquiola have valid
and meritorious cause to resists the demolition of their
house on their titled lot, which is tantamount to a dep-
rivation of property without due process of law.

(8) Special Agent

(a) This is a government employee who commits a tort while
performing a job or act foreign to his usual duties. (See
Merritt v. Government, 34 Phil. 311).

1227
Art. 2180 CIVIL CODE OF THE PHILIPPINES

In Republic v. Palacio (L-20322, May 29, 1968), the

Supreme Court held that the State is liable only for torts
caused by its special agents specially commissioned to
carry out the acts of which the torts arise, and which
acts are OUTSIDE of the REGULAR DUTIES of said
special agents.
(b) Hence, when the damage has been caused by the official
upon whom properly devolved the doing of the act per-
formed, the State (both central and local governments)
is NOT liable. Where therefore the plaintiff’s father
was run over by a truck driven by a chauffeur of the
provincial government of a province, and at the time
of the accident, he was driving a vehicle in compliance
with his duties as such, his employer is NOT liable for
the plaintiff’s claim. The chauffeur alone is liable. (Pala-
fox v. Ilocos Norte, et al., L-10659, Jan. 31, 1958). The
same principle applies to a chauffeur of the Philippine
General Hospital (Merritt v. Gov’t., 34 Phil. 311), or to
any employee of a branch of the government performing
his usual duties. (Rosell v. Aud.-Gen., 81 Phil. 453).
[NOTE: In the case of Palma v. Garciano, et al.,
it was held that if a governor and a mayor file criminal
charges which are groundless, their acts cannot have
borne the approval of the province and the municipal-
ity; hence, these political subdivisions cannot be liable.
Moreover, the prosecution of crimes is NOT corporate but
governmental or political in character. In the discharge of
functions of this nature, municipal corporations are not
liable for the acts of its officers, except if and when, and
only to the extent that, they have acted by authority of
law and in conformity with the requirement thereof.]

Republic v. Palacio
L-20322, May 29, 1968
FACTS: Ildefonso Ortiz filed a complaint against a
government entity (the Irrigation Service Unit) alleging
that said entity had induced the Handong Irrigation
Association to occupy and possess the land of Ortiz. As
a consequence of the complaint, the funds of the entity

1228
CIVIL CODE OF THE PHILIPPINES Art. 2180

(deposited at the Philippine National Bank) was gar-

nished. There was no proof, however, that the State had
specifically commissioned the entity to make the tortious
inducement.
ISSUES:
(a) Is the government here liable, for the acts of the
Irrigation Service Unit?
(b) Assuming that there is liability may there be a
levy of execution against the funds deposited by
the entity with the PNB?
HELD:
(a) The government is not liable for no authorization
was ever given to its alleged “special agent.” If
there had been such authorization, there would
have been liability for then the acts authorized are
NOT REGULARLY performed by the entity.
(b) Assuming that there is liability, the Court’s power
ends with the promulgation of the judgment. Execu-
tion cannot issue on a judgment against the State.
After all, the State should be regarded as free to
determine whether or not it will honor the judgment
by payment. The presumption of course is that the
State will honor and respect the judgment, and this
can be done when Congress, recognizing the final-
ity of the judgment, enacts a legislative measure
providing for the satisfaction of the judgment.

(9) Defense
(a) If an employee (or ward or minor child, etc.) is found
negligent, it is presumed that the employer (or person
in charge) was negligent in selecting and/or supervising
him for it is hard for the victim to prove the negligence
of such employer. It is impossible for the victim to have
observed the conduct of all employers, etc. who are
potential tortfeasors. (See Campo, et al. v. Comarote &
Gemilga, L-9147, Nov. 29, 1956).
(b) In Campo v. Camarote and Gemilga (supra), it was held
that the mere fact that the driver was a professional

1229
Art. 2180 CIVIL CODE OF THE PHILIPPINES

one does not show sufficient diligence on the part of the

employer. The employer should not have been satisfied
with the mere possession by his driver of a professional
driver’s license; he had the duty to examine thoroughly
the qualifications, experience, and record of the driver.
(c) Even if the employer can prove the diligence in the selec-
tion and supervision of the employee, still if he ratifies
the wrongful acts, or take no steps to avert further dam-
age, he (the employer) would still be liable. (See Maxion
v. Manila Railroad Co., 44 Phil. 597).

(10) Penal Provisions in Case of Crimes

Art. 365, par. 3 of the Revised Penal Code simply means
that if there is only damage to property, the amount fixed
therein shall be imposed, but if there are also physical inju-
ries there should be an additional penalty for the latter. The
information cannot be split into two; one for physical injuries
and another for the damage to property, for both the inju-
ries, and the damage committed were caused by one single
act of the defendant and constituted what may be called a
complex crime of physical injuries and damage to property. It
is clear that the fine fixed by the law in this case is beyond
the jurisdiction of the municipal court and within that of the
Court of First Instance (now Regional Trial Court). (People v.
Villanueva, L-15014, Apr. 29, 1961).

(11) Failure of Doctor to Follow Medical Procedure Is a

Clear Indicia of Negligence

Erlinda Ramos v. Court of Appeals

GR 124354, Apr. 11, 2002
FACTS: Private respondents De Los Santos Medical
Center (DLSMC), Dr. Orlino Hosaka, and Dr. Perfecta Gutier-
rez –– were held civilly liable for petitioner Erlinda Ramos’
comatose condition after she delivered herself to them for
their professional care and management.
The Philippine College of Surgeon (PSC) filed its petition-
in-intervention contending in the main that the court erred
in holding private respondent Dr. Hosaka liable under the

1230
CIVIL CODE OF THE PHILIPPINES Art. 2180

Captain-of-the-Ship doctrine. For the intervenor, said doctrine

had long been abandoned in the United States in recognition of
the developments in modern medical and hospital practice.
For his part, Dr. Hosaka mainly contends that the court
erred in finding him negligent as a surgeon by applying the
Captain-of-the-Ship doctrine. Dr. Hosaka argues that the
trend in U.S. jurisprudence has been to reject said doctrine in
light of developments in medical practice. He points out that
anesthesiology and surgery are two distinct and specialized
fields in medicine and as a surgeon, he is not deemed to have
control over the acts of Dr. Gutierrez. As anesthesiologist, Dr.
Gutierrez is a specialist in her field and has acquired skills
and knowledge in the course of her training which Dr. Hosaka,
as a surgeon, does not possess. He states further that current
American jurisprudence on the matter recognizes that the trend
towards specialization in medicine has created situations where
surgeons do not always have the right to control all personnel
within the operating room, especially a fellow specialist.
Dr. Gutierrez maintains that the court erred in finding
her negligent and in holding that it was the faulty intubation
which was the proximate cause of Erlinda’s comatose condi-
tion. The following objective facts allegedly negate a finding
of negligence on her part:
1. That the outcome of the procedure was a comatose
patient and not a dead one;
2. That the patient had a cardiac arrest; and
3. That the patient was revived from that cardiac ar-
rest.
In effect, Dr. Gutierrez, insists that, contrary to the
finding of the court, the intubation she performed on Erlinda
was successful. The instruments used in the administration
of anesthesia, including the endotracheal tube, were all under
the exclusive control of private respondents Dr. Gutierrez and
Dr. Hosaka.
Meanwhile, the hospital, DLSMC, argues that it can-
not be deemed liable for the resulting injury to petitioner
Erlinda. DLSMC contends that applying the four-fold test
in determining whether such a relationship exists between

1231
Art. 2180 CIVIL CODE OF THE PHILIPPINES

it and respondent doctors, it (DLSMC) cannot be considered

an employer of respondent doctors. The four-fold test in de-
termining whether an employer-employee relationship exists
between the parties are the following:
1. selection and engagement of services;
2. payment of wages;
3. power to hire and fire; and
4. power to control not only the end to be achieved,
but the means to be used in reaching such an end.
On the 1st test, DLSMC maintains that a hospital does
not hire or engage the services of a consultant, but rather,
accredits the latter and grants him or her the privilege of
maintaining a clinic and/or admitting patients in the hospi-
tal upon a showing by the consultant that he or she possess
the necessary qualifications, such as accreditation by the
appropriate board (diplomate), evidence of fellowship and
references.
On the 2nd test, it is not the hospital but the patient
who pays the consultant’s fee for services rendered by the
latter.
On the 3rd test, a hospital does not dismiss a consult-
ant; instead, the latter may lose his or her accreditation or
privileges granted by the hospital.
On the 4th and last test, DLSMC argues that when a
doctor refers a patient for admission in a hospital, it is the
doctor who prescribes the treatment to be given to said patient.
The hospital’s obligation is limited to providing the patient
with the preferred room accommodation, the nutritional diet
and medications prescribed by the doctor, the equipment and
facilities necessary for the patient’s treatment, as well as the
services of the hospital staff who perform the ministerial tasks
of ensuring that the doctor’s orders are carried out strictly.
Issues: (1) Whether or not Dr. Hosaka (surgeon) is liable
for negligence; (2) Whether or not Dr. Gutierrez (anesthe-
siologist) is liable for negligence; and (3) Whether or not the
hospital (DLSMC) is liable for any act of negligence committed
by their visiting consultant-surgeon and anesthesiologist.

1232
CIVIL CODE OF THE PHILIPPINES Art. 2180

HELD: (1) That there is a trend in American jurispru-

dence to do away with the Captain-of-the-Ship doctrine does
not mean that the Supreme Court will ipso facto follow said
trend. Due regard for the peculiar factual circumstances
obtaining in this case justify the application of the Captain-
of-the-Ship doctrine. From the facts on record, it can be logi-
cally inferred that Dr. Hosaka exercised a certain degree of,
at the very least, supervision over the procedure then being
performed on Erlinda. Thus:
a. It was Dr. Hosaka who recommended to petitioner
the services of Dr. Gutierrez. In effect, he represented to peti-
tioner that Dr. Gutierrez possessed the necessary competence
and skills. Drs. Hosaka and Gutierrez had worked together
since 1977. Whenever Dr. Hosaka performed a surgery, he
would always engage the services of Dr. Gutierrrez to admin-
ister the anesthesia on his patient.
b. Dr. Hosaka himself admitted that he was the at-
tending physician of Erlinda. When Erlinda showed signs of
cyanosis, it was Dr. Hosaka who gave instructions to call for
another anesthesiologist and cardiologist to help resuscitate
Erlinda.
c. It is conceded that in performing their responsibili-
ties to the patient, Dr. Hosaka and Gutierrez worked as a
team. Their work cannot be placed in separate watertight com-
partments because their duties intersect with each other.
The duties of Dr. Hosaka and those of Dr. Gutierrez
in the treatment of petitioner Erlinda are, therefore, not a
clearcut as respondents claim them to be. On the contrary,
it is quite apparent that they have a common responsibility
to treat the patient, which responsibility necessitates that
they call each other’s attention to the condition of the patient
while the other physician is performing the necessary medical
procedures.
It is important to point out that Dr. Hosaka was remiss
in his duty of attending to petitioner Erlinda promptly, for
he arrived more than 3 hrs. late for the scheduled operation.
In reckless disregard for his patient’s well-being, Dr. Hosaka
scheduled two procedures on the same day, just 30 minutes
apart from each other, at different hospitals. When the first

1233
Art. 2180 CIVIL CODE OF THE PHILIPPINES

procedure (protoscopy) at the Sta. Teresita Hospital did not

proceed on time, Erlinda was kept in a state of uncertainty
at the DLSMC. The long period that Dr. Hosaka made Er-
linda wait for him cause anxiety that adversely affected the
administration of anesthesia on her. A patient’s anxiety usually
causes the outpouring of adrenaline which, in turn, results
in high blood pressure or disturbances in the heart rhythm.
Dr. Hosaka’s irresponsible conduct of arriving very late for
the scheduled operation of petitioner Erlinda is violative, not
only of his duty as a physician “to serve the interest of his
patients with the greatest solicitude, giving them always his
best talent and skill,” but also of Art. 19 of the Civil Code
which requires a person, in the performance of his duties, to
act with justice and give everyone his due.
(2) It was the faulty intubation on Erlinda that caused
her comatose condition. Ther is no question that Erlinda
became comatose after Dr. Gutierrez performed a medical
procedure on her. Even the counsel of Dr. Gutierrez admitted
to the fact during the oral arguments.
The cyanosis (bluish discoloration of the skin or mucous
membranes caused by lack of oxygen or abnormal hemoglobin
in the blood) and enlargement of the stomach of Erlinda indi-
cate that the endotracheal tube was improperly inserted into
the esophagus instead of the traches. Consequently, oxygen
was delivered not to the lungs but to the gastrointestinal
tract. This conclusion is supported by the fact that Erlinda
was placed in trendelenbarg position. This indicates that
there was a decrease of blood supply to the patient’s brain.
The brain was, thus, temporarily deprived of oxygen supply
causing Erlinda to go into coma.
The injury occurred by petitioner Erlinda does not nor-
mally happen absent any negligenve in the administration of
anesthesia and in the use of an endotracheal tube. In Voss v.
Bridweld (364 P2d 955 [1961]), the Kansas Supreme Court
applied the doctrine of res ipsa loquitur, reasoning that the
injury to the patient therein was one which does not ordinarily
take place in the absence of negligence in the administration
of an anesthetic, and in the use and employment of an en-
dotracheal tube. The court went to say: “Ordinarily, a person
being put under anesthesia is not rendered decerebrate as a

1234
CIVIL CODE OF THE PHILIPPINES Art. 2181

consequence of administering such anesthesia in the absence

of negligence.”
(3) Respondent hospital’s position on this issue is meri-
torious. There is no employer-employee relationship between
DLSMC and Drs. Gutierrez and Hosaka which would hold
DLSMC solidarily liable for the injury suffered by petitioner
Erlinda under Art. 2180 of the Civil Code. Moreover, the
contract between the consultant in respondent hospital and
his patient is separate and distinct from the contract between
respondent hospital and said patient.
No evidence was adduced to show that the injury suf-
fered by petitioner Erlinda was due to failure on the part of
the respondent DLSMC to provide for hospital facilities and
staff necessary for her treatment.
Apropos to the award of damages to petitioner in view of the
supervening event of the former’s death, the amount represent-
ing actual (P1,325,000), moral and exemplary damages, attor-
ney’s fees, and costs of suit should be awarded to petitioner.

Art. 2181. Whoever pays for the damages caused by his

dependents or employees may recover from the latter what
he has paid or delivered in satisfaction of the claim.

COMMENT:

Right of Person (Who Pays) to Get Reimbursement

Reason for the Article: After all, the person who actually
caused the injury should be made to answer for his fault.

Sarkies Tours Phil. v.

Intermediate Appellate Court
GR 63723, Sep. 2, 1983

If as a result of an accident a tour operator and the owner

of the boat used for the tour are sued, the tour operator has
a right of action against the boat owner for reimbursement.
The principle embodied in Art. 2181 of the Civil Code may
be applied in favor of the tour operator.

1235
Arts. 2182-2184 CIVIL CODE OF THE PHILIPPINES

Art. 2182. If the minor or insane person causing damage

has no parents or guardian, the minor or insane person shall
be answerable with his own property in an action against
him where a guardian ad litem shall be appointed.

COMMENT:
When a Minor or an Insane Person Is Answerable With
His Own Property
The Article explains itself.

Art. 2183. The possessor of an animal or whoever may

make use of the same is responsible for the damage which it
may cause, although it may escape or be lost. This responsi-
bility shall cease only in case the damage should come from
force majeure or from the fault of the person who have suf-
fered damage.

COMMENT:
Damages Caused By Animals
Defenses:
(a) force majeure — as when the tooting of a car horn
frightens a horse, who thereby injures and kills a person.
(Derifas v. Escano, [C.A.] 40 O.G. [Supp. 12] 526).
(b) fault of the person injured
[NOTE: The law does not mention diligence of the
possessor of the animal as a defense.]

Art. 2184. In motor vehicle mishaps, the owner is soli-

darily liable with his driver, if the former, who was in the
vehicle, could have, by the use of due diligence, prevented
the misfortune. It is disputably presumed that a driver was
negligent, if he had been found guilty of reckless driving or
violating traffic regulations at least twice within the next
preceding two months.
If the owner was not in the motor vehicle, the provi-
sions of Article 2180 are applicable

1236
CIVIL CODE OF THE PHILIPPINES Art. 2184

COMMENT:

(1) Liability of Owner of a Motor Vehicle

Note the difference in the owner’s responsibility when
he was in the vehicle, or was not. In a sense, the owner is
compelled to be an intelligent “back-seat driver.”

(2) Case

Marcial T. Caedo, et al. v.

Yu Khe Thai, et al.
L-20392, Dec. 18, 1968

FACTS: Marcial T. Caedo and the members of his family

were injured when their Mercury car was hit on Highway 54
by a Cadillac car owned by Yu Khe Thai, and driven by the
latter’s driver, Rafael Bernardo. According to the facts, the
accident was due to Bernardo’s trying to overtake a carretela
in front of the Cadillac. There was therefore no question about
Bernardo’s negligence. Now then, would the owner Yu Khe
Thai be held solidarily liable inasmuch as he was in the car
at the time of the collision? (It was proved that the driver
had been driving for over 20 years, and had no record of an
accident; at the time of the collision, he was driving at mod-
erate speed).
HELD: Under the facts given, the owner had no negli-
gence either in employing the driver, or in supervising the
driver at or before the time of the accident. Hence, he is not
liable at all, much less solidarily liable. It is true that under
Art. 2184 of the Civil Code, “In motor vehicle mishaps, the
owner is solidarily liable with his driver if the former, who
was in the vehicle, could have, by the use of due diligence,
prevented the misfortune. It is disputably presumed that a
driver was negligent, if he had been found guilty of reckless
driving or violating traffic regulations at least twice within
the preceding two months.”
The basis of the master’s liability in civil law is not
respondeat superior but rather, the relationship of pater fa-
milias. The theory is that ultimately the negligence of the
servant, if known to the master and susceptible of timely

1237
Arts. 2185-2186 CIVIL CODE OF THE PHILIPPINES

correction by him, reflects his own negligence if he fails to

correct it in order to prevent injury or damage. There is no
such negligence here as the imputed negligence is necessarily
subjective — depending invariably on the car-driving ability
of the master himself. As a matter of fact, many car own-
ers precisely hire drivers since the former for one reason or
another cannot drive their cars themselves. Hence, the care
or vigilance demanded of them cannot be uniform; each case
must stand on its own.

Art. 2185. Unless there is proof to the contrary, it is

presumed that a person driving a motor vehicle has been
negligent if at the time of the mishap, he was violating any
traffic regulation.

COMMENT:
Presumption of Driver’s Negligence
The presumption arises if at the time of the mishap, he
was VIOLATING any traffic regulation.

Mikee v. IAC
GR 68102, Jul. 16, 1992
Under Art. 2185 of the Civil Code, a person driving a
vehicle is presumed negligent if at the time of the mishap,
he was violating any traffic regulation.

Art. 2186. Every owner of a motor vehicle shall file with

the proper government office a bond executed by a govern-
ment controlled corporation or office, to answer for damages
to third persons. The amount of the bond and other terms
shall be fixed by the competent public official.

COMMENT:
Duty of Owner of Motor Vehicle to File a Bond
(a) For the present, the “proper government office’’ would
seem to be the Land Transportation Commission (formerly
the Motor Vehicles’ Office).

1238
CIVIL CODE OF THE PHILIPPINES Arts. 2187-2189

(b) The GSIS may be called upon to take charge of the

“bonding.”
(c) One big problem is whether or not motor vehicle already
insured privately against third party liability (damages
to third persons) would still be covered by the Article.
Perhaps an amendment can better reveal the Congres-
sional intent.

Art. 2187. Manufacturers and processors of foodstuffs,

drinks, toilet articles and similar goods shall be liable for
death or injuries caused by any noxious or harmful sub-
stances used, although no contractual relation exists between
them and the consumers.

COMMENT:

Liability of Manufacturers
Note that liability exists even in the absence of contrac-
tual relations.

Art. 2188. There is prima facie presumption of negli-

gence on the part of the defendant if the death or injury
results from his possession of dangerous weapons or sub-
stances, such as firearms and poison, except when the pos-
session or use thereof is indispensable in his occupation
or business.

COMMENT:

Presumption of Negligence Because of the Possession

of Dangerous Weapons or Substances
Note the exception indicated in the law.

Art. 2189. Provinces, cities and municipalities shall be

liable for damages for the death of, or injuries suffered by
any person by reason of the defective condition of roads,
streets, bridges, public buildings, and other public works,
under their control or supervision.

1239
Art. 2190 CIVIL CODE OF THE PHILIPPINES

COMMENT:

Liability of Municipal Subdivisions Because of Defec-

tive Roads, Bridges, Etc.

(a) The liability is for the DEATH or INJURIES suffered by

a person (it would seem that damages to property would
not come under this Article).
(b) If a pedestrian falls into a manhole in a city street
(Manila), the Supreme Court has ruled that the City
Government would be liable under this Article despite
the fact that under the Revised Charter of Manila, the
City incurs no liability. While the Charter of Manila is
a special law insofar as territory is involved, still this
Article is a special provision insofar as defective condition
of streets, etc. is concerned. (City of Manila v. Genero N.
Teotico, L-23052, Jan. 29, 1968).

Guilatco v. City of Dagupan and CA

GR 61516, Mar. 21, 1989

The liability of public corporations for damages arising

from injuries suffered by pedestrians from the defective condi-
tion of roads extends to the fact that it is not even necessary
for such defective road or street to belong to the province,
city, or municipality for liability to attach. Art. 2189 only
requires that either control or supervision is exercised over
the defective road or street.

Art. 2190. The proprietor of a building or structure

is responsible for the damages resulting from its total or
partial collapse, if it should be due to the lack of necessary
repairs.

COMMENT:

Liability of Proprietor if a Building or Structure Col-

lapses
The Article is self-explanatory.

1240
CIVIL CODE OF THE PHILIPPINES Art. 2191

Art. 2191. Proprietors shall also be responsible for

damages caused:
(1) By the explosion of machinery which has not been
taken care of with due diligence, and the inflammation of
explosive substances which have not been kept in a safe
and adequate place;
(2) By excessive smoke, which may be harmful to
persons or property;
(3) By the falling of trees situated at or near highways,
or lanes, if not caused by force majeure;
(4) By emanations from tubes, canals, sewers or de-
posits of infectious matter, constructed without precautions
suitable to the place.

COMMENT:

Other Liabilities of Proprietors of Buildings or Struc-

ture
(a) The Article enumerates four instances.
(b) Injunction is an available remedy here because the damage
may be irreparable. (See Bengzon v. Prov. of Pangasinan,
62 Phil. 816 and Ollendorf v. Abrahamson, 38 Phil. 585).

Austin Hardware Co., Inc. & All-Steel Products,

Inc. v. The Court of Appeals, et al.
L-41754, Feb. 27, 1976

FACTS: A hardware business and a factory for the

manufacture of steel products located at No. 115 L.K. San-
tos St., San Juan, Rizal, was ordered stopped by the Mayor,
pursuant to a municipal council resolution finding same to be
nuisances in a residential zone, causing both noise and air
pollution. May the permit for the same be validly revoked?
HELD: Yes. The power to license carries with it the
power to revoke it, either for cause or upon a change of policy

1241
Arts. 2192-2194 CIVIL CODE OF THE PHILIPPINES

and legislation. Moreover, the permit violated the existing

ordinances.

Art. 2192. If damages referred to in the two preceding

articles should be the result of any defect in the construc-
tion mentioned in Article 1723, the third person suffering
damages may proceed only against the engineer or architect
or contractor in accordance with said article, within the
period therein fixed.

COMMENT:

Rule if the Cause Is a Construction Defect

The Article explains itself.

Art. 2193. The head of a family that lives in a build-

ing or a part thereof, is responsible for damages caused by
things thrown or falling from the same.

COMMENT:

Responsibility for Thrown or Fallen Things

The Article can apply to the lessee of a house who con-
verts same into a hotel. (See Dingcong v. Kanaan, 72 Phil.
14). Note the liability of the head of the family.

Art. 2194. The responsibility of two or more persons

who are liable for a quasi-delict is solidary.

COMMENT:

(1) Solidary Liability of Tort-Feasors

Although all those responsible for a quasi-delict are called
joint tortfeasors, their liability is SOLIDARY. (See Worcester
v. Ocampo, 22 Phil. 42).

1242
CIVIL CODE OF THE PHILIPPINES Art. 2194

(2) Cases

Metro Manila Transit Corp. v. CA

42 SCAD 538
1993

Where the injury is due to the concurrent negligence of

the drivers of the colliding vehicles, the drivers and owners of
said vehicles shall be primarily, directly and solidarily liable
for damages and it is immaterial that one action is based on
quasi-delict and the other on culpa contractual.

Light Rail Transit Authority & Rodolfo

Roman v. Marjorie Navidad, Heirs of the
late Nicanor Navidad & Prudent
Security Agency
GR 145804, Feb. 6, 2003

ISSUE: Can a contractual obligation be breached by

tort?
HELD: Yes, and when the same act or omission causes
the injury, one resulting in culpa contractual and the other
culpa acquiliana, Art. 2194 can well apply. (Air France v.
Carrascoso, 124 Phil. 722).
In fine, a liability for tort may arise even under a con-
tract, where tort is that which breaches the contract. (PSBA
v. CA, 205 SCRA 729). Stated differently, when an act which
constitutes a breach of contract would have itself constituted
the source of a quasi-delict liability and no contract existed
between the parties, the contract can be said to have been
breached by tort, thereby allowing the rules on tort to apply.
(Cangco v. Manila Railroad, 38 Phil. 768 and Manila Railroad
v. Compania Transatlantica, 38 Phil. 875).

1243
 CIVIL CODE OF THE PHILIPPINES

TITLE XVIII
DAMAGES
(New, except Arts. 2200, 2201, 2209, and 2212.)

Introductory Comment:
The fundamental principle of the law on damages is that one
injured by a breach of a contract or by a wrongful or negligent act
or omission shall have a fair and just compensation, commensurate
with the loss sustained as a consequence of the defendant’s act.
Hence, actual pecuniary compensation is the general rule, whether
the action is based on a contract or in tort, except where the cir-
cumstances warrant the allowance of other kinds of damages. (See
Western Union Teleg Co. v. Green, 153 Tenn. 69). In general, the
damages awarded should be equal to, and precisely commensurate
with the injury sustained. However, rules of law respecting the
recovery of damages are framed with reference to just rights of
BOTH PARTIES, not merely what may be right for an injured
person to receive, but also what is just to compel the other party
to pay, to accord just compensation for the injury. (Kennings v.
Kline, 158 Ind. 602).

Zulueta v. Pan American World Airways, Inc.

43 SCRA 397

FACTS: Zulueta and his wife were passengers of a Pan

American airplane. At a stop-over, Zulueta was ill-treated and
was left at the airport. Is he entitled to recover damages?
HELD: Yes. Passengers should be treated by the employ-
ees of an airplane carrier with kindness and courtesy, and
should be protected against indignities, abuses, and injurious
language from such employees. In case of breach of contract,
the airline company should be held liable for damages. Be it

1244
CIVIL CODE OF THE PHILIPPINES

noted further that the contract of common air carriage gener-

ates a relation attended with a public duty.

Air France v. CA and Morales

GR 76093, Mar. 21, 1989

Mere refusal to accede to the passenger’s wishes does

not necessarily translate into damages in the absence of bad
faith.

Tiu v. Court of Appeals

46 SCAD 408, 228 SCRA 51
1993
An adverse result of a suit in law does not mean that
the same is wrongful as to justify assessment of damages
against the actor.

1245
 CIVIL CODE OF THE PHILIPPINES

Chapter 1

GENERAL PROVISIONS

Art. 2195. The provisions of this Title shall be respectively

applicable to all obligations mentioned in Article 1157.

COMMENT:
Applicability to All Kinds of Legal Obligations
Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punishable by law; and
(5) Quasi-delicts.

Art. 2196. The rules under this Title are without preju-
dice to special provisions on damages formulated elsewhere
in this Code. Compensation for workmen and other em-
ployees in case of death, injury or illness is regulated by
special laws. Rules governing damages laid down in other
laws shall be observed insofar as they are not in conflict
with this Code.

COMMENT:
(1) Special Provisions and Laws
It is to be observed that in case of conflict between the
Civil Code and the Special Laws, it is the Civil Code that
prevails insofar as damages are concerned — EXCEPT in the
case of compensation for workmen and other employees.

1246
CIVIL CODE OF THE PHILIPPINES Art. 2196

(2) Indemnity in Workmen’s Compensation Cases

Milagros F. Vda. de Forteza v. Workmen’s

Compensation Commission and the Philippine
Charity Sweepstakes Office
L-21718, Jun. 29, 1968

FACTS: Amadeo R. Forteza worked as watchman in the

Philippine Charity Sweepstakes Office (PCSO) from Jul. 1,
1950 up to Jan. 17, 1955. He was more than 60 years old, and
was suffering from hypertension when he entered the service of
the office. On Jan. 17, 1955, he died of cerebral hemorrhage
due to said hypertension. It was proved that he had to work
at nighttime, was exposed to colds, lacked proper sleep and
rest, and had to go up and down a 3-story building (without
elevator) to check out the premises. Is his death compensa-
ble?
HELD: Yes, his death is compensable. It is the rule in
Workmen’s Compensation cases that it need not be proven
that his employment was the sole cause of the death or in-
jury suffered by the employee. It is enough — to entitle him
or his heirs to compensation benefits under the law — that
there be a showing that his employment (as in this case)
had contributed to the acceleration of his death or ailment.
Moreover, the law presumes that such death is compensable,
unless the employer clearly establishes that it was not caused
or aggravated by the employment. (See Niara v. Workmen’s
Compensation Commission, L-18066, Oct. 30, 1962).

Ysmael Maritime Corp. v. Avelino

GR 43674, Jun. 30, 1987
FACTS: RGL was a licensed second mate on board a
vessel owned by YMC when the same ran aground and sank.
RGL perished as a result. FL and CG, the parents of RGL,
sued YMC in the Court of First Instance (Regional Trial
Court) for damages. YMC invoked the rule in Robles v. Yap
Wing, 41 SCRA 267, that all claims for death or injuries by
employees against employers are exclusively cognizable by
the Workmen’s Compensation Commission (WCC) regardless

1247
Art. 2196 CIVIL CODE OF THE PHILIPPINES

of the causes of said death or injuries. CG admitted that he

had previously filed a claim for death benefits with the WCC
and had received the compensation payable to them under the
Workmen’s Compensation Act (WCA). The trial court denied
YMC’s motion to dismiss.
ISSUE: Is the compensation remedy under the WCA (now
under the Labor Code) for work-connected death or injuries
sustained by an employee exclusive of the other remedies
available under the Civil Code?
HELD: The rule in Robles v. Yap Wing no longer controls.
In Floresca v. Philex, 136 Phil. 141, involving a complaint
for damages for the death of five miners in a cave-in, the
Supreme Court was confronted with three divergent opinions
on the exclusivity rule.
One view is that the injured employee or his heirs, in
case of death, may initiate an action to recover damages (not
compensation under the Workmen’s Compensation Act) with
the regular courts on the basis of negligence of the employer
pursuant to the Civil Code. Another view, as enunciated in
the Robles case, is that the remedy of an employee for work-
connected injury or accident is exclusive in accordance with
Sec. 5 of the WCA. A third view is that the action is selec-
tive and the employee or his heirs have a choice of availing
themselves of the benefits under the Workmen’s Compensation
Act or of suing in the regular courts under the Civil Code
for higher damages from the employer by reason of his negli-
gence. But once the election has been exercised, the employee
or his heirs are no longer free to opt for the other remedy,
i.e., the employee cannot pursue both actions simultaneously.
The view was adopted by the majority in the Floresca case,
reiterating as main authority its earlier decision in Pacana v.
Cebu Autobus, 32 SCRA 442. In so doing, the Court rejected
the doctrine of exclusivity of the rights as remedies granted
by the WCA as laid down in the Robles case.
Claimants cannot be allowed to maintain their action
to recover additional damages against the employer if the
former had previously filed a claim for death benefits with
the WCC and had received the compensation payable to them
under the WCA. If they had not only opted to recover under

1248
CIVIL CODE OF THE PHILIPPINES Art. 2197

the Act but they had also been duly paid, at the very least,
a sense of fair play would demand that if a person entitled
to a choice of remedies made a first election and accepted the
benefits thereof, he should no longer be allowed to exercise the
second option. If one had staked his fortunes on a particular
remedy, he is precluded from pursuing the alternate course,
at least until the prior claim is rejected by the WCC.

(3) Dismissal of Action

Enrique A. Defante v. Hon. Antonio

E. Rodriguez, et al.
L-28380, Feb. 27, 1976
If an action for damages is sought to be dismissed by
plaintiff-appellant or his heirs when the case is already on
appeal, may the dismissal be granted despite the appeal?
Yes, since the parties involved are no longer interested in
prosecuting the appeal.

Art. 2197. Damages may be:

(1) Actual or compensatory;
(2) Moral;
(3) Nominal;
(4) Temperate or moderate;
(5) Liquidated; or
(6) Exemplary or corrective.

COMMENT:
(1) Damages Distinguished from Injury
Damages (from the Latin “damnum” or “demo” — to take
away) refers to the harm done and what may be recovered
(See Hale on Damages, 2nd Ed., p. 1); injury refers to the
wrongful or unlawful or tortious act. The former is the meas-
ure of recovery, the latter is the legal wrong to be redressed.
There may be damages without injury, and an injury without
damages. (15 Am. Jur., p. 388).

1249
Art. 2197 CIVIL CODE OF THE PHILIPPINES

(2) Damage Without Injury

There can be “damage without injury” (damnum absque
injuria) (or physical hurt or injury without legal wrong). The
principle was mentioned in, among other cases, De la Rama
Steamship Co., Inc. v. Judge Tan and the NDC (99 Phil.
1034). In that case, the government exercised a contractual
right to cancel an agency, although by such cancellation, the
agent would suffer damages.
Similarly, one who complies with a government-promul-
gated rule cannot be held liable for damages that may because
by other person. (Janda v. Lepanto Cons. Mining Co., L-6930,
May 25, 1956).

(3) Some Rules on Waiver

(a) Although the right to recover civil liability whether aris-
ing from an offense or otherwise is waivable, still, where
the waiver thereof was made in behalf of the minor heirs
by a person who is not their judicial guardian, such
waiver is ineffective if it lacks judicial approval. (People
v. Verano, L-15805, Feb. 28, 1961).
(b) Waiver of the right to recover upon the civil liability
of an accused employee arising from a crime, made in
favor of his employer, embraces also the civil liability of
the accused himself, since the law makes his employer
subsidiarily liable for the civil obligation and in default
of the person criminally liable, responsible for the civil
liability. (Ibid.). (QUERY: Should extinction of the sub-
sidiary obligation result also in extinction of the principal
obligation?)

(4) Liability of Fiscal (now Prosecutor)

Lim v. De Leon
L-22554, Aug. 29, 1975
A Fiscal (now Prosecutor) who orders the seizure of prop-
erty alleged to be involved in the crime of robbery without
a search warrant is liable (except in the case of a citizen’s

1250
CIVIL CODE OF THE PHILIPPINES Art. 2198

arrest) for actual damages (including attorney’s fees), moral

damages, and exemplary damages. There is nothing in the
law (RA 732) which gives to provincial fiscals the power to
issue warrants, much less to order the seizure without war-
rant, of personal property alleged to be the corpus delicti of
a crime.

(5) Damages in Voidable Contracts

Development Bank of the Phil.

v. Court of Appeals
L-28774, Feb. 28, 1980, 96 SCRA 342

A person not obliged principally or subsidiarily in a con-

tract may nevertheless ask for its annulment (with damages
in the proper cases) if he is prejudiced in his rights regarding
one of the contracting parties. (See Banez v. Court of Appeals,
L-30351, Sep. 11, 1974, 59 SCRA 16, 21).

Art. 2198. The principles of the general law on damages

are hereby adopted insofar as they are not inconsistent
with this Code.

COMMENT:
Adoption of the Principles of the General Law on Dam-
ages
It is clear that in case of conflict, it is the Civil Code
that prevails.

1251
 CIVIL CODE OF THE PHILIPPINES

Chapter 2

ACTUAL OR COMPENSATORY DAMAGES

Art. 2199. Except as provided by law or by stipula-

tion, one is entitled to an adequate compensation only for
such pecuniary loss suffered by him as he has duly proved.
Such compensation is referred to as actual or compensa-
tory damages.

COMMENT:
(1) ‘Actual or Compensatory Damages’ Defined
Actual or compensatory damages are those recoverable
because of pecuniary loss (in business, trade, property, profes-
sion, job, or occupation). (Algarra v. Sandejas, 27 Phil. 284).
They include:
(a) the value of the loss suffered (daño emergente);
(b) profits which were not obtained or realized (lucro cesante).
(Art. 2199; 8 Manresa 100).
NOTE: Recovery cannot be had for the death of an
unborn (aborted) child. This is not to say that the parents
are not entitled to collect any damages at all. But all such
damages must be those inflicted directly upon them, as
distinguished from the injury or violation of the rights
of the deceased, his right to life, and physical integrity.
Because the parents cannot expect either help, support,
or service from an unborn child, they would normally be
limited to moral damages for the illegal arrest of the nor-
mal development of the spos hominis that was the foetus,
i.e., on account of distress and anguish attendant to its
loss, and the disappointment of their parental expecta-
tions (Art. 2217), as well as to exemplary damages, if the
circumstances should warrant them. (Art. 2230). (Geluz v.
Court of Appeals, et al., L-16439, Jul. 20, 1961).

1252
CIVIL CODE OF THE PHILIPPINES Art. 2199

Bert Osmeña and Associates v. Court of Appeals

GR 56545, Jan. 28, 1983

Because of a breach of contract on the part of the sell-

ers, the buyers were not able to construct the house they
had intended to build (at a certain estimated cost). Can they
recover said cost from the delinquent party?
HELD: No, they are not entitled to be awarded said es-
timated costs because after all they did not lose this amount.
The amount was an expense, not expected income that had
been lost.

Radio Communications of the Philippines, Inc. v.

Court of Appeals
L-55194, Feb. 26, 1981

In transmitting a telegramic message, the RCPI er-

roneously transmitted “no truck available” instead of “truck
available,” causing damage to a freight company the Yabut
Freight Express. The RCPI was held liable:
(1) for both actual damages (damnum emergens) and compen-
satory damages (lucrum cessans or unrealized profit).
(2) for exemplary damages — because of the gross negligence
or wanton misconduct here.
(3) attorney’s fees and expenses of litigation (which may be
reduced if found unreasonable)
(4) temperate or moderate damages — for injury to one’s
business standing.

Ramos v. CA,
GR 124354, Apr. 11, 2002
The Court rules on actual or compensatory damages
generally assume that at the time of litigation, the injury
suffered as a consequence of an act of negligence, has
been completed and that the cost can be liquidated.
These provisions, however, neglect to take into ac-
count those situations, as in the case at bar, where the
resulting injury might be continuing and possible future

1253
Art. 2199 CIVIL CODE OF THE PHILIPPINES

complications directly arising from injury, while certain

to occur, are difficult to predict.
[NOTE: To be able to recover actual or compensa-
tory damages, the amount of loss must be proven with a
reasonable degree of certainty, based on competent proof
and on the best evidence obtainable by the injured party.
(MOF Co. v. Enriquez, GR 149280, May 9, 2002).]

(2) Necessity of Pleading

To be recoverable, actual damages must be pleaded or
prayed for. However, when a prayer mentions only exemplary
damages, moral damages, and attorney’s fees and “such further
relief... as this Honorable Court may deem just and equitable,”
the phrase “such further relief” may include “actual damages”
if and when they are proved. (Heirs of Justiva v. Court of
Appeals, L-16396, Jan. 31, 1963).

(3) Necessity of Proof

(a) Actual damages must be proved as a general rule (Tomassi
v. Villa-Abrille, L-7047, Aug. 21, 1958) and the amount of
damages must possess at least some degree of certainty.
(Chua Teck Hee v. Phil. Publishing Co., 34 Phil. 447).
[NOTE: It is not necessary to prove exactly how
much the loss is; it is enough that LOSS is proved; and if
the amount the court awards is fair and reasonable, this
will be allowed. (Tan Ti v. Alvear, 26 Phil. 506; Hicks v.
Manila Notel, 28 Phil. 235; Pedret v. Ponce Enrile, (C.A.)
53 O.G. 2809). In Republic v. Tayengco, et al., L-23766,
Apr. 27, 1967, it was held that in expropriation, the
owners of the lands involved can recover interest from
the date the expropriator takes possession of the parcels
concerned until payment or deposit in court is made.]

Inhelder Corporation v. Court of Appeals

GR 52358, May 30, 1983

Judges and Justices must be careful not to award

exorbitant damages. There must be balanced restraint
and measured objectivity.

1254
CIVIL CODE OF THE PHILIPPINES Art. 2199

[NOTE: If there is NO proof of loss (Sanz v. Lavin

Brothers, 6 Phil. 299) or if the proof is flimsy and unsub-
stantial, no damages will be given (Heredia v. Salinas, 10
Phil. 157). The Court cannot rely on its own speculations
as to the fact and amount of damages, but must depend
on actual proof that damage had been suffered and actual
proof of the amount. (Suntay Tanjangco v. Jovellanos,
L-12332, Jun. 30, 1960). The Court in awarding dam-
ages, must point out specific acts which afford a basis
for measuring compensatory or actual damages had been
suffered. (Malonzo v. Galang, et al., L-13851, Jul. 27,
1960). However, if there was proof, but it is not clear or
satisfactory, the appellate court may remand the case to
the lower court for new trial. (Brodeck v. Larsen, 8 Phil.
425; Roroqui v. Maiquez, et al., {C.A.} 37 O.G. 1191). In no
instance may the judge give more than the damages proved
in court. (Marker v. Garcia, 5 Phil. 557). Just because the
complaint filed by the plaintiffs against the defendant is
“clearly unfounded,” this does not necessarily mean, in
the absence of specific facts proving damages, that said
defendants really suffered actual damages over and above
attorney’s fees and costs. A mere relief by the Court that
the sum of P500 must have been what they had actually
suffered clearly should not be countenanced. (Malonzo v.
Galang, et al., L-13851, Jul. 27, 1960). Similarly, an alleged
but unproved claim of damages in the amount of P10,000
simply because a party had been made a defendant in an
unfounded “easement” case cannot be allowed. Indeed, the
Court cannot rely on its own speculations as to the fact
and amount of damages alleged to have been suffered.
(Tanjangco v. Jovellanos, et al., L-12332, Jun. 30, 1960;
see Basilan Lumber Co. v. Cagayan Timber Export Co., et
al., L-15908, Jun. 30, 1961).]
[NOTE: If there be an award for compensatory
damages, there can be no grant of nominal damages.
The reason is that the purpose of nominal damages is
to vindicate or recognize a right that has been violated,
in order to preclude further cost thereon, and “not for
the purpose of indemnifying the plaintiff for any loss
suffered by him.” (Medina, et al. v. Cresencia, et al.,
L-8194, Jul. 11, 1956).]

1255
Art. 2199 CIVIL CODE OF THE PHILIPPINES

[NOTE: The damages given must be based on the

evidence given and not on the personal knowledge of the
court. (Villaroman v. Lastrella, [C.A.] L-136-R, Feb. 11,
1947 and Romualdez v. Ysmael and Co., [C.A] 53 O.G.
8858). Neither must the damages be remote or specula-
tion (Tomassi v. Villa Abrille, L-7047, Aug. 21, 1958 and
Standard Oil Co. v. Castro, 54 Phil. 716), nor must the
claim be delayed unreasonably. (Strong v. INAEC, 40 O.G.
[18th, S] p. 269). In Kairuz v. Pacio and Pacio (L-14506,
Jul. 25, 1960), it was held that a person who unjustifiably
withholds from another the latter’s motor engine used for
the hauling of logs should not be held liable for speculative
and contingent damages (in the form of possible rentals).
Instead, the withholder must be held responsible for its
return (or payment of its value) plus legal interest ther-
eon from the date of demand. In the case of Ventanilla
v. Centeno, L-14333, Jan. 28, 1961, the Supreme Court
held that even if an attorney fails to perfect an appeal in
a civil case from an adverse judgment in a lower court,
he should not be held liable for the “damages that could
have been recovered” since these damages are highly
speculative. In Rizal Surety and Insurance Co., Inc. v.
MRR Co., L-22409, Apr. 27, 1967, the Court ruled that
a provisional claim filed by a consignee BEFORE knowl-
edge of any actual shortage or damage with respect to
cargo consigned to her is a speculative claim. In Delfin
v. Court of Agrarian Relations, L-23348, Mar. 14, 1967,
the Court decreed that damages, such as those awarded
to an illegally dispossessed tenant, should not be given
the basis of guesswork or speculation.]
(b) In the following cases, actual damages need NOT be
proved:
1) In case liquidated damages had been previously
agreed upon. (Art. 2216).
2) In case of damages other than actual. (Art. 2216).
3) In case loss is presumed as when a child (minor) or a
spouse dies. (Manzanares v. Moreta, 38 Phil. 821).
4) In case of forfeiture of bonds in favor of the govern-
ment for the purpose of promoting public interest

1256
CIVIL CODE OF THE PHILIPPINES Art. 2200

or policy (like a bond for the temporary stay of an

alien). (Far Eastern Surety & Ins. Co. v. Court of
Appeals, L-12019, Oct. 16, 1958).

Radio Communications of the Philippines,

Inc. (RCPI) v. Lantin
L-59311, Jan. 31, 1985
If because of a breach in a lease contract, there
is an award of compensatory damages, this award
may be ordered executed pending appeal, but not an
award for moral or exemplary damages. The award
for moral or exemplary damages cannot be regarded
as fixed or definite until there is a final judgment.
Otherwise stated, their grant is dependent on the
outcome of the main case.

Art. 2200. Indemnification for damages shall comprehend

not only the value of the loss suffered, but also that of the
profits which the obligee failed to obtain.

COMMENT:
(1) Two Kinds of Actual Damages
There are two kinds of actual or compensatory damages:
(a) losses suffered (damno vitando or daño emergente)
(b) unrealized profits (lucro captando or lucro cesante or
lucrum cessans). (Angeles v. Lerma, [C.A.] 45 O.G. No. 6,
p. 2589).
[NOTE that “lucrum cessan” is also a basis for indem-
nification. Hence, if there exists a basis for a reasonable ex-
pectation that profits would have continued had there been
no breach of contract, indemnification for damages based
on such expected profits is proper. (General Enterprises v.
Lianga Bay Logging Co., L-18487, Aug. 31, 1964).]

St. Louis Realty Corporation v. Court of Appeals

L-46061, Nov. 14, 1984
If a person’s house is used as advertising material
without the consent of the owner, and without apologizing

1257
Art. 2200 CIVIL CODE OF THE PHILIPPINES

to him, he is entitled to an award of actual and moral

damages.

BA Finance Corp. v. CA
GR 61464, May 28, 1988
The court cannot sustain the award of unrealized
profits if the same have not been proved or justified before
the trial court, and the basis of the alleged unearned
profits is too speculative and conjectural to show actual
damages for a future period.

Batong Buhay Gold Mines, Inc. v. CA

GR 45048, Jan. 7, 1987
Damages by way of unrealized profits (lucro cesante)
may not be awarded in the absence of supporting evidence
or merely on the basis of pure assumption, speculation or
conjecture. Speculative damages cannot be recovered.

Aguilar v. Chan
GR 28688, Oct. 9, 1986
Where the actual damages suffered by plaintiff
exceeded the amount awarded her by the lower court,
but plaintiff did not appeal, the appellate court cannot
award her more than the amount awarded by the lower
court.

(2) Examples of Daño Emergente

(a) destruction of things. (19 Scaevola 557).
(b) fines or penalties that had to be paid. (19 Scaevola
557).
(c) medical and hospitalization expenses. (See Araneta, et
al. v. Arreglado, et al., 104 Phil. 529).
[NOTE: If the injured party claims actual damages
because a jaw injury prevented him from going to school
for one year, will not be given said damages because
damages due to a lost school year and the resulting re-
duction in the victim’s earning capacity are manifestly

1258
CIVIL CODE OF THE PHILIPPINES Art. 2201

speculative, and may not exist at all. (Araneta, et al. v.

Arreglado, et al., 104 Phil. 529). In one case, however,
where the victim’s mental capacity was so reduced that
according to a psychiatrist, he could no longer finish his
studies as a medical student; had become a misfit for
any kind of work; and unable to walk around without
someone helping him, compensatory damages amount-
ing to P25,000 were awarded by the Court. (Carriaga,
et al. v. Laguna-Tayabas Bus Co., et al., L-11037, Dec.
29, 1960).]
(d) rents and agricultural products not received in an agri-
cultural lease. (J.M. Tuason, Inc. v. Santiago, et al.,
L-5079, Jul. 31, 1956).

(3) Examples of Lucro Cesante

(a) profits that could have been earned had there been
no interruption in the plaintiff’s business as evidenced
by the reduced receipts of the enterprise. (See Algarra
v. Sandejas, 27 Phil. 284; Tan Ti v. Alvear, 26 Phil.
566).
(b) profits because of a proposed future re-sale of the property
being purchased — if the existence of a contract there
was known to the delinquent seller. (See Enriquez de la
Cavoda v. Diaz, 37 Phil. 982).
(c) interest on rentals that were not paid. (Here, the interest
undeniably forms profits which could have been realized
had the rents been given.) (See J.M. Tuason, Inc. v.
Santiago, et al., L-5079, Jul. 31, 1956).

Art. 2201. In contracts and quasi-contracts, the damages

for which the obligor who acted in good faith is liable shall
be those 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 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.

1259
Art. 2201 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Liability of Debtor in Contracts and Quasi-Contracts
(a) if in GOOD FAITH ––
It is essential that the damages be:
1) the NATURAL and PROBABLE consequences of
the breach of the obligation;
2) those which the parties FORESAW or COULD
HAVE REASONABLY FORESEEN at the time the
obligation was constituted.
(b) if in BAD FAITH
It is ENOUGH that the damages may be REA-
SONABLY ATTRIBUTED to the non-performance of the
obligation. (Relation of cause and effect is enough.)
[NOTE: There is no necessity of the damage be-
ing a natural or probable consequence, and there is no
necessity of foreseeing or foreseeability. (See 8 Manresa
103-104).]
[NOTE: The fundamental difference between the
first paragraph and the second paragraph in Art. 2201
is this: in the first, there was mere carelessness; in the
second, there was deliberate or wanton wrongdoing
(Verzesa v. Baytan, et al., L-14092, Apr. 29, 1960). Mere
carelessness or negligence of a bus driver in a collision
with a train would make his liability fall under the first
paragraph. (Carriaga, et al. v. Laguna, Tayabas Bus Co.,
et al., L-11037, Dec. 29, 1960).]

(2) Examples of Reasonably Foreseen or Foreseeable Dam-

ages in Contracts
(a) ORDINARY DAMAGES (generally inherent in a breach
of typical contract)
1) Value of the use of the land if same is withheld,
computed for the duration of the withholding. (Day-
walt v. Corporacion de P.P. Agustinos Recoletos, 39
Phil. 587).

1260
CIVIL CODE OF THE PHILIPPINES Art. 2201

2) Difference in the value of goods at the time of

stipulated delivery and the time of actual delivery
(common carriers). (Uy Chaco v. Admiral Line, 46
Phil. 418).
3) Cost of completing or repairing a defective build-
ing (in the case of building contracts). (Marker v.
Garcia, 5 Phil. 551).
4) The income which an injured bus passenger could
have earned (had he finished his medical course
and passed the corresponding board examinations)
must be deemed within the category of “natural
and probable consequences which parties should
have foreseen by the parties at the moment said
passenger boarded the bus. (Carriaga, et al. v. La-
guna, Tayabas Bus. Co., et al., L-111037, Dec. 29,
1960).
5) Salary for the entire period agreed upon in an em-
ployment contract in case the employer breaks it
without just cause MINUS income actually earned
or could have been earned during the unexpired
period. (Lemoine v. Alkan, 33 Phil. 162; see Sotelo v.
Behn, Meyer & Co., 57 Phil. 775; Berbari v. General
Oil Co., 43 Phil. 414 and Logan v. Phil. Acetylene
Co., 33 Phil. 177).
[NOTE: The breach is generally indivisible,
and therefore action may be brought AT ONCE for
both present and future salaries, without waiting for
the stipulated end of the contract. Failure to sue for
all damages by suing only for the damages already
accrued will BAR future suits on the same point.
(Hicks v. Manila Hotel, 78 Phil. 325 and Garcia v.
Hotel de Francia, 42 Phil. 660).]
[NOTE: The employer has the duty to prove
the earnings made or which could have been earned
during the unexpired period. (Hicks v. Manila Hotel,
supra; Garcia v. Hotel de Francia, supra).]
(b) SPECIAL DAMAGES (Those which exist because of
special circumstances and for which a debtor in GOOD

1261
Art. 2202 CIVIL CODE OF THE PHILIPPINES

FAITH can be held liable only if he had been previously

informed of such circumstances.)
Example: If a carrier fails to deliver a movie film
intended for showing at a fiesta, it cannot be held liable
for the extraordinary profits realizable at a fiesta showing,
if it had not been told that the film had to be delivered
in time for said fiesta. (Mendoza v. PAL, 90 Phil. 836).
[NOTE: If a debtor is in BAD faith, special damages
can be assessed against him even if he had NO knowl-
edge of the special circumstances. It is enough that the
damage be reasonably attributed to the non-performance
of obligation. (8 Manresa 103).]

Art. 2202. In crimes and quasi-delicts, the defendant

shall be liable for all damages which are the natural
and probable consequences of the act or omission com-
plained of. It is not necessary that such damages have
been foreseen or could have reasonably been foreseen
by the defendant.

COMMENT:
(1) Damages in Crimes and Quasi-Delicts
(a) Note here that as distinguished from the rule in the
preceding article, it “is not necessary that such dam-
ages have been foreseen or could have reasonably been
foreseen by the defendant.”
(b) The Article applies to CRIMES and QUASI-DELICTS.

Maranan v. Perez
L-22272, Jun. 26, 1967

If a taxi driver should kill his passenger, the civil

liability of the offender is based on his having commit-
ted a crime. On the basis of contracts, it is the taxicab
owner-operator who should be held liable for damages,
not the driver-killer, for said driver is not a party to the
contract of carriage.

1262
CIVIL CODE OF THE PHILIPPINES Art. 2202

People v. Salig
L-53568, Oct. 31, 1984

During their appeal in a criminal case where they

were convicted, one of the accused died. The estate of
the person who died, can be held solidarily liable with
others in case of a final judgment of conviction. [NOTE:
Justice Serafin Cuevas dissents because under Art. 89
of the Revised Penal Code, the pecuniary liability of the
deceased was extinguished because of his death before
final judgment.]

(2) What Victim Must Prove in a Tort or Quasi-Delict

Suit
In a tort action the alleged victim must prove:
(a) a causal connection between the tort and the injury;
(b) the amount and extent of the injury.

(3) Unfair Competition

If unfair competition deprives the victims of certain prof-
its, the person liable must respond if the two things stated
above are proved. Liability may, however, be reduced if loss
was suffered by the plaintiff not only because of the unfair
competition but also because of his fault, e.g., inferior quality
or service. (Castro, et al. v. Ice and Cold Storage Industries,
et al., L-10147, Dec. 27, 1958).

(4) Concealment of an Existing Marriage

Concealment of an existing marriage from a girl whom
a man intends to seduce can make a man liable for damages.
Thus, if on account of his concealment, the woman lives with
him and bears a child, and relinquishes her employment to
attend to a litigation filed to obtain support for her child
— he must be held liable for all the consequent damages. This
concealment of the marriage in fact is NOT mere negligence,
but actual fraud (dolo) practiced upon the girl. While the
liability may be considered extra-contractual in nature, still
under the old Civil Code as well as, it is believed, the new
Civil Code, said liability is equivalent to that of a contractual

1263
Art. 2203 CIVIL CODE OF THE PHILIPPINES

debtor in bad faith. (Silva, et al. v. Peralta, et al., L-13114,

Aug. 29, 1961). Should the man be also held liable for moral
damages? YES. It is true that no moral damages are gener-
ally allowable as a consequence of sexual relations outside of
wedlock, but in the instant case it appears that after the girl
had filed the action for support the man avoided the service
of summons and then exercised improper pressure upon her to
make her withdraw the suit. When she refused, the man and
his lawful wife even filed an action against her, thus calling
to her employer’s attention the fact that she was an unwed
mother. These are deliberate maneuvers causing her anguish
and physical suffering in which she got sick as a result. As this
injury was inflicted after the new Civil Code became operative,
it constitutes a justification for the award of moral damages.
(Ledesma Silva, et al. v. Peralta, L-13114, Aug. 29, 1961).

Budiong v. Judge Apalisok

GR 60151, Jun. 24, 1983
Even if there is no specific allegation of damages in the
complaint or information, civil liability may still be claimed
in the criminal case.

Brinas v. People
GR 50309, Nov. 25, 1983
Even if a separate civil case is brought because of an
accident, the Court in the criminal case can still impose civil
liability (arising from the commission of a crime). In the civil
case, if it is the employer who is sued, it will be an obliga-
tion arising from culpa contractual (not one arising from the
commission of the criminal act).

People v. Castañeda
GR 49781, Jun. 24, 1983
If the accused in a criminal case is acquitted on reasonable
doubt, a civil action for damages may still be instituted.

Art. 2203. The party suffering loss or injury must exer-

cise the diligence of a good father of a family to minimize the
damages resulting from the act or omission in question.

1264
CIVIL CODE OF THE PHILIPPINES Art. 2203

COMMENT:
(1) Victim Must Minimize the Damage
Prudent men must minimize the damage done to them
by others. Thus, one prevented from entering a particular
hacienda must complain to the proper officials in time. (Del
Castelvi v. Compania Gen. de Tabacos, 49 Phil. 998). One
ousted from a job must try to seek other employment. (Lem-
oine v. Alkan, 33 Phil. 162).

(2) Burden of Proof

The person sued has the burden of proving that the
victim could have mitigated the damage. (Lemoine v. Alkan,
supra).

(3) Plastic Surgery Which Could Have Been Performed in

the Philippines
A victim cannot recover the cost of plastic surgery in
the United States if it is proved that the operation could
have been completely performed in the Philippines by local
practitioners. (Araneta, et al. v. Arreglado, et al., 104 Phil.
529).

(4) Case

Abelardo Lim & Esmadito Gumalan v.

CA & Donato H. Gonzales
GR 125817, Jan. 16, 2002
FACTS: Private respondent left his passenger jeepney
by the roadside at the mercy of the elements.
HELD: Art. 2203 exhorts parties suffering from loss or
injury to exercise the diligence of a good father of a family
to minimize the damages resulting from the act or omission
in question. One who is injured then by the wrongful or
negligent act of another should exercise reasonable care and
diligence to minimize the resulting damage. Anyway, he can
recover from the wrong doer’s money lost in reasonable efforts
to preserve the property injured and for injuries incurred in
attempting to prevent damages to it.

1265
Arts. 2204-2205 CIVIL CODE OF THE PHILIPPINES

Art. 2204. In crimes, the damages to be adjudicated

may be respectively increased or lessened according to the
aggravating or mitigating circumstances.

COMMENT:
Effect of Aggravating or Mitigating Circumstances
The Article explains itself.

Art. 2205. Damages may be recovered:

(1) For loss or impairment of earning capacity in cases
of temporary or permanent personal injury;
(2) For injury to the plaintiff’s business standing or
commercial credit.

COMMENT:
Damages to Earning Capacity and to Business
(a) The Article is self-explanatory.
(b) Lameness is a permanent personal injury. (Marcelo v.
Veloso, 11 Phil. 287). If a dancer’s leg is amputated, it is
clear that recovery is proper. (Julio v. Manila Railroad
Co., 58 Phil. 176).

Consolidated Plywood Industries, Inc. & Henry

Lee v. CA, Willie Kho & Alfred C.H. Kho
GR 101706, Sep. 23, 1992

While it is the Court’s belief that petitioner is entitled

to an award for moral damages, the award granted by
the trial court in the amount of P200,000 is excessive.
It should be stated here that the hauling agreement
between the petitioners and the private respondent had
no fixed date of termination; it was a verbal agreement
where the private respondents bound themselves until
the loan with Equitable Bank in the personal account of
petitioners had been fully paid. There was substantial
compliance by the private respondents of their obliga-
tions in the contract for about a year. The record showed

1266
CIVIL CODE OF THE PHILIPPINES Art. 2205

that the remaining balance owing to the bank was only

P30,000 which was not due until one year and 6 months
after the breach by the private respondents, or on Sep.
4, 1980. However, the trial court found that private re-
spondents acted with bad faith when it surreptitiously
pulled out their hauler trucks from petitioner’s jobsite
before the termination of the contract.
The trial court held that the act of defendants in
suddenly and surreptitiously withdrawing its hauler
trucks from the jobsite and abandoning its obligation of
hauling the logs is indubitably a wanton violation of its
obligation, under the contract, a neglect to perform its
obligation in bad faith more particularly in its stipulation
to liquidate the cash advance obtained from Equitable
Bank, for the law would not permit said defendants to
enrich themselves at the expense of the plaintiffs. Thus,
an award of P50,000 for moral damages is sufficient.

Francisco, et al. v.
Ferrer, Jr., et al.
GR 142029, Feb. 28, 2001

FACTS: A couple engaged to be married had ordered

a 3-layered cake from a bakeshop to be delivered at 5
p.m. of the wedding day itself. On the wedding day, the
now newly-married couple arrived at the country club
(venue-reception of the wedding) at around 6 p.m., but
the wedding cake was nowhere to be found. At 10 p.m.,
the wedding cake finally arrived, but by then rejected
because of the lateness of the hour. One other reason
for its rejection: what arrived was only a 2-layered cake
and not a 3-layered one as originally agreed upon. The
bakeshop owner was sued for breach of contract, with
the complaints alleging personal embarrassments, mental
anguish, serious anxiety, and sleepless nights. Issue: To
recover moral damages, is it enough that one suffered
sleepless nights, mental anguish, serious anxiety, social
embarrassment, or besmirched reputation?
HELD: No. To recover moral damages, it must be
proven that the guilty party acted in bad faith. In the

1267
Art. 2206 CIVIL CODE OF THE PHILIPPINES

instant case, no such bad faith existed. The bakeshop

owner was quick to apologize and offered to repair what-
ever damage was done. Note that the bakeshop owner
sent a letter of apology accompanied by a P5,000 check
for the harm done, but which was unacceptable to the
couple who considered the amount offered as inadequate.
Nevertheless, while not liable for moral damages, the
bakeshop owner must pay nominal damages in the
amount of P10,000 for prevarication when confronted
with failure to deliver the cake on time, this, in addition
to paying the cost of the cake in the sum of P3,175 and
attorney’s fees of P10,000.

Art. 2206. The amount of damages for death caused

by a crime or quasi-delict shall be at least three thousand
pesos, even though there may have been mitigating circum-
stances. In addition:
(1) The defendant shall be liable for the loss of the earn-
ing capacity of the deceased, and the indemnity shall be paid
to the heirs of the latter; such indemnity shall in every case
be assessed and awarded by the court, unless the deceased on
account of permanent physical disability not caused by the
defendant, had no earning capacity at the time of his death;
(2) If the deceased was obliged to give support accord-
ing to the provisions of Article 291, the recipient who is not
an heir called to the decedent’s inheritance by the law of
testate or intestate succession, may demand support from
the person causing the death, for a period not exceeding
five years, the exact duration to be fixed by the court;
(3) The spouse, legitimate and illegitimate descendants
and ascendants of the deceased may demand moral damages
for mental anguish by reason of the death of the deceased.

COMMENT:

(1) Damages for Death — Reason for Awarding Damages

(a) “Human life has heretofore been very cheap, in law and
the practice thereunder. Before the passage of Common-

1268
CIVIL CODE OF THE PHILIPPINES Art. 2206

wealth Act 284, in Jun. 1938, the practice was to allow

P1,000 to the heirs of the deceased in case of death
caused by a crime. Later, by virtue of that special law,
a minimum of P2,000 was fixed, but the courts usually
award only the minimum, without taking the trouble
to inquire into the earning capacity of the victim, and
regardless of aggravating circumstances.” (Report of the
Code Com., p. 34).
(b) Note that under Art. 2206, the minimum to be given is
P3,000, but this does not mean that the court should
stop after awarding that amount, because the life of a
captain of industry, scientist, inventor, a great writer
or statesman, is materially more valuable to the family
and community than that of an ordinary man. Moreo-
ver, exemplary damages may be justified by aggravating
circumstances. The earning capacity of the deceased, his
obligation to support dependents, and the moral damages
suffered by his kin must also be considered. (Report of
the Code Com., p. 35). It is clear from Art. 2206 that
P3,000 is the minimum award. Hence, a greater sum
can be given. (Nita Lira v. Gonzalo Mercado, et al. and
Gonzalo Mercado, et al. v. Ramon Ura, et al., L-13358,
L-13328, L-13329, Sept. 29, 1961).
(c) In fact in many decisions, the appellate courts awarded
P6,000, then P12,000, and now, P50,000, as damages.
The Court gave as its reason the great rise in prices and
declining purchasing power of the peso. Independently
of its financial capacity, a common carrier, if liable for
the death of a passenger or of a pedestrian, must be
made to pay the minimum amount. But if its financial
capacity enables it to pay more, said greater sum should
be given. It is here where financial capacity is material
and significant.
(d) Cases

Mckee, et al. v. IAC, et al.

GR 68102, Jul. 16, 1992

In light of recent decisions of the Supreme Court,

the indemnity for death is now P50,000.

1269
Art. 2206 CIVIL CODE OF THE PHILIPPINES

(2) Factors Which May Be Considered in Determining the

Amount
(a) life expectancy (considering the state of health and
habit of the deceased; mortality tables are inconclusive
evidence) and consequent loss of earning capacity.

Monzon, et al. v. IAC and Theo H.

Davies and Co., Far East Ltd.
GR 72828, Jan. 31, 1989
Life expectancy fluctuates with several factors but it
is for that very reason that a generally accepted formula
has been established by this Court in a long line of cases.
It would be most unfair and illogical for a court to
reduce the compensation due for the loss of the earning
capacity of a deceased by discarding the well-established
formula by taking a pessimistic and depressed view of
every situation instead of an average standard. For as a
man grows older, and gains more experience, his income
generally increases, with each passing year.

Smith Bell Dodwell Shipping Agency Corp. v.

Catalino Borja and International Towage
& Transport Corp.
GR 143008, Jun. 10, 2002
FACTS: Petitioner contends that respondent Borja
died nine years after the incident and, hence, his life
expectancy of 80 years should yield to the reality that
he was only 59 when he actually died.
ISSUE: Is this contention correct?
HELD: No. The Court uses the American Experi-
ence/Expectancy Table of Morality or the Actuarial Com-
bined Experience Table of Mortality, which consistently
pegs the life span of the average Filipino at 80 years,
from which it extrapolates the estimated income to be
earned by the deceased had he not been killed. (People
v. Villanueva, 302 SCRA 380 [1999]).
The owner or the person in possession and control of
a vessel is liable for all natural and proximate damages

1270
CIVIL CODE OF THE PHILIPPINES Art. 2206

caused to persons and property by reason of negligence

in its management or navigation. Negligence is conducted
that creates undue risk of harm to another. It is failure
to observe that degree of care, precaution, and vigilance
that circumstances justly demand — whereby that other
person suffers injury. (Jarco Marketing Corp. v. CA,
321 SCRA 375 [1999]; Bulitan v. COA, 300 SCRA 445
[1998]; and Valenzuela v. CA, 253 SCRA 303 [1996]).
Petitioner’s vessel was carrying chemical cargo — alkyl
benzene and methyl methacrylate monomer. While know-
ing that their vessel was carrying dangerous inflammable
chemicals, its officers and crew failed to take all the
necessary precautions to prevent an accident. Petitioner
was, therefore, negligent and held liable for damages and
loss of respondent Borja’s income.
As a result of the fire and the explosions during
the unloading of the chemicals from petitioner’s vessel,
respondent Borja suffered damages and injuries, thus:
1. chemical burns of the face and arms;
2. inhalation of fumes from burning chemicals;
3. exposure to the elements while floating in sea water
for about 3 hours;
4. homonymous hemianopsia or blurring of the right
eye which was of possible toxic origin; and
5. cerebral infract with neo-vascularization, left oc-
cipital region with right sided headache and the
blurring of vision of right eye.
Respondent Borja’s demise earlier than the estimated
life span is of no moment. For purposes of determining
loss of earning capacity, life expectancy remains at 80.
Otherwise, the computation of loss of earning capacity
will never become final, being always subject to the
eventuality of the victim’s death. The computation should
not change even if Borja lived beyond 80 years. Fair is
fair.
(b) pecuniary loss, loss of support and service.

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Art. 2206 CIVIL CODE OF THE PHILIPPINES

(c) moral and mental suffering. (Alcantara, et al. v. Surro,

et al., 93 Phil. 472).
[NOTE: The minimum award (actual) for the debt of
a person does NOT cover the case of an unborn foetus, be-
cause it is NOT endowed with juridical personality. (Geluz
v. C.A. and Lazo, L-16439, Jul. 20, 1961). However, under
certain circumstances, moral damages may be awarded.]

Villa-Rey Transit v. Bello

L-18957, Apr. 23, 1963
FACTS: The Villa-Rey Transit, Inc. committed a
breach of contract when it failed to comply with its ob-
ligation of bringing safely the passenger, Felipe Tejada,
to his place of destination. Issue: How much damages
may Tejada’s heirs recover?
HELD: Had not Tejada met this fatal accident on
Jul. 17, 1961, he would have continued to serve in the
government for some 27 years until his retirement with
a compensation of P6,000. As consequential damages,
the heirs having been deprived of the earning capacity of
their husband and father, respectively, they are entitled
to P3,300 a year for at least 17 years the average life of a
Filipino being between 50 and 60 years (17 years because
he could have died at the age of 50 only). For failure of
the transportation company to exercise due diligence in
employing a careful and prudent driver, the amount of
P2,000 as exemplary damages is hereby awarded. And for
the agony, mental anguish and sorrow suffered by the heirs
because of the sudden death of Tejada and the mutilated
and gory condition of the body, the amount of P5,000 is
awarded as moral damages. (See Art. 2234; Velayo v. Shell
Co., 100 Phil. 187; Singson v. Aragon and Lerza, 92 Phil.
514; Estopa v. Piansay, L-14733, Sep. 30, 1962 and Yutuk
v. Manila Electric Co., L-13106, May 31, 1961).

Davila v. Phil. Air Lines

49 SCRA 497
At the age of 30, one’s normal life expectancy is
33-1/3 years more. This is the formula adopted by the

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CIVIL CODE OF THE PHILIPPINES Art. 2206

Supreme Court in Villa-Rey Transit v. Court of Appeals,

31 SCRA 511, based on the American Expectancy Table
of mortality. Earning capacity under Art. 2206(1) means
gross earning LESS the necessary living expenses of the
deceased.

Budiong v. Judge Apalisok

GR 60161, Jun. 24, 1983

After the accused has pleaded guilty in a criminal

case, the judge must set the case for hearing so that
the offended party’s evidence on the civil liability may
be received. And this is true even if the accused has
already filed an application for probation.

Dangwa Transportation v. CA
GR 95582, Oct. 7, 1991

The amount recoverable by the heirs of a victim, a

tort is not the loss of the entire earnings, but rather the
loss of that portion of the earnings which the beneficiary
would have received. In other words, only net earnings,
not gross earnings, are to be considered, that is, the total
of the earnings less expenses necessary in the creation
of such earnings or income and minus living and other
incidental expenses.
The deductible living and other expenses of the
deceased may fairly and reasonably be fixed at P500 a
month or P6,000 a year. In adjudicating the actual or
compensatory damages, the appellate court found that
the deceased was 48 years old, in good health with a
remaining productive life expectancy of 12 years and
then earning P24,000 a year. Using the gross annual
income as the basis, and multiplying the same by 12
years, it accordingly awarded P288,000. Applying the
aforesaid rule on computation based on the net earnings,
said award must be rectified and reduced to P216,000.
However, in accordance with prevailing jurisprudence,
the death indemnity is hereby increased to P50,000.

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Art. 2206 CIVIL CODE OF THE PHILIPPINES

Metro Manila Transit Corp. (MMTC),

et al. v. CA & Spouses Rodolfo V. Rosales
and Lily R. Rosales
GR 116617, Nov. 16, 1998
FACTS: Pedro Musa, a bus driver of MMTC, was
found guilty by the trial court of reckless imprudence
resulting in homicide for the death of Liza Rosalie Ro-
sales. Liza Rosalie’s parents filed an independent civil
action for damages against MMTC, Musa, MMTC Actg.,
Gen. Mgr. Conrado Tolentino, the GSIS, and Felicinao
Celebrado, an MMTC dispatcher. The trial court found
MMTC and Musa guilty of negligence and ordered them
to pay damages and attorney’s fees. The Court of Appeals
(CA) affirmed the trial court’s decision, but deleted the
award of actual damages and awarded instead death
indemnity. On appeal, the Supreme Court set aside the
CA’s decision.
HELD: Both MMTC and Musa, respectively, are
liable for negligence for the death of Liza Rosalie. The
responsibility of employers for the negligence of their
employees is primary, i.e., the injured party may recover
from the employers directly, regardless of the solvency of
their employees. Employees may be relieved of respon-
sibility for the negligent act of their employees within
the scope of their assigned tasks only if they can show
that they observed all the diligence of a good father of
a family to prevent damage. For this purpose, they have
the burden of proving that they have indeed exercised
such diligence, both in the selection of employee who
committed the quasi-delict and in the supervision of the
performance of his duties.
In addition to the death indemnity, the heirs of
Liza Rosalie are awarded moral damages, exemplary
damages, attorney’s fees, and compensation for loss of
earning capacity. Compensation for loss of earning capacity
was awarded because Liza Rosalie’s parents had adduced
proof that the victim was a good student, a promising
artist, and an obedient child. Such form of damages,
computed in accordance with the formula laid down in
decided cases, may use as basis for the victim’s projected

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CIVIL CODE OF THE PHILIPPINES Art. 2206

gross annual income the minimum wage for workers in

the non-agricultural sector at the time of her death.

(3) Moral Damages

(a) If the victim dies because of a CRIME, QUASI-DELICT
(Art. 2206), or BREACH OF CONTRACT BY COMMON
CARRIER (Art. 1764 read together with Art. 2206), moral
damages may be recovered by:
1) the spouse (legitimate);
2) legitimate descendants and ascendants:
3) illegitimate descendants and ascendants [Art. 2206;
Necesito, etc. v. Paras, et al., 104 Phil. 75 –– where
the court said that moral damages may be recov-
ered here as an EXCEPTION to the general rule
against moral damages in breach of contract under
Art. 2220. Indeed, once the heirs are able to prove
that they are entitled to the actual damages of at
least P3,000, it becomes the duty of the court to
award moral damages to the claimants in an amount
commensurate with their mental anguish. (Mercado
v. Lira, L-13328-29, Sept. 29, 1961).]
[NOTE: In the case of Tamayo v. Aquino
(Nos. L-12634, L-12720, May 29, 1959), the Court
apparently forgot the ruling in the case of Necesito
v. Paras (supra), when it denied moral damages
for the heirs of a passenger who died as a result
of culpa contractual. The Court obviously forgot to
consider Art. 1764 read together with Art. 2206.
However, the error was obviously corrected in later
cases which correctly granted moral damages in
case of death. One such case is Mercado v. Lira,
L-13328-29, Sep. 29, 1961).]
[NOTE: In ordinary breaches of contract, moral
damages may be recovered only if the defendant
acted fraudulently or in bad faith. (Art. 2220).]
[NOTE: In Heirs of Gervacio Gonzales v. Ale-
garbes, et al., 99 Phil. 213, it was held that Arts.
2206 (No. 3) and 2217, do NOT grant brothers and

1275
Art. 2206 CIVIL CODE OF THE PHILIPPINES

sisters of the deceased who left a child a right to

recover moral damages arising out of or from the
death of the deceased caused by the wrongful or
tortuous act of the defendant. (See Art. 2219, last
paragraph, which excludes brothers, and sisters, if
a descendant is present).]
(b) If the victim does not die, but merely suffers physical
injuries, may moral damages be recovered?
ANS.: Yes, but only in the following instances:
1) if caused by a crime. (Art. 2219, No. 1).
2) if caused by a quasi-delict. (Art. 2219, No. 2).
3) if caused by a breach of contract BUT ONLY if the
defendant acted fraudulently or in bad faith (Art.
2220) or in case of wanton and deliberately injurious
conduct on the part of the carrier. (LTB v. Cornista,
L-22193, May 29, 1964). Thus, if a passenger is
merely injured due to the negligence of a common
carrier there is no right to recover moral damages,
unless the common carrier acted fraudulently or in
bad faith. (Art. 2220). This is DIFFERENT from a
case of death. (Necesito, et al. v. Paras, et al., supra).
Indeed, proof of fraud, malice, or bad faith must
be given if only physical injuries were sustained.
The mere bursting of a tire while a passenger bus
was overspeeding cannot be considered evidence
of fraud, malice, or bad faith. (Lira v. Mercado,
L-13328, Sept. 29, 1961 and Consolidated Plywood
Industries, Inc. & Henry Lee v. CA, Willie Kho &
Alfred C. H. Kho, GR 101706, Sep. 23, 1992).

(4) Right of Recovery Not Affected By Testimony

People v. Santiago Manos

L-27791, Dec. 24, 1970
FACTS: A son was convicted for having killed his fa-
ther. May he be required to indemnify the victim’s heirs (the
defendant’s mother, brothers, and sisters) even if they had
testified in his favor?

1276
CIVIL CODE OF THE PHILIPPINES Art. 2207

HELD: Yes, for they have suffered, even if their natural

impulses compelled them to seek exoneration of the guilty
son.

(5) Liability for Reckless Imprudence

People v. Eutiquia Carmen, et al.

GR 137268, Mar. 26, 2001
FACTS: Accused-appellants, none of whom was a medical
practitioner, belonged to a religious group engaged in faith-
healing. Upon advise of one of the accused-appellants, the
parents of the victim agreed to subject their child, who had
earlier suffered from a nervous breakdown, to a “treatment,”
but which, resulted in the child’s death. Charged with and
later convicted of murder by the trial court, the Supreme Court
modified the accused-appellants’ judgment upon appeal.
HELD: Accused-appellants can only be made liable
for reckless imprudence resulting in homicide as qualifying
circumstance of treachery cannot be appreciated absent an
intent to kill.
As to the their civil liability, accused-appellants should
pay the heirs of the victim an indemnity in the amount of
P50,000 and moral damages also in the amount of P50,000.
(Arts. 2206[3] and 2219[1], Civil Code). (See People v. Silva,
321 SCRA 647 [1999]). (See also People v. Silvestre, 307 SCRA
60 [1999]). In addition, they should pay exemplary damages
in the amount of P30,000 in view of accused-appellants’ gross
negligence in attempting to “cure” the victim without a license
to practice medicine and to give an example or correction for
the public good. (Arts. 2229 and 2231). (See People v. Medroso,
Jr., 62 SCRA 245 [1975]).

Art. 2207. If the plaintiff’s property has been insured,

and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrong-
doer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover

1277
Art. 2207 CIVIL CODE OF THE PHILIPPINES

the injury or loss, the aggrieved party shall be entitled to

recover the deficiency from the person causing the loss or
injury.

COMMENT:
(1) Effect if Property Was Insured
(a) According to American jurisprudence, the fact that the
plaintiff has been indemnified by an insurance company
cannot lessen the damages to be paid by the defendant.
Such rule gives more damages than those actually suf-
fered by the plaintiff, and the defendant, if also sued
by the insurance company for reimbursement, would
have to pay in many cases twice the damages he has
caused. The proposed article would seem to be a better
judgment of the rights of the three parties. (Report of
the Code Commission, p. 73).
(b) The principle enunciated in this article can apply even
to cases that accrued prior to the effectivity of this ar-
ticle and the new Civil Code — otherwise, the general
principle against unjust enrichment would be violated.
(Africa v. Caltex, L-12986, Mar. 21, 1966). Hence, the
amount of insurance recovered shall be deducted from
the total liability of the defendant. (Ibid.)

(2) Meaning of “Authorized Driver” in Car Insurance

CCC Insurance Corp. v. Court of Appeals

and Carlos F. Robes
L-25920, Jan. 30, 1970

FACTS: A car insured against loss or damage was being

driven by a driver, who was licensed, WITHOUT an examina-
tion (he was illiterate). The car was subsequently damaged
in an accident, but the insurance company refused to pay on
the ground that the driver was not an “authorized driver.” Is
the insurance company liable?
HELD: Yes, the insurance company is liable for under Sec.
24 of the Revised Motor Vehicles Law, Act 3992, as amended
by Republic Acts 587, 1204, and 2363, an examination or

1278
CIVIL CODE OF THE PHILIPPINES Art. 2208

demonstration of the applicant’s ability to operate a motor

vehicle may (only) be required in the discretion of the Chief,
Motor Vehicles Office. Sec. 26 even allows a non-examination.
Whether discretion on the part of the government official was
abused or not is a matter of legislative policy. The issuance
of the license is proof that the driver was entitled to drive.
Besides, insurance contracts must be construed liberally in
favor of the insured and strictly against the insurer.

(3) Subrogation of Insurer

Fireman’s Fund Insurance Co., et al. v.

Jamila and Co., Inc.
L-27427, Apr. 7, 1976

FACTS: Firestone Corporation had its properties insured

by Fireman’s Fund Insurance Co. Some of said properties
were lost allegedly because of the acts of its own employees,
who were in connivance with security guards from the Jamila
agency. These security guards were supposed to safeguard the
Firestone properties, and under the contract, Jamila assumed
responsibility for the guards’ actuations. The First Quezon City
Insurance guaranteed this obligation of Jamila. The losses of
Firestone Corporation were paid by Fireman’s Fund Insurance
Company as insurer. Does Fireman’s Fund Insurance Company
have a cause of action against Jamila and the First Quezon City
Insurance Company, so that the money paid may be reimbursed?
Can there be subrogation even without Jamila’s consent?
HELD: Yes, it has a valid cause of action, under Art.
2207, Civil Code. Said article states that the insurer who has
paid shall be subrogated in the place of the injured party in
the latter’s rights against the offender or violator of a con-
tractual commitment. This is an instance when the consent
of the debtor is not required for the subrogation in favor of
the Fireman’s Fund Insurance Company.

Art. 2208. In the absence of stipulation, attorney’s fees

and expenses of litigation, other than judicial costs, cannot
be recovered except:
(1) When exemplary damages are awarded;

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Art. 2208 CIVIL CODE OF THE PHILIPPINES

(2) When the defendant’s act or omission has com-

pelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
(3) In criminal cases of malicious prosecution against
the plaintiff;
(4) In case of a clearly unfounded civil action or pro-
ceeding against the plaintiff;
(5) Where the defendant acted in gross and evident
bad faith in refusing to satisfy the plaintiffs plainly valid,
just and demandable claim;
(6) In actions for illegal support;
(7) In actions for the recovery of wages of household
helpers, laborers and skilled workers;
(8) In actions for indemnity under workmen’s com-
pensation and employer’s liability laws;
(9) In a separate civil action to recover civil liability
arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just
and equitable that attorney’s fees and expenses of litigation
should be recovered.
In all cases, the attorney’s fees and expenses of litiga-
tion must be reasonable.

COMMENT:

(1) Concept of Attorney’s Fees As Damages

The attorney’s fees referred to in this article do not refer
to the duty of a client to pay his own attorney. Such payment
generally involves only the client and his attorney. The fees
stated in the article apply rather to instances when a client
may recover from the other party the fees which the former
may pay the former’s attorney. (See Tan Ti v. Alvear, 26 Phil.
566).

1280
CIVIL CODE OF THE PHILIPPINES Art. 2208

Luz G. Cristobal v. Employees’

Compensation Commission
L-49280, Feb. 26, 1981

While a pauper litigant is exempt from the payment of legal

fees and from filing an appeal bond, a printed record on appeal,
and a printed brief, he is not exempted from the payment of
attorney’s fees. An award of attorney’s fees whether in favor of
or against a litigant in “forma pauperis” is thus proper.

Borcena, et al. v. IAC

GR 70099, Jan. 7, 1987

The Supreme Court has invariably fixed counsel fees on

a quantum meruit basis whenever the fees stipulated appear
excessive, unconscionable, or unreasonable, because a lawyer is
primarily a court officer charged with the duty of assisting the
court in administering impartial justice between the parties.
Hence, the fees should be subject to judicial control. Sound
public policy demands that courts disregard stipulations for
counsel fees, whenever they appear to be a source of specula-
tive profit at the expense of the debtor or mortgagor.
In determining the compensation of an attorney, the fol-
lowing circumstances should be considered: the amount and
character of the services rendered; the responsibility imposed;
the amount of money or the value of the property affected by
the controversy, or involved in the employment; the skill and
experience called for in the performance of the service; the
professional standing of the attorney; the results secured; and
whether or not the fee is contingent or absolute, it being a
recognized rule that an attorney may properly charge a much
larger fee when it is to be contingent than when it is not.

Sun Insurance Office, Ltd. v. CA & Nerissa Lim

GR 92383, Jul. 17, 1992

FACTS: Petitioner issued a personal accident policy to

Felix Lim, Jr. with a face value of P200,000. Two months
later, he was shot dead with a bullet wound in his head.
As beneficiary, his wife Nerissa Lim sought payment on the
policy but her claim was rejected. The petitioner agreed that

1281
Art. 2208 CIVIL CODE OF THE PHILIPPINES

there was no suicide. It argued, however, that there was no

accident either.
HELD: The petitioner is liable to the private respondent
in the sum of P200,000 representing the face value of the
insurance contract, with interest at the legal rate from the
date of the filing of the complaint until the full amount is
paid, but modified with the deletion of all awards for dam-
ages, including attorney’s fees, except the costs of the suit.
In order that a person may be made liable to the pay-
ment of moral damages, the law requires that his act be
wrongful. The adverse result of an action does not per se
make the act wrongful and subject the act or to the payment
of moral damages. The law could not have meant to impose
a penalty on the right to litigate; such right is so precious
that moral damages may not be charged on those who may
exercise it erroneously. For these, the law taxes costs. If a
party wins, he cannot, as a rule, recover attorney’s fees and
litigation expenses, since it is not the fact of winning alone
that entitles him to recover such damages of the exceptional
circumstances enumerated in Art. 2208. Otherwise, every
time a defendant wins, automatically the plaintiff must pay
attorney’s fees thereby putting a premium on the right to
litigate, which should not be so. For those expenses, the law
deems the award of costs as sufficient.

(2) Generally Not Part of Damages

Generally, attorney’s fees, as understood in this article
are not a proper element of damage, for it is NOT sound
public policy to place a penalty on the right to litigate. To
compel the defeated party to pay the fees of counsel for his
successful opponent would throw wide the door of temptation
to the opposing party and his counsel to swell the fees to
undue proportions. (Tan Ti v. Alvear, 26 Phil. 566). Thus, no
right to such fees can accrue merely because of an adverse
decision. Otherwise stated, if a party loses in court, this does
not mean necessarily that the court will compel him to award
attorney’s fees (as damages) to the winning party. (Ramos
v. Ramos, 61 SCRA 284). This is precisely the rationale for
taxing costs in certain cases against the losing party. The
payment of said costs is deemed a sufficient sanction. How-

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CIVIL CODE OF THE PHILIPPINES Art. 2208

ever, under the new Civil Code, it may truly be said that in
certain cases, attorney’s fees are an element of recoverable
damages, whether they be in writing or not stipulated at all.
(Santiago v. Dimayuga, L-17883, Dec. 30, 1961). The appellate
court may fix attorney’s fees even when the trial court did
not award attorney’s fees, and even when no appeal on this
point was interposed before the appellate tribunal. (Medenilla
v. Kayanan, 40 SCRA 154).

Salao v. Salao
L-26699, Mar. 16, 1976
FACTS: Plaintiffs lost in a reconveyance case although
they presented 15 witnesses in a protracted five (5)-year case,
and fought vigorously. They honestly thought that their ac-
tion could prosper because they believed (albeit erroneously)
that the property involved had been acquired by the funds
of the common ancestor of plaintiffs and defendants. Should
said plaintiffs be held liable for moral damages and attorney’s
fees?
HELD: No, they should not be assessed moral damages
and attorney’s fees. Although their causes of action turned
out to be unfounded, still, the pertinacity and vigor with
which they pressed their claim indicate sincerity and good
faith. Thus, the action was not manifestly frivolous. With
respect to attorney’s fees, while the case was unfounded (Art.
2208[4], Civil Code), still there was the element of good faith,
and, therefore, neither attorney’s fees or litigation expenses
should be awarded. (See Rizal Surety and Insurance Co., Inc.
v. Court of Appeals, L-23729, May 16, 1967).

Public Estates Authority v. Elpidio S. Uy

GR 147933-34, Dec. 12, 2001

FACTS: Anent petitioner’s claim for attorney’s fees, suf-

fice it to state that it was represented by the Government
Corporate Counsel in the proceedings before the Construction
Industry Arbitration Commission.
HELD: Attorney’s fees are in the nature of actual dam-
ages, which must be duly proved. Petitioner failed to show
with convincing evidence that it incurred attorney’s fees.

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Art. 2208 CIVIL CODE OF THE PHILIPPINES

(3) Given to Party, Not to Counsel

The Court’s award of attorney’s fees is an indemnity to
the party and NOT to counsel, and the fact that the contract
between the client and his counsel was on a CONTINGENT
basis does not affect the client’s right to counsel fees. A litigant
who improvidently stipulates higher counsel fees than those to
which he is lawfully entitled, does NOT for that reason earn
the right for a larger indemnity, but by parity of reasoning,
he should NOT be deprived of counsel fees if by law he is
entitled to recover. (Necesito, et al. v. Paras, et al., 104 Phil.
75).

Tiu Po v. Bautista
L-55514, Mar. 17, 1981

A claim for attorney’s fees which arises out of the filing

of a complaint partakes of the nature of a compulsory coun-
terclaim. Therefore, if it is not pleaded or prayed for in the
answer to the complaint, it is barred.
What has been said above applies also to all damages
claimed to have been suffered by the defendant as a conse-
quence of the action filed against him.

Quirante and Cruz v. IAC, et al.

GR 73886, Jan. 31, 1989
Attorney’s fees as an item of damages provided for under
Art. 2208 of the Civil Code is an award made in favor of the
litigant, not of his counsel. And the litigant, not his counsel,
is the judgment creditor who may enforce the judgment for
attorney’s fees by execution.
What is being claimed in this case as attorney’s fees by
petitioners is, however, different. Herein, the petitioners’ claims
are based on an alleged contract for professional services, with
them as the creditors and the private respondents as the debt-
ors.

(4) Express Stipulation

(a) Note that aside from the eleven instances enumerated,
attorney’s fees and expenses of litigation may be recov-

1284
CIVIL CODE OF THE PHILIPPINES Art. 2208

ered also should there be an express stipulation to that

effect. (Introductory paragraph, Art. 2208). However, if
despite an express stipulation for attorney’s fees, there
is an implied WAIVER thereof (as when instead of
demanding specific fulfillment of an obligation — with
attorney’s fees in compelling such fulfillment — there is
a demand for cancellation of a contract), attorney’s fees
cannot be recovered. (Luneta Motor Co. v. Baguio Bus
Co., L-15157, Jun. 30, 1960).
(b) If the parties agree on attorney’s fees based on a certain
percentage of the amount of the principal obligation, the
stipulation is valid. (Luneta Motor v. Mora Limlengco,
73 Phil. 80).
(c) Where the contract does not expressly stipulate that
a fixed sum by way of attorney’s fees shall be paid by
defendant in case of collection even if the same is subse-
quently settled by compromise, it is just and fair to reduce
the amount of counsel’s fees in the court’s discretionary
power, where the case is partially or fully settled out of
court. (Santiago v. Dimayuga, L-17833, Dec. 30, 1961).
(d) Be it noted, however, that an agreement whereby a
non-lawyer will be given part of the attorney’s fees, is
condemned by legal ethics, is immoral and cannot be justi-
fied. (PAFLU v. Binalbagan Isabela Sugar Co., 42 SCRA
302).

Kapol v. Masa
L-50473, Jan. 21, 1985

(1) When exemplary damages are recovered, there

can be an award of attorney’s fees.
(2) Exemplary damages may be awarded even if
not expressly prayed for in the complaint and even if
not proved.
(3) Moral damages may be proved by documentary
evidence even without testimonial proof.

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Art. 2208 CIVIL CODE OF THE PHILIPPINES

(5) Paragraph 2 (Defendant’s Act or Omission)

If the litigation was caused not by the defendant’s failure
to pay but by the plaintiff’s exorbitant charge, the plaintiff
cannot get attorney’s fees. (Cachero v. Manila Yellow Taxicab
Co., 101 Phil. 523 and Globe Assurance Co. v. Arcache, L-
12378, May 28, 1958). Similarly, if the plaintiff goes to court
after refusing an amicable settlement by the guilty party, said
plaintiff cannot recover attorney’s fees if it is proved that he
was asking “too much.” Here, the defendant was justified in
resisting the unjust claim. (Juana Soberano & Jose B. Sober-
ano v. The Manila Railroad Co., L-19407, Nov. 23, 1966). If
the suit, however, was prompted by the defendant’s deliberate
failure to pay for the trucks it had purchased, compelling the
plaintiff to litigate and incur expenses in order to protect its
interest, the plaintiff is entitled both to attorney’s fees under
Art. 2208(2) and to costs under Rule 131 of the Rules of Court
(now Rule 142) as the prevailing party. (Luneta Motor Co. v.
Baguio Bus Co., Inc., L-15167, Jun. 30, 1960; see also Suntay
Tanjangco v. Jovellanos, et al., L-12332, Jun. 30, 1960).

Bert Osmeña and Associates v. Court of Appeals

GR 56545, Jan. 28, 1983
If the prevailing party in a case was compelled to litigate
to protect his interests he is entitled to an award of attorney’s
fees.

Sarming v. Dy
GR 133643, Jun. 6, 2002
The award of attorney’s fees for P2,000 is justified under
Art. 2208(2) of the Civil Code.
This is, in view of the trial court’s finding, that the unjusti-
fied refusal of petitioners to reform or to correct the document of
sale compelled respondents to litigate to protect their interest.

(6) Paragraph 3 (Malicious Prosecution)

(a) There is malicious prosecution only if the person concerned
acted deliberately and knew that his accusation was false
or groundless. (Buenaventura v. Sto. Domingo, 54 O.G.
8439).

1286
CIVIL CODE OF THE PHILIPPINES Art. 2208

(b) Hence, if there is in the record no indication that the

action was malicious and intended only to prejudice the
other party, attorney’s fees on this ground cannot be
recovered. (Mercader v. Manila Polo Club, L-8373, Sep.
28, 1956).

(7) Paragraph 4 (Unfounded Civil Action)

(a) If A’s complaints against B are found to be insincere,
baseless and intended to harass, annoy, and defame B,
B can now sue for and be granted attorney’s fees, for the
“clearly unfounded civil actions or proceedings against the
plaintiff (A).” (See Heirs of Justiva v. Court of Appeals,
L-16396, Jan. 31, 1963 and Suntay Tanjangco v. Jovel-
lanos, et al., L-12332, Jun. 30, 1960; See also Enervida
v. De la Torre, 55 SCRA 339).
(b) Paragraph 4 also applies in favor of a defendant under a
counterclaim for attorney’s fees, because a counterclaim is a
complaint filed by the defendant against the original plaintiff.
(Malonzo v. Galang, et al., L-13851, Jul. 27, 1960).

Hermosa, Jr. v. Zobel y Roxas

L-11836, Oct. 1958
FACTS: A sued B for annulment of a contract. A
did not take part in the contract itself, and he did not
know the circumstances under which it was entered into.
It turned out that the contract was valid, and therefore
was not annulled. Shortly thereafter, B asked A for at-
torney’s fees incurred in the prior litigation.
HELD: Under the circumstances (good faith and
lack of knowledge of the actual facts), A is not liable for
attorney’s fees.

Roque Enervida v. Lauro De la Torre

and Rosa De la Torre
L-38037, Jan. 28, 1974
FACTS: The owner (Ciriaco Enervida) of land cov-
ered by a homestead patent issued Nov. 17, 1952 sold
the same on Nov. 20, 1957 to the spouses Dela Torre. In
1965, Roque Enervida, son of the seller, sued the spouses

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for the cancellation of the deed of sale stating that the

sale had been made within the 5-year prohibitory period.
Incidentally, at the pre-trial, Roque admitted his father
is still alive. The trial court dismissed the complaint and
awarded attorney’s fees and moral damages in favor of
the spouses. Is the decision correct?
HELD:
(1) The dismissal of the case is proper because the
property was sold after the 5-year prohibitory period,
and besides, Roque’s father is still alive.
(2) The award of attorney’s fees is proper because the
suit is clearly unfounded (Art. 2208, No. 4) but
–– there should be no award of moral damages
because same is not provided for in Art. 2219. Art.
2208 cannot be applied by analogy.

Metropolitan Bank v. Tan

Chuan Leong, et al.
GR 46539, Jun. 25, 1986
FACTS: On Apr. 22, 1965, “A” sold his house
and lot to his son “B”. “A” twice mortgaged the
same property: first to “C” on Apr. 21, 1965, and
then to “D” on Feb. 11, 1966. The first mortgage
had been cancelled on Sep. 21, 1967.
On Dec. 17, 1967, the trial court ordered “A”
to pay Metrobank the unliquidated balance of an
overdraft line secured by “A” from the bank on
Mar. 4, 1965. Unable to obtain satisfaction of this
judgment, the bank sued “A,” “B,” and “C” for re-
scission to annul the sale and mortgages. It alleged
that these transactions were in fraud of creditors,
the sale being fictitious and the mortgages having
been entered into in bad faith.
The trial court dismissed the complaint and
ordered “A” to pay “C” and “D” (first and second
mortgagees) P5,000 as attorney’s fees. The appel-
late court modified this decision by nullifying the
sale as fictitious, but affirming it in all respects.
Petition for review was lodged with the Supreme

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CIVIL CODE OF THE PHILIPPINES Art. 2208

Court. Pending said petition, the Court approved a

compromise agreement whereby “A” and “B” paid
their monetary liability to “X” to the satisfaction of
the latter. The award of attorney’s fees, however,
remained unresolved.
HELD: Attorney’s fees cannot be recovered,
except in cases of clearly unfounded civil action or
proceeding against plaintiff.
The mortgage did not in anyway affect the
bank’s rights. It were as if said mortgage had never
existed. With the mortgage no longer existing, the
same could not be cited as reason for the bank’s
failure to collect its credit. Although “C” may have
had knowledge of the simulated sale between “A”
and his son “B” and had entered into the contract
of mortgage pursuant to a design to defraud “A’s”
creditors, no damage or prejudice was suffered by
the bank thereby. The cancellation of “C’s” lien over
the property had rendered the issues of rescissibility
and bad faith moot and academic. The fact that the
bank nevertheless impleaded “C,” in its complaint,
compelling the latter to litigate to protect its rights,
justifies the award of attorney’s fees. At the time
the second mortgage was entered into, the certifi-
cate of title was in the name of “B” without any
annotation of encumbrance in favor of the bank or
any one else. Mortgage “D” then had every right
to rely on what appeared in that certificate of title
and there being none to excite suspicion, did not
have to inquire further. There being good faith, “D”
is an innocent purchaser for value. Since “D” had
no intention to defraud “X,” and in fact he is also
a creditor of “A,” the bank had no cause of action
against “D”. The award of attorney’s fees in favor
of “D” should also be beyond question.

Phoenix Publishing House v. Ramos

GR 32339, Mar. 29, 1988

FACTS: Phoenix charged Ramos with gross

violation of the copyright law and prayed for actual,

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Art. 2208 CIVIL CODE OF THE PHILIPPINES

moral and exemplary damages as well as attorney’s

fees. The trial court dismissed the complaint and
ordered Phoenix to pay Ramos P5,000 attorney’s fees
as and by way of damages. The Court of Appeals
affirmed the judgment of the trial court. Phoenix
appealed contending that the court erred in assign-
ing attorney’s fees against it for no other apparent
reason than for losing its case.
HELD: The award of attorney’s fees, if at all,
is proper in case of a “clearly unfounded civil ac-
tion or proceeding.” It cannot be said that the case
filed by Phoenix is clearly an unfounded civil ac-
tion. Phoenix secured the corresponding copyrights
for its books. These copyrights were found to be
all right by the Copyright Office, and Phoenix was
conceded to be the real owner thereof. It was on
the strength of these facts that Phoenix filed the
complaint against Ramos. Thru a proper search
warrant obtained after Phoenix was convinced that
Ramos was selling spurious copies of its copyrighted
books, the books were seized from the latter and
were identified to be spurious. There is therefore
not enough justification for such an award under
paragraph 11 of Art. 2208 of the Civil Code.

(8) Paragraph 5 (Bad Faith of Defendant)

(a) Here, the defendant (in the suit for attorney’s fees) must
have acted in GROSS and EVIDENT BAD FAITH in refus-
ing to satisfy plaintiff’s claim. (Art. 2208, No. 5). (See Carlos
M. Sison v. Gonzalo D. David, L-11268, Jan. 28, 1961).
(b) Therefore, where the defendant’s refusal to pay the amount
claimed was due not to malice but to the fact that the
plaintiff demanded more than what it should, and conse-
quently, the defendant had the right to refuse it, plaintiff
is not entitled to attorney’s fees. (Globe Assurance Co., Inc.
v. Arcache, L-12378, May 28, 1958).
(c) Similarly, where the defendant did not deny the debt but
merely pleaded for adjustment in accordance with the

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CIVIL CODE OF THE PHILIPPINES Art. 2208

Ballantine Scale, the refusal is not done in bad faith.

(Jimenez v. Bucoy, L- 10221, Feb. 28, 1958 and Intestate
Estate of Luther Young v. Bucoy, 54 O.G. 7560). As a
matter of fact, even clearly untenable defenses would be
no ground for awarding attorney’s fees unless the plea
thereof amounts to gross and evident bad faith. (Jimenez
v. Bucoy, L-10221, Feb. 28, 1958).
(d) Indeed, mere failure of the defendant to pay his obligation
without bad faith does not warrant recovery of attorney’s
fees. (Lasedeco v. Gaston, L-8938, Oct. 31, 1956; Koster,
Inc. v. Zulueta, 99 Phil. 945 and Francisco v. GSIS,
L18155, Mar. 30, 1963).

(9) Paragraph 8 (Workmen’s Compensation and Employer’s

Liability)
Because Sec. 31 of the Workmen’s Compensation Act does
not govern attorney’s fees recoverable from the adverse party,
Art. 2208(8) of the Civil Code will apply — to supply the defi-
ciency in the said Act, in accordance with Art. 18 of the new
Civil Code. (MRR v. Manalang, L-20845, Nov. 29, 1965 and
Nat. Development Corp. v. WCC, L-19863, Apr. 29, 1964).

(10) Paragraph 9 (Civil Liability Arising from a Crime)

Attorney’s fees by express provision of law may be
awarded in a separate civil action to recover the civil liabil-
ity arising from a crime. (Art. 2208, par. 9). Moreover, an
award of attorney’s fees granted by a trial court can envisage
the services of counsel only up to the date of its judgment.
Therefore, if the decision is appealed, attorney’s fees should
perhaps be at least doubled. (Bantoto, et al. v. Bobis, et al.
& Vallejo, L-18966, Nov. 22, 1966).

Ebajan v. CA
GR 77930-31, Feb. 9, 1989

Reiterating its ruling in People v. Biador, CA-GR 19589-R,

Jan. 21, 1959 (55 O.G. No. 32, p. 6384), the Court ruled that
attorney’s fees, under Art. 2208 (No. 9) of the Civil Code, can

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Art. 2208 CIVIL CODE OF THE PHILIPPINES

only be recovered in a separate civil action to recover civil

liability arising from crime.

(11) Paragraph 11 (Any Other Case)

(a) Paragraph 11 does not apply if the case was instituted
before the effectivity of the new Civil Code. This was the
ruling in the case of Bureau of Lands v. Samia (L-8068,
Aug. 26, 1956), where the court said that unless author-
ized by statute, attorney’s fees cannot be recovered from
the government if it abandons expropriation proceedings.
It would be otherwise if the abandoner is a private entity
or a quasi-public corporation.
Thus also, if the award of attorney’s fees would be
just and equitable, still if the suit was brought before the
new Civil Code became effective, attorney’s fees (other
than those allowed as costs under the Rules of Court)
could not be recovered as damages against the losing
party (otherwise, there would be a sort of penalty on the
right to litigate). (See Receiver for North Negros Sugar
Co., Inc. v. Ybanez, L-22183, Aug. 30, 1968 and Koster
v. Zulueta, 99 Phil. 945).
(b) Attorney’s fees and expenses of litigation may be recov-
ered when deemed by the court as just and equitable
as when the defendant never questioned the correctness
and legality of the plaintiff’s case but based its defense
and appeal entirely on a pure technicality which took up
the time of two appellate courts, and delayed giving of
appropriate relief to plaintiff for more than three years.
(Phil. Milling Co. v. Court of Appeals, L-9404, Dec. 27,
1956). Indeed, the award of attorney’s fees is essentially
discretionary in the trial court (Francisco v. GSIS, L-
18165, Mar. 30, 1963), and in the absence of abuse of
discretion, the same should not be disturbed. (Lopez, et
al. v. Gonzaga, L-18788, Jan. 31, 1964). The allowance,
for example, of counsel’s fees in probate proceedings rests
largely on the sound discretion of the Court which shall
not be interfered with except for manifest abuse. (In Re
Estate of Raquel, L-16349, Jan. 31, 1964).

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CIVIL CODE OF THE PHILIPPINES Art. 2209

(12) Instance When the Insurance Code Grants Damages

Prudential Guarantee and Assurance, Inc. v.

Trans-Asia Shipping, Lines, Inc.
491 SCRA 411 (2006)
Sec. 244 of the Insurance Code grants damages consisting
of attorney’s fees and other expenses incurrd by the insured
after a finding by the Insurance Commissioner or the Court,
as the case may be, of an unreasonable denial or withholding
of payment of the claims due. Sec. 244 of the Code does not
require a showing of bad faith in order that attorney’s fees
be granted.
In the instant controversy, Sec. 244 thereof is categori-
cal in imposing an interest twice the ceiling prescribed by
the Bangko Sentral’s Monetary Board due the insured, from
the date following the time prescribed in Sec. 242 or in Sec.
243 of the Code, as the case may be, until the claim is fully
satisfied.

Art. 2209. If the obligation consists in the payment of a

sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in
the absence of stipulation, the legal interest, which is six
per cent per annum.

COMMENT:
(1) Monetary Obligations
This applies to a monetary obligation where the debtor
is in default.

(2) Rules
(a) give the indemnity (other than interest) agreed upon
[NOTE: Attorney’s fees may be stipulated. (Andreas
v. Green, 48 Phil. 463).]
(b) if none was specified, give the interest agreed upon.

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Art. 2209 CIVIL CODE OF THE PHILIPPINES

(c) if none, give the legal interest (now this is 12% per an-
num).
State Investment House, Inc. v. CA
GR 90676, Jun. 19, 1991

FACTS: The promissory note executed by respondent

had three components: (a) principal of the loan in the
amount of P110,000; (b) regular interest in the amount
of 17% per annum; and (c) additional or penalty interest
in case of non-payment at maturity, at the rate of 2%
per month or 24 per cent per annum. In the dispositive
of his resolution, the trial judge did not specify which of
these components of the loan he was ordering respond-
ent to pay and which component or components he was
in effect defecting. It cannot be assumed that the judge
meant to grant the relief prayed for by respondent in
all its parts. The decision was ambiguous in the sense
that it was cryptic. It must be assumed that the judge
meant to decide in accordance with law, that it cannot
be fairly assumed that the judge was grossly ignorant
of the law or that he intended to grant the respondent
relief to which he was not entitled under the law. The
ultimate question which arises is: If respondent was not
in delay, what should he have been held liable for in
accordance with law?
HELD: Since the respondent was held not to have
been in delay, he is properly liable only for: (a) the
principal of the loan or P110,000; and (b) regular or
monetary interest in the amount of 17% per annum. He
is not liable for penalty or compensatory interest, fixed
in the promissory note at 2% per month or 24% per an-
num. The fact that the respondent was not in default
did not mean that he, as a matter of law, was relieved
from the payment not only of penalty or compensatory
interest at the rate of 24% per annum but also of regular
monetary interest of 17 per cent per annum. The regular
or monetary interest continued to accrue under the terms
of the relevant promissory note until actual payment is
effected. The payment of regular interest continues to
accrue since the debtor continues to use such principal
amount. In the instant case, since respondent, while he

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CIVIL CODE OF THE PHILIPPINES Art. 2209

is properly regarded as having made a written tender

or payment to the creditor, failed to consign in court the
amount due at the time of the maturity of the obliga-
tion. Hence, his obligation to pay principal-cum-regular
or monetary interest under the terms and conditions of
the note was not extinguished by such tender of pay-
ment alone. For the respondent to continue in possession
of the principal of the loan amounting to P110,000 and
to continue to use the same after maturity of the loan
without payment of regular or monetary interest, would
constitute unjust enrichment on the part of the respondent
at the expense of the creditor even though the respondent
had not been guilty of mora. It is precisely this unjust
enrichment which Art. 1256 Of the Civil Code prevents
by requiring, in addition to tender of payment, the
consignation of the amount due in court which amount
would thereafter be deposited by the Clerk of Court in
a bank and earn interest to which the creditor would
be entitled.

Tio Khe Chio v. CA

GR 76101-02, Sep. 30, 1991

FACTS: Tio Khe Chio imported 1,000 bags of fish

meal valued at $36,000 which were insured with East-
ern Assurance and shipped on Board the M/V Peskev,
owned by Far Eastern Shipping. When the goods reach
Manila, they were found to have been damaged by sea
water which rendered the fishmeal useless. Chio filed a
claim with Eastern Assurance and Far Eastern Shipping.
Both refused to pay. So Chio sued them before the Court
of First Instance (Regional Trial Court) for damages.
Eastern Assurance filed a counterclaim against Chio for
recovery of unpaid insurance premiums. The trial court
ordered Eastern Assurance and Far Eastern Shipping
to pay Chio solidarily P105,986, less P18,387 for unpaid
premiums with interest at the legal rate from the filing
of the complaint. Judgment became final as to Eastern
Assurance, but Far Eastern Shipping appealed and was
absolved from liability by the Court of Appeals. The trial
court issued a writ of execution against Eastern Assur-

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Art. 2209 CIVIL CODE OF THE PHILIPPINES

ance. The sheriff enforcing the writ fixed the legal rate
of interest at 12%. Eastern Assurance moved to quash
the writ alleging that the legal interest to be computed
should be 6% in accordance with Art. 2209 of the Civil
Code and not 12%. The trial court denied Eastern As-
surance’s motion. The Court of Appeals (CA) reduced
the interest to 6%. Chio maintains that not only is it
unjust and unfair but it is also contrary to the correct
interpretation of the fixing of interest rates under Secs.
243 and 244 of the Insurance Code. Since Chio’s claim is
based on an insurance contract, then it is the Insurance
Code that must govern and not the Civil Code.
HELD: The Supreme Court sustained the Court of
Appeals and held that the legal rate of interest in the
case at bar is 6% per annum. Secs. 243 and 244 of the
Insurance Code are not pertinent to the instant case.
They apply only when the court finds an unreasonable
delay or refusal in the payment of the claims. Neither
does Circular 416 of the Central Bank which took effect
on Jul. 29, 1974 pursuant to Presidential Decree No.
116 (Usury Law) which raised the legal rate of interest
from 6% to 12% per annum apply to the case at bar as
contended by the petitioner. The adjusted rate mentioned
in the circular refers only to loans or forbearances of
money, goods or credits and court judgments thereon but
not to court judgments for damages arising from injury
to persons and loss of property which does not involve
a loan.
The legal rate of interest is 6% per annum and
not 12% where a judgment award is based on an action
for damages for personal injury, not use or forbearance
of money, goods or credit. In the same vein, the court
held that the rates under the Usury law (amended by
PD 116) are applicable only to interest by way of dam-
ages is governed by Art. 2209 of the Civil Code. Since
the contending parties did not allege the rate of interest
stipulated in the insurance contract, the legal interest
was properly pegged by the appellate court, at 6% per
annum.

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CIVIL CODE OF THE PHILIPPINES Art. 2209

(3) Absence of Stipulation

In the absence of stipulation, only the legal interest can
be recovered. This is true even if a chance to make more in
business can be proved, inasmuch as here, the profit would
be SPECULATIVE. The Court in the case of Lopez v. Del
Rosario and Quiogue (44 Phil. 98) said that “the deprivation
of an opportunity for making money, which might have proved
beneficial or might have been ruinous, is of too uncertain a
character to be weighed in the even balance of the law.”

(4) From What Moment Interest Runs

In the absence of stipulation, interest (as damages) runs
from default (after a judicial or extrajudicial demand, except
when demand is NOT essential to put the debtor in default).
(Art. 2209 which states “in delay’’; Zobel v. City of Manila,
47 Phil. 169). If there is no evidence of an extrajudicial de-
mand, the period starts from the judicial demand (Vda. de
Murciano v. Auditor General, et al., L-11744, May 28, 1958),
which naturally is in the form of filing a complaint in court.
(Cabarroguis v. Vicente, 107 Phil. 340).

Consuelo Piczon, et al. v. Esteban Piczon, et al.

L-29139, Nov. 15, 1974

FACTS: In a contract of loan, Esteban Piczon, as guar-

antor, promised to pay in default of the principal debtor, the
sum of P12,500 with interest, “commencing from the date of
execution” (Sept. 28, 1956) of the contract. On Aug. 6, 1964
demand was made for payment, but neither the principal
debtor nor the guarantor was able to pay. Issue: From what
time will interest run on the debt: from Sept. 28, 1956 or
from Aug. 6, 1964?
HELD: Interest will run from Sept. 28, 1956, in view of
the express stipulation in the contract. Under Art. 2209, Civil
Code, the indemnity of damages in a monetary obligation shall
be the payment of interest agreed upon, as a general rule.
Here it was expressly agreed that interest should commence
from the execution of the contract. (See Firestone Tire & Rub-
ber Co. v. Delgado, 104 Phil. 920). [NOTE — the statement
in the decision that Art. 1169, Civil Code (damages in case

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Art. 2209 CIVIL CODE OF THE PHILIPPINES

of default) applies only to obligations other than monetary is

only an obiter dictum.]
[NOTE: While it is true that interest (by way of com-
pensation for the use of money) cannot be demanded unless
it was previously stipulated upon in writing (Art. 1956), still
interest (by way of damages or penalty) can be recovered in
case of default even if there be no stipulation to the effect.
(See Zobel v. City of Manila, 47 Phil. 169).]
[NOTE: If the amount of the debt is unliquidated, it is
the final judgment that will ascertain the amount. In such a
case, interest by way of damages shall be counted only from
the date the decision becomes final. (Montilla v. Agustinian
Corp., 25 Phil. 477; Seton Donna v. Inouye, 40 Phil. 728 and
See Art. 2213). However, the court should not require the col-
lection of interest when the judgment on which it is issued
does not give it, and interest is not allowed by statute. This
has been held to be the rule even where interest on judg-
ments is allowed by statute, if the judgment does not include
it. (Robles, et al. v. Timario, L-13911, Apr. 28, 1960).]
[NOTE: If the contract stipulates from what time inter-
est by way of damages will be counted, said stipulated time
controls, and therefore the interest is payable from such time,
and not from the date of the filing of the complaint. (Firestone
Tire & Rubber Co. v. Ines Chavez & Co., Ltd., et al., L-11162,
Dec. 4, 1958).]
[NOTE: If the term for payment was left to the will of the
debtor, the interest should not run from the time the action
was commenced in court, but only from default of payment
AFTER the period was fixed by the Court. (Tiglao v. Manila
Railroad Co., L-7900, Jan. 2, 1956).]

Arwood Industries, Inc.

v. D.M. Consunji, Inc.
GR 142277, Dec. 11, 2002

FACTS: Petitioner and respondent, as owner and con-

tractor, respectively, entered into a Civil, Structural, and
Architectural Works Agreement, dated Feb. 6, 1989 for the
construction of petitioner’s Westwood Condominium at 23

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CIVIL CODE OF THE PHILIPPINES Art. 2209

Eisenhower St., Greenhills, San Juan, Metro Manila. The

contract price for the condominium project aggregated to
P20,800,000. Despite completion of the condominium project,
the amount of P962,434.78 remained unpaid by petitioner.
Repeated demands by respondent for petitioner to pay went
unheeded. Respondent specifically prayed for payment of the
amount of P962,434.78 with interest of 2% per month or a
fraction thereof, from Nov. 1990 up to the time of payment.
Issue: Is the imposition of a 2% per month interest on the
award of P962,434.78 correct?
HELD: Yes. Upon the fulfillment by respondent of its
obligation to complete the construction project, petitioner had
the correlative duty to pay for respondent’s services. However,
petitioner refused to pay the balance of the contract price.
From the moment respondent completed the construction of
the condominium project and petitioner refused to pay in full,
there was delay on the part of petitioner.
Delay in the performance of an obligation is looked upon
with disfavor because, when a party to a contract incurs delay,
the other party who performs his part of the contract suffers
damages thereby. Dilationes in lege sunt idiosae (“Delays in
law are idious”). Obviously, respondent suffered damages
brought about by the failure of petitioner to comply with its
obligation on time. And, sans elaboration of the matter at
hand, damages take the form of interest. Accordingly, the
appropriate measure of damages in this case is the payment
of interest at the rate agreed upon, which is 2% interest for
every month of delay.
Art. 2209 specifies the appropriate measure of damages
where the obligation breached consisted of the payment of
sum of money. (See State Investment House, Inc. v. CA, 198
SCRA 390 [1991]). (See also Pacific Mills, Inc. v. CA, 206
SCRA 317 [1992]). Payment of interest as penalty is a neces-
sary consequence of petitioner’s failure to exercise diligence in
the discharge of its obligation under the contracts. And even
in the absence of a stipulation on interest, under Art. 2209,
respondent would still be entitled to recover the balance of
the contract price with interest. Respondent court, therefore,
correctly interpreted the terms of the agreement which pro-

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Art. 2209 CIVIL CODE OF THE PHILIPPINES

vides that “the owner shall be required to pay the interest

at a rate of 2% per month or the fraction thereof in days of
the amount due for payment by the owner.”

(5) Query
In a loan, is it permissible to stipulate that in addition
to 10% interest for use of the money, the debtor would pay
an additional 10% by way of penalty (penal clause) in case
of default?
ANS.: Generally, the answer should be in the affirma-
tive, for after all, if there is NO default, the additional 10%
cannot be recovered, and there would be no violation of the
Usury Law which in essence regulates only interest (by way
of compensation for the use of the money). The two interests
referred to are indeed distinct and therefore separately de-
mandable, and should NOT be added. (See Lopez v. Hernaez,
32 Phil. 631 and Bachrach Motor Co. v. Espiritu, 52 Phil.
346).
However, under the present Usury Law (as amended),
the word “penalties” is referred to, in case of a SECURED debt,
aside from the word “interests.” It would seem therefore that a
strict construction of the present Usury Law results in a nega-
tive answer (in case of SECURED debts) to the query posed
hereinabove. The Lopez and Bachrach cases referred to above
were decided PRIOR to the amendment of the Usury Law.

(6) Recovery of Interest in Case of Usury

Angel Jose Warehousing Co., Inc. v.

Chelda Enterprises and David Syjuico
L-25704, Apr. 24, 1968

FACTS: A partnership (Chelda Enterprises and David

Syjuico) borrowed some P20,000 from Angel Jose Warehous-
ing Co. at clearly usurious rates from 2% to 2-1/2% PER
MONTH).

Issues:
(a) Can creditor recover the PRINCIPAL debt?

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CIVIL CODE OF THE PHILIPPINES Art. 2209

(b) If the entire usurious rate has been paid by the debtor,
how much of it can be recovered by said debtor from the
creditor?
HELD:
(a) Yes, the creditor can recover the PRINCIPAL debt. The
contract of loan with usurious interest is valid as to
the interest is valid as to the loan, and void only with
respect to the interest — for the loan is the principal
contract while the interest is merely an accessory ele-
ment. The two are separable from each other. (See Lopez
v. El Hogar Filipino, 47 Phil. 249). The ruling on this
point by the Court of Appeals in the case of Sebastian
v. Bautista, 58 O.G. No. 15, p. 3146, holding that even
the loan itself is void is WRONG.
(b) With respect to the usurious interest, the entire interest
agreed upon is void, and if already paid, may be recov-
ered by the debtor. It is wrong to say that the debtor
can recover only the excess of 12% or 14% as the case
may be –– for the simple reason that the entire inter-
est stipulated is indivisible, and being illegal, should be
considered entirely void. It is true that Art. 1413 of the
Civil Code states: “interest paid in excess of the inter-
est allowed by the usury laws may be recovered by the
debtor with interest thereon from the date of payment.”
But as we construe it, Art. 1413, in speaking of “inter-
est paid in excess of the interest allowed by the usury
laws” means the whole usurious interest; i.e., in a loan of
P1,000, with interest of 20% per annum or P200 for one
year, if the borrower pays said P200, the whole P200 is
the usurious interest not just that part thereof in excess
of the interest allowed by law. It is in this case that
the law does not allow division. The whole stipulation
as to interest is void since payment of said interest is
the cause or object and said interest is illegal. Note that
there is no conflict on this point between the new Civil
Code and the Usury Law. Under the Usury Law, in Sec.
6, any person who for a loan shall have paid a higher
rate or greater sum or value than is allowed in said law,
may recover the whole interest paid. The only change

1301
Art. 2209 CIVIL CODE OF THE PHILIPPINES

effected therefore by Art. 1413, of the New Civil Code is

not to provide for the recovery of interest paid in excess
of that allowed by law, which the Usury Law already
provided for, but to add that the same can be recovered
“with interest thereon from the date of payment.” The
foregoing interpretation is reached with the philosophy
of usury legislation in mind; to discourage stipulation on
usurious interest. Said stipulation is treated as wholly
void, so that the loan becomes one without stipulation
as to payment of interest. It should not, however be
interpreted to mean forfeiture even of the principal, for
this would unjustly enrich the borrower at the expense
of the lender. Furthermore, penal sanctions are avail-
able against a usurious lender, as further deterrence to
usury.
The principal debt remaining without stipulation for
payment of interest can thus be recovered by judicial ac-
tion. And in case of such demand, and the debtor incurs in
delay, the debt earns interest from the date of the demand,
whether judicial or extrajudicial (in the instant case, from
the filing of the complaint). Such interest is not due to stipu-
lation, for there was none, the same being void. Rather,
it is due to the general provision of law that in obligation
to pay money, where the debtor incurs in delay, he has to
pay interest, by way of damages. (Art. 2209).
(NOTE: As already adverted to, the Usury Law
has been repealed.)

GSIS v. CA, et al.

GR 52478, Oct. 30, 1986
The Civil Code permits the agreement upon a pen-
alty apart from the interest. Should there be such an
agreement, the penalty does not include the interest, and
as such the two are different and distinct things which
may be demanded separately. The stipulation about pay-
ment of such additional rate is a penalty clause, which
is sanctioned by law.
The usury law applies only to interest by way of
compensation for the use or forbearance of money. Inter-

1302
CIVIL CODE OF THE PHILIPPINES Art. 2210

est by way of damages is governed by Art. 2209 of the

Civil Code.

Florendo v. Hon. Ruiz, et al.

GR 64571, Feb. 21, 1989
Central Bank (Bangko Sentral) Circular 416 (dated
July 29, 1974), which fixes the legal rate of interest at
12% per annum, applies only to loans or forbearances of
money, goods or credits and court judgments thereon.
Said Circular does not apply to actions based on a
breach of employment contract.
[NOTA BENE: In Reformina, et al. v. Hon. Tomol,
Jr., et al., L-59096, Oct. 11, 1985, the Supreme Court
held that the judgments spoken of and referred to in CB
(BS) Circular 416 are judgments in litigations involving
loans or forbearance of any money, goods or credits. Any
other kind of monetary judgment which has nothing to
do with, nor involving loans or forbearance of any money,
goods or credits does not fall within the coverage of the
said law for it is not within the ambit of the authority
granted by the Central Bank (Bangko Sentral).]

Art. 2210. Interest may, in the discretion of the court, be

allowed upon damages awarded for breach of contract.

COMMENT:
Interest on Damages for Breach of Contract
Actual damages given by a court in a breach of contract
case shall earn legal interest, not from the date of the filing
of the complaint but from the date the judgment of the trial
court is rendered. (Juana Soberano & Jose B. Soberano v.
The Manila Railroad Co., L-19407, Nov. 23, 1966).

Pleno v. Court of Appeals and Manila Gas Corp.

GR 56919, Oct. 23, 1981

A CFI (RTC) judgment ordering payment of a sum of

money with interest was appealed to the Court of Appeals on

1303
Arts. 2211-2212 CIVIL CODE OF THE PHILIPPINES

the question of prescription. The Court of Appeals affirmed

the CFI (RTC) judgment but neglected to give interest. In
executing the judgment, should interest be also given?
HELD: Yes, despite the silence of the Court of Appeals
judgment. The reason is the Court of Appeals decided merely
the issue of prescription. Interest was not discussed in the Court
of Appeals judgment. Its affirmance of the CFI (RTC) decision
can only mean affirmance also of the grant of interest.

Art. 2211. In crimes and quasi-delicts, interest as a part

of the damages may, in a proper case, be adjudicated in the
discretion of the court.

COMMENT:

Interest on Damages Because of Crimes and Quasi-

Delicts
The Article explains itself.

Art. 2212. Interest due shall earn legal interest from

the time it is judicially demanded, although the obligation
may be silent upon this point.

COMMENT:
Interest on Interest Due
(a) Interest due is also referred to as “accrued interest.”
(b) Note that accrued interest earns legal interest, not from de-
fault (which may be from judicial OR extrajudicial demand)
but from JUDICIAL DEMAND. (Art. 2212; Cu Unjieng v.
Mabalacat Sugar Co., 54 Phil. 976; Sunico v. Ramirez, 14
Phil. 500 and Bachrach v. Golingco, 39 Phil. 912).
(c) An agreement to charge interest on interest is valid even
if in adding the combined interest, the limits under the
Usury Law are exceeded. (Valdezco v. Francisco, 52 Phil.
350 and Government v. Conde, 61 Phil. 14).
(d) If a stipulation governing the rate of interest is inserted in
a contract for the payment of money, this rate, if lawful,

1304
CIVIL CODE OF THE PHILIPPINES Art. 2213

remains in force until the obligation is SATISFIED. The

interest that accrues prior to the date of the filing of the
complaints should be capitalized and consolidated as of
that date with the capital, after which the whole bears
interest at the contract rate until the amount is paid.
The contracted obligation is not merged in the judgment,
but remains in full force until the debt is paid. (Zobel
v. City of Manila, 47 Phil. 169).

Art. 2213. Interest cannot be recovered upon unliqui-

dated claims or damages, except when the demand can be
established with reasonable certainty.

COMMENT:

(1) Interest on Unliquidated Claims or Damages

Bareng v. Court of Appeals, et al.

L-12973, Apr. 25, 1960
FACTS: The buyer of a certain equipment, because of cer-
tain alleged violations of warranties, refused to pay the balance
to the seller. Instead of tendering payment of said balance and
instead of depositing said balance in Court, the buyer sought
to have the sale rescinded on account of the alleged breach of
warranty. The alleged breach was not however, proved. Issue:
Should the buyer pay interest on the balance?
HELD: Yes, on account of the default, counted from the
date of the filing of the complaint by the seller (there appar-
ently having been no extrajudicial demand). Incidentally, the
arguments that the debt was unliquidated until its amount
was determined by the appellate court at P3,600 and that
consequently, he cannot be made answerable for interest on
the amount due before the judgment in said court is completely
untenable. The price of the equipment under their contract of
sale was determined and known; hence, liquidated; and the
obligation to pay any unpaid balance thereof did not cease
to be liquidated and determined simply because the vendor
and the vendee, in the suit for collection disagrees as to its
amount. If the buyer had wanted to free himself from any
responsibility for interests on the amount he had already ac-

1305
Art. 2213 CIVIL CODE OF THE PHILIPPINES

knowledged he still owed his vendor, he should have deposited

the same in Court at the very start of the action.

(2) No Liquidated Obligation

Abelardo Lim & Esmadito Gumabon v.

CA & Donato H. Gonzales,
GR 125817, Jan. 16, 2002
FACTS: Assessment of the damage on the vehicle was
heavily debated upon by the parties with private respond-
ent’s demand for P236,000 being refuted by petitioners who
argue that they could have the vehicle repaired easily for
P20,000.
ISSUE: Was the matter a liquidated obligation?
HELD: The amount due private respondent was not a
liquidated amount that was already demandable and pay-
able. Upon the provisions of Art. 2213, interest “cannot be
recovered upon unliquidated claims or damages, except when
the demand can be established with reasonable certainty.” It
is axiomatic that if the suit were for damages, unliquidated
and not known until definitely ascertained, assessed, and
determined by courts after proof — interest at the rate of 6%
per annum should be due from the date the judgment of the
court is made (at which time the quantification of damages
may be deemed to be reasonably ascertained.)
Sadly, petitioners failed to offer in evidence the esti-
mated amount of the damage caused by private respondent’s
unconcern towards the damaged vehicle. It is the burden of
petitioners to show satisfactorily not only that the injured
party could have mitigated his damages but also the amount
thereof; failing in this regard, the amount of damages award
cannot be proportionally reduced.
The questioned decision awarding private respondent
P236,000 with legal interest from Jul. 22, 1990 as compen-
satory damages and P30,000 as attorney’s fees is modified.
Interest at the rate of 6% per annum shall be computed from
the time judgment of the lower court is made until the finality
of this decision. If the adjudged principal and interest remain

1306
CIVIL CODE OF THE PHILIPPINES Arts. 2214-2215

unpaid thereafter, interest shall be 12% per annum computed

from the time judgment becomes final and executory until it
is fully satisfied.

Art. 2214. In quasi-delicts, the contributory negligence

of the plaintiff shall reduce the damages that he may re-
cover.

COMMENT:

Contributory Negligence of Plaintiff in Quasi-Delicts

Note that here the damages shall be reduced.

Art. 2215. In contracts, quasi-contracts, and quasi-

delicts, the court may equitably mitigate the damages un-
der circumstances other than the case referred to in the
preceding article, as in the following instances:
(1) That the plaintiff himself has contravened the
terms of the contract;
(2) That the plaintiff has derived some benefit as a
result of the contract;
(3) In cases where exemplary damages are to be award-
ed, that the defendant acted upon the advice of counsel;
(4) That the loss would have resulted in any event;
(5) That since the filing of the action, the defendant
has done his best to lessen the plaintiffs loss or injury.

COMMENT:
Mitigation of Damages in Contracts, Quasi-Contracts,
and Quasi-Delicts
Note that the enumeration is not exclusive for the law
uses the phrase “as in the following instances.”

1307
 CIVIL CODE OF THE PHILIPPINES

Chapter 3

OTHER KINDS OF DAMAGES

Art. 2216. No proof of pecuniary loss is necessary in

order that moral, nominal, temperate, liquidated or exem-
plary damages may be adjudicated. The assessment of such
damages, except liquidated ones, is left to the discretion of
the court, according to the circumstances of each case.

COMMENT:

(1) When No Proof of Pecuniary Loss Is Necessary

The Article was applied in Del Castillo v. Guerrero,
L-11994, Jul. 26, 1960.

(2) Necessity of Proving the Factual Basis

While no proof of pecuniary loss is necessary in order
that moral damages may be awarded, the amount of indemnity
being left to the discretion of the Court, it is, nevertheless,
essential that the claimant satisfactorily prove the existence
of the factual basis of the damages (Art. 2217) and its causal
relation to the defendant’s acts. This is because moral damages
though incapable of pecuniary estimation, are in the category
of an award designed to compensate the claimant for actual
injury suffered, and not to impose a penalty on the wrongdoer.
The mere fact that a party was sued for instance without any
legal foundation, does not entitle him to an award of moral
damages, for it would make a moral damage a penalty, which
they are not, rather than a compensation for actual injury
suffered, which they are intended to be. Moral damages, in
other words, are not corrective or exemplary damages. (Malonzo
v. Galang, et al., L-13851, Jul. 27, 1960).

1308
CIVIL CODE OF THE PHILIPPINES Art. 2217

(3) In Civil Case to Recover or for Restitution, Reparation

of Damages or Indemnification for Consequential and
Other Damages or Any Other Civil Actions under the
New Civil Code or Other Existing Laws Filed with the
Sandiganbayan against Ferdinand E. Marcos, et al., the
Sandiganbayan is Not to Look for Proof Beyond Reason-
able Doubt. But to Determine, Based on the Evidence
Presented, in Light of Common Human Experience,
which of the Theories Proffered by the Parties is More
Worthy of Credence

Yuchengco v. Sandiganbayan
479 SCRA 1 (2006)
“Juries must often reason,” says one author, ”according
to probabilities, drawing an inference that the main fact in
issue existed from collateral facts not directly proving, but
strongly tending to prove, its existence. The vital question in
such cases is the cogency of the proof afforded by the second-
ary facts. How likely, according to experience, is the existence
of the primary fact if certain secondary facts exist?”
For the Supreme Court ––

if the required quantum of proof obtains to establish ille-

gal acquisition, accumulation, misappropriation, fraud, or
illicit conduct –– ours is the duty to affirm the recovery
efforts of the Republic but should such proof be wanting,
we have the equally-exacting obligations to declare that
it is so –– the guarantee against deprivation of property
without due process, which, like other basic constitutional
guarantees, applies to all individuals, including tyrants,
charlatans, and scoundrels of enemy stripe.

Section 1
MORAL DAMAGES

Art 2217. Moral damages include physical suffering,

mental anguish, fright, serious anxiety, besmirched reputa-
tion, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation,

1309
Art. 2217 CIVIL CODE OF THE PHILIPPINES

moral damages may be recovered if they are the proximate

result of the defendant’s wrongful act or omission.

COMMENT:
(1) Requisites for the Recovery of Moral Damages
(a) There must be physical suffering, mental anguish, fright,
etc.

NOTE:
1) Physical suffering includes pain incident to a
surgical operation or medical treatment (Serio v.
American Brewing Co., 141 La. 290), as well as
possible FUTURE pain. (Southern Brewery & Ice
Co. v. Schmidt, 226 U.S. 162).
2) Mental anguish is a high degree of mental suf-
fering and not a mere disappointment or regret
(Southwestern Bell Tel. Co. v. Cooks, 30 S.W. 497)
or from annoyance or vexation. (Johnson v. West-
ern Union Teleg Co., 128 Am. Rep. 905). However,
inconvenience amounting to physical discomforts is
a subject of compensation.
3) Fright is one form of mental suffering. (Eastern v.
United Trade School Contracting Co., 77 Am. State
Rep. 859).
(b) The suffering, etc. must be the proximate result of the
wrongful act or omission. (St. Francis High School v.
CA, GR 82466, Feb. 25, 1991).
Thus, the grant of moral damages is NOT subject to
the whims and caprices of judges or courts. The court’s
discretion in granting or refusing it is governed by reason
and justice. In order that an individual may be made li-
able, the law requires that his act be WRONGFUL. The
adverse result of an action does not per se make the act
wrongful and subject the actor to the payment of moral
damages. (Barreto v. Arevalo, et al., 99 Phil. 771).

1310
CIVIL CODE OF THE PHILIPPINES Art. 2217

St. Mary’s Academy v. William Carpitanos

& Lucia S. Carpitanos, Guada Daniel,
James Daniel II, James Daniel, Sr., &
Vivencio Villanueva
GR 143363, Feb. 6, 2002

FACTS: Petitioner St. Mary’s Academy was made

liable for the death of Sherwin Carpitanos under Arts.
218 and 219 of the Family Code. It was pointed out that
petitioner was negligent in allowing a minor to drive and
in not having a teacher accompany the minor students
in the jeep.
Respondents, however, failed to show that the negli-
gence of petitioner was the proximate cause of the death
of the victim. Respondents Daniel spouses and Villanueva
admitted that the immediate cause of the accident was
not the negligence of petitioner or the reckless driving
of James Daniel II, but the detachment of the steering
wheel guide of the jeep.
ISSUES: (1) Was petitioner liable for damages for
the death of Sherwin Carpitanos?; and (2) Was the award
of moral damages against petitioner proper?
HELD: On the first issue, considering that the
negligence of the minor driver or the detachment of the
steering wheel guide of the jeep owned by respondent
Villanueva was an event over which petitioner St. Mary’s
Academy had no control, and which was the proximate
cause of the accident, petitioner may not be held liable
for the death resulting from such accident.
On the second issue, petitioner cannot be held liable
for moral damages in the amount of P500,000 awarded
by the trial court and affirmed by the Court of Appeals.
Though incapable of pecuniary computation, moral dam-
ages may be recovered if they are the proximate result of
defendant’s wrongful act or omission. (Art. 2217). In the
instant case, the proximate cause was not attributable
to petitioner.
There was no question that the registered owner of
the vehicle was respondent Villanueva, and who never

1311
Art. 2217 CIVIL CODE OF THE PHILIPPINES

denied and, in fact, admitted this fact. Hence, with

the overwhelming evidence presented by petitioner and
respondent Daniel spouses that the accident occurred
because of the detachment of the steering wheel guide of
the jeep, it is not the school, but the registered owner of
the vehicle who shall be held responsible for the death
of Sherwin Carpitanos.
[NOTE: The registered owner of any vehicle, even
if not used for public service, would primarily be re-
sponsible to the public or to third persons for injuries
caused the latter while the vehicle was being driven on
the highways or streets. (Aguilar, Sr. v. Commercial
Savings Bank, GR 128705, Jun. 29, and Erezo v. Depte,
102 Phil. 103 [1957]).]
(c) There must be clear testimony on the anguish, etc. (Thus,
if the plaintiff fails to take the witness stand and testify
as to her social humiliation, wounded feelings, anxiety,
etc., moral damages cannot be recovered. (Francisco v.
GSIS, L-18166, Mar. 30, 1963).

People v. Manero
218 SCRA 85
1993

It is only when a juridical person has a good repu-

tation that is DEBASED, resulting in social humiliation,
that moral damages may be awarded.

Carlota P. Valenzuela, et al. v. CA, et al.

GR 56168, Dec. 22, 1988

The grant of moral damages is expressly allowed

by law in instances where proofs are shown that mental
anguish, serious anxiety, and moral shock have been
suffered by the private respondent as a consequence of
the fraudulent act committed by the petitioner who took
advantage of the very limited education of the respond-
ent.

1312
CIVIL CODE OF THE PHILIPPINES Art. 2217

Danao v. CA
GR 48276, Sep. 30, 1987

The filing alone of the foreclosure application should

not be a ground for an award of moral damages.

Boysaw, et al. v. Interphil

Promotions, Inc.
GR 22590, Mar. 20, 1987

Moral damages cannot be imposed on a party

litigant, although such litigant exercises it erroneously
because if the action has been erroneously filed, such
litigant may be penalized for costs.

(2) Social and Financial Standing

In Layda v. Court of Appeals (90 Phil. 724), the Supreme
Court held that the social and financial standing (including
the earning capacity) of the victim, is NOT important in the
assessment of moral damages, because the controlling ele-
ment is the dignity of man and his human value. However,
in Domingding and Aranas v. Ng, et al. (103 Phil. 111), the
Court seemingly reversed its former stand when it held that
the social and financial standing of the offender and offended
party should be taken into account in the computation of
moral damages. In that case, where the trial court ordered
the offender, an overseer of a mango store to pay the victim
(a customer of the store, whom he had subjected to indigni-
ties by embracing and kissing her inside a taxi) P50,000 as
moral damages, the Supreme Court reduced the award to a
measly P1,000, considering the lack of wealth or financial
consequence on the part of both parties. In Yutuk v. Manila
Electric Co., L-13016, May 31, 1961, the Court held that the
aggrieved party’s moral feeling and personal pride should be
weighed in the determination of the indemnity.

(3) Need for Certain Steps

The husband of a woman, who voluntarily procured her
abortion, cannot recover moral damages from the physician who
caused the same where the said husband appeared to have

1313
Art. 2217 CIVIL CODE OF THE PHILIPPINES

taken no steps to investigate or pinpoint the causes thereof,

and obtain the punishment of the responsible practitioner.
(Geluz v. Court of Appeals, et al., L-16439, Jul. 20, 1961).

(4) Necessity of Personal Injury

(a) As a general rule, if a person is not himself physically
hurt, he cannot obtain moral damages. Thus, mere
sympathy for a close relative’s physical injuries cannot
grant moral damages to the sympathizer, even if he also
suffers mental anguish, as a result of such sympathy.
(See Strebel v. Figueras, et al., 96 Phil. 321; 15 Am. Jur.
597-598 and Araneta, et al. v. Arreglado, et al., 104 Phil.
529). Thus also, if it is the wife who suffered the physi-
cal injuries, moral damages may be recovered only by
her, and not by her next of kin or the husband. (Juana
Soberano & Jose B. Soberano v. Manila Railroad Co.,
L-19407, Nov. 23, 1966).
(b) Exceptions to the rule
Exceptions to the rule may be found in the last two
paragraphs of Art. 2219.

(5) Rule Under the Old Law

Under the old Civil Code, moral damages could not be
recovered for pain and suffering, even by the person person-
ally injured. (Marcelo v. Velasco, 11 Phil. 287 and Algarra v.
Sandejas, 7 Phil. 84).
The Code Commission decided to revise the rule, with
the following explanation:
“Denial of the award of moral damages has been predi-
cated on the idea that physical suffering, mental anguish, and
similar injury are incapable of pecuniary estimation. But it
is unquestionable that the loss or injury is just as real as in
other cases. The ends of justice are better served by giving
the judge discretion to adjudicate some definite sum as moral
damages. That is more equitable than that the sufferer should
be uncompensated. The wrongdoer cannot complain because
it was he who caused the injury. In granting moral damages,
the court proceeds upon the ancient maxim that when there

1314
CIVIL CODE OF THE PHILIPPINES Art. 2217

is a wrong, there is a remedy.” (Report of the Code Commis-

sion, p. 74).

(6) Mental Anguish

Ramos v. Ramos
L-19872, Dec. 3, 1974
FACTS: Because an action for reconveyance of real prop-
erties brought against them had already prescribed, and was
resultantly dismissed, the defendants sued the plaintiffs for
moral damages, alleging that they had suffered from worries,
anxieties, and mental anguish because of the suit that had
been brought against them. However, while the action for
reconveyance had indeed prescribed, there was no showing
that the action had been maliciously brought. The plaintiffs
in the reconveyance case had honestly believed that they had
a good and valid cause of action. Issue: May moral damages
be assessed against the unsuccessful plaintiffs?
HELD: No, moral damages cannot be awarded in favor
of the defendants, and against the unsuccessful plaintiffs. The
reason is because there was no malice in the institution of
the suit for reconveyance. If a case is filed in good faith, and
the defendant suffers from worries and anxieties, said mental
anguish is not the anguish where the law allows a recovery
of moral damages. The law does not impose a penalty on the
right to litigate.

American Express International, Inc. v.

IAC and Jose M. Alejandrino, Nov. 9, 1988
Private respondent Alejandrino was awarded moral dam-
ages amounting to P100,000 with 6% interest thereon computed
from the finality of this decision until paid because of the
alleged humiliation suffered by him when he was forced to
surrender his credit card at Bon Department Store in Seattle.
But as there are no pre-set spending limits to the use of the
Amexco credit card, petitioner could not be faulted for order-
ing the immediate seizure of private respondent’s credit card.
Considering the large number of people availing themselves
of the pre-set spending privilege in the use of the credit card,

1315
Art. 2217 CIVIL CODE OF THE PHILIPPINES

petitioner’s only protection consists in its ability to stop with

dispatch anyone wrongfully using the credit card.
Whatever humiliation or embarrassment Alejandrino
might have suffered on account of the seizure incident in
Seattle, the Director of Operations of Amexco’s Hongkong
office apologized to private respondent. The Director offered
to write a letter of explanation to Bon Department Store.
He even offered to reopen Alejandrino’s account. Alejandrino,
however, rejected the offers. Clearly then, while petitioner was
not in bad faith, its negligence caused the private respondent
to suffer mental anguish, serious anxiety, embarrassment and
humiliation, for which he is entitled to recover reasonable
moral damages.

Pan American World Airways, Inc. v. IAC

GR 44442, Aug. 31, 1987
The award of moral damages by the trial court and the
Court of Appeals in favor of a Pan American passenger, who
was bumped off, in the amount of P500,000 as moral damages,
P200,000 as exemplary damages and P100,000 as attorney’s
fees was considered by the Supreme Court to be exorbitant
and consequently reduced the moral and exemplary damages
to the combined total sum of P200,000 and the attorney’s
fees to P20,000. It retained the award of actual damages in
the amount of US$1,546.15 computed at the exchange rate
prevailing at the time of payment.

Danao v. CA
GR 48276, Sep. 30, 1987
The creditor not only filed an unwarranted foreclosure
proceedings, but also carried out the proceedings in a manner
as to embarrass the debtor by publishing the notice of extra-
judicial foreclosure and sale in the society page of a Sunday
edition of a widely circulated newspaper, instead of in the
“legal notices” or “classified ads” sections as usual in these
types of notices, in extraordinarily large and boxed advertise-
ments, which allegedly bespoke of the bank’s malicious intent
to embarrass and harass the defendant in alleged violation
of the canons of conduct provided for in Articles 19, 20 and
21 of the Civil Code.

1316
CIVIL CODE OF THE PHILIPPINES Art. 2217

Both the Court of Appeals (CA) and the lower court took
cognizance of the debtor’s mental anguish, serious anxiety and
besmirched reputation traceable to the unfortunate publica-
tion. The lower court awarded P100,000 moral damages, but
the CA reduced said amount to P30,000. The Supreme Court
increased the amount to P60,000.

(7) Courts Given Discretion to Award Moral Damages

Prudenciado v. Alliance Transport System, Inc.

GR 33836, Mar. 16, 1987
Trial courts are given discretion to determine the amount
of moral damages. The Court of Appeals can only modify or
change the amount awarded when they are palpably and
scandalously excessive “so as to indicate that it was the
result of passion, prejudice or corruption on the part of the
trial court.” But where the awards of moral and exemplary
damages are far too excessive compared to the actual losses
sustained by the aggrieved party, they should be reduced to
more reasonable amounts.
While the amount of moral damages is a matter left
largely to the sound discretion of a court, the same when
found excessive should be reduced to more reasonable amounts,
considering the attendant facts and circumstances. Moral
damages, though incapable of pecuniary estimation, are in
the category of an award designed to compensate the claim-
ant for actual injury suffered and not to impose a penalty on
the wrongdoer. Moral damages are not intended to enrich a
complainant at the expense of a defendant. They are awarded
only to enable the injured party to obtain means, diversion
or amusements that will serve to alleviate the moral suffer-
ing he has undergone, by reason of the defendants’ culpable
action. The award of moral damages must be proportionate
to the suffering inflicted.

Isabelita Vital-Gozon v. CA & Alejandro

dela Fuente
GR 129132, Jul. 8, 1998
A public officer, like petitioner herein, may be liable for
moral damages for as long as the moral damages suffered by

1317
Art. 2217 CIVIL CODE OF THE PHILIPPINES

private respondent were the proximate result of petitioner’s

wrongful act or omission, i.e., refusal to perform an official
duty or neglect in the performance thereof.
Since moral damages are, in the language of Art. 2217,
“incapable of pecuniary estimation,” courts have the discre-
tion to fix the corresponding amount, not being bound by any
self-serving assessment by the claimants.

Development Bank of the Phils. v.

CA & Emerald Resort Hotel Corp.
GR 125838, Jun. 10, 2003

FACTS: DBP maintains that ERHC, a juridical person,

is not entitled to moral damages. ERHC counters that its
reputation was debased when the sheriffs and several armed
men intruded into Hotel Ibalon’s premises and inventoried
the furniture and fixtures in the hotel. The Court of Appeals
(CA) affirmed the trial court’s award of moral damages.
HELD: The CA erred in awarding moral damages to
ERHC, the latter having failed to present evidence to warrant
the award. In a long line of decisions, the Supreme Court
has ruled that the claimant for moral damages must present
concrete proof to justify its award. (Enervida v. Dela Torre,
154 Phil. 301 [1974], citing Algara v. Sandejas, 27 Phil. 284
[1914]).
Moreover, as a general rule, moral damages are not
awarded to a corporation because, being an artificial person
and having existence only in legal contemplation, it has no
feelings, no emotions, no senses. It cannot, therefore, experience
physical suffering and mental anguish which can be experi-
enced only by one having a nervous system. The statement
in People v. Manero and Mamburao Lumber Co. v. PNB that
a corporation may recover moral damages if it “has a good
reputation that is debased, resulting in social humiliation” is
an obiter dictum. On this core alone, the award for damages
must be set aside. (ABS-CBN Broadcasting Corp. v. CA, 361
Phil. 499 [1999] and Napocor v. Philipp Brothers Oceanic,
Inc., GR 126204, Nov. 20, 2001).

1318
CIVIL CODE OF THE PHILIPPINES Arts. 2218-2219

Art. 2218. In the adjudication of moral damages, the

sentimental value of property, real or personal, may be
considered.

COMMENT:

Sentimental Value
Sentimental value may be considered both in civil li-
abilities arising from crimes (Art. 106, Rev. Penal Code) and
in civil cases, where there are fraudulent or deceitful motives.
(See Arnaldo v. Famous Dry Cleaners, [C.A.] 52 O.G. 282).

Art. 2219. Moral damages may be recovered in the fol-

lowing and analogous cases:
(1) A criminal offense resulting in physical injuries;
(2) Quasi-delicts causing physical injuries;
(3) Seduction, abduction, rape or other lascivious
acts;
(4) Adultery or concubinage;
(5) Illegal or arbitrary detention or arrest;
(6) Illegal search;
(7) Libel, slander or any other form of defamation;
(8) Malicious prosecution;
(9) Acts mentioned in article 309;
(10) Acts and actions referred to in Articles 21, 26, 27,
28, 29, 30, 32, 34, and 35.
The parents of the female seduced, abducted, raped, or
abused, referred to in No. 3 of this article, may also recover
moral damages.
The spouse, descendants, ascendants, and brothers
and sisters may bring the action mentioned in No. 9 of this
article, in the order named.

1319
Art. 2219 CIVIL CODE OF THE PHILIPPINES

COMMENT:
(1) Instances (Not Exclusive) When Moral Damages May
Be Recovered
(a) The law here speaks of 9 instances and “analogous
cases.”

Mayo y Agpaoa v. People

GR 91201, Dec. 5, 1991

Article 2219 of the New Civil Code provides: “Moral

damages may be recovered in the following and analogous
cases:
(1) A criminal offense resulting in physical inju-
ries;
(2) Quasi-delicts causing physical injuries;

Equitable Leasing Corp. v. Lucita Suyom,

Marissa Enano, Myrna Tamayo & Felix Oledan
GR 143360, Sep. 5, 2002

FACTS: Petitioner claims it is not liable for moral

damages, because respondents failed to establish or show
the causal connection or relation between the factual
basis of their claim and their wrongful act or omission,
if any.
HELD: Having established the liability of petitioner
as the registered owner of the vehicle, respondents have
satisfactorily shown the existence of the factual basis for
the award and its causal connection to the acts of the
driver, who is deemed as petitioner’s employee. Indeed,
the damages and injuries suffered by respondents were
the proximate result of petitioner’s tortuous act or omis-
sion.
(3) Seduction, abduction, rape or other lascivious
acts;
(4) Adultery or concubinage;
(5) Illegal search;

1320
CIVIL CODE OF THE PHILIPPINES Art. 2219

(6) Libel, slander or any other form of defama-

tion;
(7) Malicious prosecution;
(8) Acts mentioned in article 309;
(9) Acts and actions referred to in Articles 21, 26,
27, 28, 29, 30, 32, 34 and 35.”

Garciano v. CA, et al.

GR 96126, Aug. 10, 1992
Moral damages are recoverable only if the case
falls under Art. 2219 in relation to Art. 21. In the case
at bar, petitioner is not without fault. Firstly, she went
on an indefinite leave of absence and failed to report
back in time for the regular opening of classes. Secondly,
for reasons known to herself alone, she refused to sign
a written contract of employment. Lastly, she ignored
the Board of Directors’ order for her to report for duty
on July 5, 1982. The trial court’s award of exemplary
damages to her was not justified for she is not entitled
to moral, temperate, or compensatory damages.
In sum, the Court of Appeals correctly set aside the
damages awarded by the trial court to the petitioner for
they did not have any legal or factual basis.
(b) “Analogous cases” refers to instances similar to the cases
enumerated in the article, and not to ALL causes of
mental anguish. (People v. Plaza, [C.A.] 52 O.G. 6609).
One example is the institution of unfounded suits, one
after another, all resulting in the dismissal of said suits;
the anguish and embarrassment suffered by the defend-
ant cannot be denied. (Haw Pia v. Court of Appeals, L-
20047, Jun. 30, 1967). Ordinarily, a breach of contract
cannot be considered as included in the descriptive term
“analogous cases” used in Art. 2219, not only because
Art. 2220 specifically provides for the damages that are
caused by a contractual breach but because the definition
of quasi-delict in Art. 2176 of the Code expressly excludes
the cases where there is a pre-existing contractual re-
lation between the parties. The advantageous position
of a party suing a carrier for breach of the contract of

1321
Art. 2219 CIVIL CODE OF THE PHILIPPINES

transportation explains to some extent, the limitations

imposed by the new Code on the amount of the recov-
ery. The action for breach of contract imposes on the
defendant carrier a presumption of liability upon mere
proof of injury to the passenger; the latter is relieved
from the duty to establish the fault of the carrier, or of
his employees; and the burden is placed on the carrier
to prove that it was due to an unforeseen event or to
force majeure. Moreover, the carrier, unlike in suits in-
volving quasi-delict, may not escape liability by proving
that it has exercised due diligence in the selection and
supervision of the employees. Incidentally, regarding the
claim that moral damages may be awarded because of
Art. 1170 (incidental fraud), suffice it to state that said
article merely sets forth a general principle on dam-
ages. (See Geraldez v. CA, GR 108253, Feb. 23, 1994,
48 SCAD 508). As regards moral damages, Art. 2219 is
controlling, it being a specific provision thereon and as
such, it prevails over Art. 1170. (Verzosa v. Baytan, et
al., 107 Phil. 1010).

Bert Osmeña and Associates v.

Court of Appeals
GR 56545, Jan. 28, 1983
(1) When fraud or bad faith has been proved,
moral damages may be awarded.
(2) When moral damages are awarded, exemplary
damages may also be decreed.

Darang v. Ty Belizar
L-19487, Jan. 31, 1967
To recover moral damages, there must be pleading
and proof of moral suffering, anguish, fright, etc.

Imperial v. Ziga
L-19726, Apr. 13, 1967
Moral damages, imposed in a judgment, can earn
interest, if so provided in the judgment, and reckoning
can begin from the time the judgment is promulgated.

1322
CIVIL CODE OF THE PHILIPPINES Art. 2219

Gatchalian v. Delim
GR 56487, Oct. 21, 1991

Since respondent and his driver had been grossly

negligent in connection with the bus mishap which
had injured petitioner and other passengers and recall-
ing the aggressive maneuvers of respondent, thru his
wife, to get the victims to waive their right to recover
damages even as they were still hospitalized for their
injuries, petitioner must be held entitled to such moral
damages. Considering the extent of pain and anxiety
which petitioner must have suffered as a result of her
physical injuries including the permanent scar on her
forehead, the amount of P30,000 would be a reasonable
award. Petitioner’s claim for P1,000 as attorney’s fees
is in fact even more modest.

Mayo y Agpaoa v. People

GR 91201, Dec. 5, 1991

FACTS: June Navarette was driving a Lancer car

owned by Linda Navarette, her sister. On board the car
were Linda, Legionaria, Mae, Noel, Reymond, Antonette
and Mercy. Before the accident took place, the Tamaraw
jeep driven by Danilo was first ahead, followed by the
Lancer car and behind the Lancer car was the Rabbit
bus driven by Mayo travelling towards the direction of
Manila. The Lancer car as well as the Rabbit bus fol-
lowing one after the other overtook the Tamaraw jeep.
The Lancer car was then cruising steadily at the right
lane of the road at a speed rate of about 40 kilometers
per hour. As the vehicle approached the vicinity of
Mabalacat Institute, the Rabbit bus picked up speed
and swerved to the left lane to overtake the Lancer car
which was running on the right lane of the highway.
When the Rabbit bus was abreast with the Lancer, an
oncoming vehicle from the opposite direction appeared
and flashed its headlights to warn the bus to give way.
The bus swerved to its right in an effort to return to the
right lane to avoid collision with the oncoming vehicle,
and in the process it hit the left rear side portion of

1323
Art. 2219 CIVIL CODE OF THE PHILIPPINES

the Lancer car with its right front bumper. Because of

the impact, the driver of the Lancer lost control of the
wheel and the car crashed against the concrete fence.
Mayo was charged and convicted with the crime of reck-
less imprudence resulting in damage to property with
multiple serious, less serious and slight physical injuries.
He filed an appeal with the Court of Appeals (CA) which
affirmed the trial court’s decision with the modification
that the appellant suffered a straight penalty of three
months, on the ground that the Indeterminate Sentence
Law is not applicable, the maximum penalty imposable
not exceeding one year. The complainants in the criminal
case were awarded damages. The CA sustained the trial
court.
ISSUE: Whether the findings of the trial court
justify the award of moral damages in the amount of
P700,000 in favor of Linda Navarette.
HELD: The Supreme Court modified the amount of
P700,000 as moral damages granted to complainant by
reducing it to P200,000 and holding that Linda is enti-
tled to moral damages. She suffered injuries as a result
of the criminal offense of Mayo. Moreover, her injuries
resulting in a permanent scar at her forehead and the
loss of her right eye gave her mental anguish, wounded
feelings and shock. The psychological effect on her as
regards the scar on her forehead and her false eye must
have devastated her considering that women in general
are fastidious on how they look. More important was the
loss of vision of her right eye which was severely injured
as a result of the accident. Since the accident, Linda had
to contend with the loss of her eyesight on her right eye
which necessarily hampers her not only physically but
also professionally for the rest of her life. Before the ac-
cident, Linda who is a home economist by profession was
doing well in her career. A graduate of the University of
the Philippines with the degree of Home Economics, she
is the Assistant Vice President as well as the Resident
Manager of Club Solviento receiving a gross income of
P10,000 a month. Simultaneously with her work at Club
Solviento, she served as Food Consultant of Food City

1324
CIVIL CODE OF THE PHILIPPINES Art. 2219

where she received a monthly salary of P7,000. However,

she had to give up her consultancy job after the accident
not only because of her prolonged absences but because
of the physical handicap she suffered. Nevertheless,
there is no justification toward moral damages in favor
of Linda for the loss of her boyfriend. No doubt, the loss
of her boyfriend after the accident added to her mental
and emotional sufferings and psychologically affected and
disturbed her. However, there is no evidence to show
that her boyfriend left her after the accident due to her
physical injuries. He may have left her even if she did not
suffer the slightest injury. The reasons for the break-up
of a courtship are too many and too complicated such
that they should not form the basis of damages arising
from a vehicular accident. Moreover, granting that her
boyfriend left her due to her physical injuries, there is
no legal basis for the award of moral damages in favor
of Linda because of the loss of a boyfriend. Art. 2219
of the new Civil Code enumerates cases wherein moral
damages may be granted. Loss of a boyfriend as a result
of physical injuries suffered after an accident is not one
of them. Neither can it be categorized as an analogous
case. The award of P700,000 as moral damages in favor
of Linda is unconscionable and excessive. The Court
rejects Linda’s claim for the amount of P1,000,000 as
moral damages for the loss of her boyfriend. She asked
for the amount of P500,000 as moral damages due to her
personal injuries. Therefore, the award for moral damages
should not exceed P500,000. Under the circumstances,
the amount of P200,000 as moral damages in favor of
Linda is reasonable, just and fair. Thus, moral damages
may be awarded where gross negligence on the part of
the common carrier is shown.

Spouses Quisumbing v. Manila Electric Co.

GR 142943, Apr. 3, 2002

Art. 2219 lists the instances when moral damages

may be recovered. One such instance is when the rights
of individuals, including the right against deprivation of
property without due process of law, are violated.

1325
Art. 2219 CIVIL CODE OF THE PHILIPPINES

Although incapable of pecuniary computation, such

damages may be recovered if they are the proximate
results of the defendant’s wrongful act or omission.

(2) Rule With Respect to Contracts

Note that contracts are not referred to in this article.
However:
(a) Under Art. 2220, moral damages may be recovered where
the defendant acted fraudulently or in bad faith.

Filinvest Credit Corp. v. Mendez

GR 66419, Jul. 31, 1987

FACTS: A credit corporation sued an installment

buyer of a car to recover said car and/or the sum of
money when the latter’s check intended for the February,
March and April installments bounced due to insufficiency
of funds. By virtue of an order of seizure by the court,
the car was repossessed. The buyer later redeposited the
check and credited for the months mentioned. When the
buyer negotiated with the credit company for the release
of the car, the latter demanded payment of the total
outstanding balance on the promissory note. Due to the
persistent pleas of the buyer, the credit company released
the car to him upon payment of the installment remain-
ing unpaid for the months of April, May and June, in
addition to the costs incurred in repossessing. The court
dismissed the case on motion of the credit company.
HELD: The buyer is not entitled to damages. The
willingness of the credit company to allow the buyer to
pay only the unpaid installments for April, May and June,
instead of the total outstanding balance and to release
the car as well as its voluntary motion to dismiss the
case indicates lack of fraud or bad faith on the part of
the credit company. The buyer was not without fault.
He was three months behind in his payments and he
issued a bouncing check.

1326
CIVIL CODE OF THE PHILIPPINES Art. 2219

Moral damages cannot be awarded in the absence

of a wrongful act or omission or fraud or bad faith.
When the action is filed in good faith there should be
no penalty on the right to litigate. One may have erred,
but error alone is not a ground for moral damages.
(b) If death is caused to a passenger by the negligence of a
common carrier, moral damages may be recovered. (Arts.
1764, 2206).

(3) Re Par. 1 (Physical Injuries Because of a Crime)

“A criminal offense resulting in physical injuries.”
(a) If a passenger dies or is injured, and a criminal case is
brought by himself or by his heirs, in the proper case,
moral damages may be recovered.
(b) If there be no death or physical injuries, moral damages
cannot be recovered. (People v. Plaza, [C.A.] 52 O.G.
6609; Strebel v. Figueras, 96 Phil. 321).
(c) If a taxi driver was negligent and injures a passenger,
he can be liable for moral damages, but not the taxi
company, for the company did not commit the crime.
(See Cachero v. Manila Yellow Taxicab Co., Inc., 101
Phil. 523).
[NOTE: Rule in Civil Actions: Moral damages
are NOT recoverable in damage actions predicated on
a breach of the contract of transportation in view of
the provisions of Arts. 2219 and 2220 of the new Civil
Code. (Verzosa v. Baytan, et al., 107 Phil. 1010). The
exceptions to this rule are (a) where the mishap results
in the death of a passenger, and (b) where it is proved
that the carrier was guilty of fraud or bad faith, even if
death does not result. (Fores v. Miranda, 105 Phil. 266).
The mere carelessness of the carrier’s driver does not
per se constitute or justify an inference of malice or bad
faith on said carrier’s part (Rex Taxicab Co. v. Bautista,
L-15392, Sept. 30, 1960), because fraud, malice, or bad
faith must be proved. (Soberano and Soberano v. Manila
Railroad Co., L-19407, Nov. 23, 1966).]

1327
Art. 2219 CIVIL CODE OF THE PHILIPPINES

(4) Re Par. 3 (Seduction, etc.)

“Seduction, abduction, rape or other lascivious acts.”

People of the Philippines v. Mariano Fontanilla

L-25354, Jun. 28, 1968

FACTS: Mariano Fontanilla, 52 years of age, was ac-

cused by his servant, Fe Castro, a 15-year-old virgin of
repeated carnal knowledge with her for three months. She
could not recall the total number of times. She testified that
she repeatedly yielded because of his promises of marriage
(despite the fact that he was a married man), and because
she was frightened by his acts of intimidation. The accused
made love to her during the day when his wife was away,
and at night, when the latter was already asleep. One night,
they were caught in flagrante on the kitchen floor. Fontanilla
denied the accusation stating, inter alia, that because of his
age, it was impossible for him to make love to his wife more
than once a week, much less, to have had Fe carnally day
and night. Fontanilla was found guilty in view of the evidence
presented. Regarding the repeated acts of carnal knowledge,
there is a presumption that an adult male has normal powers
of virility. The Court also awarded Fe or her parents moral
damages amounting to P500. Issue: Is this award of moral
damages proper?
HELD:
(a) The award of only P500 is inadequate. The victim was
a virgin, and she was deflowered by Fontanilla. This
loss of virginity, together with the attendant shame
and scandal, entitles her to the sum of P2,500 in moral
damages. Her future as a woman is definitely impaired,
and the resultant prejudice against her engendered in
the male population of the barrio where she resides,
cannot be blinked away.
(b) The award must not be in the alternative, for under Art.
2219 of the Civil Code, the parents are ALSO entitled
to recover moral damages. The conviction of the accused
suffices as a basis to adjudge him, in the same action,
liable for an award of moral damages, without independ-

1328
CIVIL CODE OF THE PHILIPPINES Art. 2219

ent proof thereof, to the victim AND her parents, because

the law presumes that the parents also naturally suf-
fered besmirched reputation, social humiliation, mental
anguish, and wounded feelings.

People v. Manalo
GR 49810, Oct. 13, 1986
In rape cases, moral damages have been raised to
P20,000.

People v. Bondoy
41 SCAD 432
1993
The indemnity to a rape victim has been increased
to P50,000.

People v. Eric Baid y Ominta

GR 129667, Jul. 31, 2000
FACTS: Appellants was accusing of raping a 27-year
old woman diagnosed with schizophrenia. Found guilty,
appellant assailed victim’s credibility on account of her
ailment.
HELD: It is medically established that schizophrenic
persons do not suffer from a clouding of consciousness
and gross deficits of memory. The victim could understand
the questions propounded to her relating to the rape and
could give responsive answers to them despite exhibiting
inappropriate emotions in the course of her testimony.
Notably, complainant’s submission to the sexual advances
of appellant notwithstanding, the intercourse was without
consent considering that schizophrenia caused an impair-
ment of the judgment on complainant. Hence, appellant
may be convicted of rape under Art. 335(2) of the Re-
vised Penal Code for the victim was completely insane
or deprived of reason when he had carnal knowledge of
her. The phrase “deprived of reason” includes those suf-
fering from mental abnormality, or deficiency, or some
form of mental retardation, those who are feeble-minded
although coherent.

1329
Art. 2219 CIVIL CODE OF THE PHILIPPINES

The trial court is correct in awarding moral damages

in the amount of P50,000 in accordance with jurispru-
dence that moral damages may be awarded in rape cases
without any need of proof of moral suffering. Additionally,
civil indemnity in the amount of P50,000 should have been
awarded the complainant consistent with the ruling that
rape victims are entitled to such an award without need
of proof except the fact of the commission of the offense.
(People v. Capillo, GR 123059, November 25, 1999). The
prosecution’s plea that the indemnity should be raised
to P75,000 cannot be granted because such amount is
awarded only in cases of qualified rape. In the case at
bar, there have been no qualifying circumstances raising
the penalty to death. (People v. Lasola, GR 123152, Nov.
17, 1999).

(5) Re Par. 7 (Libel, Slander, Defamation)

“Libel, slander, or any other form of defarmation.”
If there is no libel, etc. because of the defense of “privi-
leged communication” and malice is not proved, there will be
no award of moral damages. This is particularly true in the
case of court pleadings which may contain libelous remarks.
(See De la Rosa, et al. v. Maristela, [C.A.] 50 O.G. 254).
On the other hand, the allegation of forgery in a docu-
ment is all but a defamation, which in the light of Art. 2217
could by analogy be a ground for payment of moral damages,
considering the wounded feelings and besmirched reputation
of the parties involved. (Heirs of Justiva v. Court of Appeals,
L-16396, Jan. 31, 1963).

(6) Re Par. 8 (Malicious Prosecution)

“Malicious Prosecution”
The defendant, to be liable, must have acted deliberately
knowing that his charges were false and groundless. Indeed,
the mere act of submitting a case to the authorities for pros-
ecution does not make him liable for malicious prosecution,
for generally, it is the Government or representative of the
State that takes charge of the prosecution of the offense.

1330
CIVIL CODE OF THE PHILIPPINES Art. 2219

There must be proof that the prosecution was prompted by a

sinister design to vex and humiliate a person, for if the rule
were otherwise, every acquitted person can turn against the
complainant in a civil action for damages. (Buenaventura, et
al. v. Sto. Domingo, et al., L-10661, Mar. 2, 1958). In order
that moral damages may be recovered as a result of a writ
of attachment wrongfully issued, malice must be proved to be
present. (Lazatin v. Tuano, et al., L-12736, Jul. 31, 1961).

Alejo Madera, et al.

v. Heirs of Salvador Lopez
L-37105, Feb. 10, 1981

Statutory basis for an action for moral damages due to

malicious prosecution can be found in Arts. 19, 2176, and
2219 of the Civil Code.

PCIB v. IAC
GR 73610, Apr. 19, 1991

An action to recover damages from the plaintiff who

secures a writ of attachment based on a false affidavit is
identical with or analogous to the ordinary action for mali-
cious prosecution. Moral damages may be recovered by the
defendant on account of an improperly and irregularly issued
writ of attachment.

Albenson Enterprises Corp., et al. v.

CA & Eugenio S. Baltao
GR 88694, Jan. 11, 1993

A civil action for damages for malicious prosecution is

allowed under the Civil Code, more specifically Arts. 19, 20,
26, 29, 32, 33, 35, and 2219(8) thereof.
In order that such a case can prosper, however, the fol-
lowing three (3) elements must be present, to wit: (1) the fact
of the prosecution and the further fact that the defendant was
further fact that the defendant was himself the prosecutor,
and that the action was finally terminated with an acquittal;
(2) that in bringing the action, the prosecutor acted without
probable cause; and (3) the prosecutor was actuated or impelled

1331
Art. 2219 CIVIL CODE OF THE PHILIPPINES

by legal malice. Thus, a party injured by the filing of a court

case against him, even if he is later on absolved, may file a
case for damages grounded either on the principle of abuse
of rights, or on malicious prosecution. It is well-settled that
one cannot be held liable for maliciously instituting a pros-
ecution where one has acted with probable cause (defined as
the existence of such facts and circumstances as would excite
the belief, in a reasonable mind, acting on the facts within
the knowledge of the prosecutor, that the person charged was
guilty of the crime for which he was prosecuted). To constitute
malicious prosecution, there must be proof that the prosecu-
tion was prompted by a sinister design to vex and humiliate
a person, that it was initiated deliberately by the defendant
knowing that his charges were false and groundless. Conce-
dedly, the mere act of submitting a case to the authorities for
prosecution does not make one liable for malicious prosecu-
tion. Proof and motive that the institution of the action was
prompted by a sinister design to vex and humiliate a person
must be clearly and preponderantly established to entitle the
victims to damages.
In the case at bar, there is no proof of a sinister design on
the part of petitioners to vex or humiliate private respondent
by instituting the criminal case against him. While petitioners
may have been negligent to some extent in determining the
liability of private respondent for the dishonored check, the
same is not so gross or reckless as to amount to bad faith
warranting an award of damages. The questioned judgment
in the instant case attests to the propensity of trial judges
to award damages without basis. Lower courts are hereby
cautioned anew against awarding unconscionable sums as
damages without bases therefor.

(7) Re Par. 10 (Articles on Human Relations)

Bar Question
(a) Is a breach of promise to marry an actionable wrong?
Explain briefly.
(b) A promised to marry his sweetheart B. Later, both ap-
plied for and obtained a marriage license. Thereafter,
they sent out wedding invitations to friends and rela-

1332
CIVIL CODE OF THE PHILIPPINES Art. 2219

tives. B purchased her wedding trousseau, and dresses

for other participants in the wedding. Two days before
the wedding, A left for the province, and sent a note
to B stating that he could not go on with the wedding
because his mother was opposed to it. He was nowhere
to be found on the date of the wedding. Question: Is A
liable for damages?
Reasons:
ANS.: (a) A breach of promise to marry is by itself
not an actionable wrong. (Hermosisima v. Court of Ap-
peals, L-14628, Sept. 30, 1960 and Estopa v. Piansay, Jr.,
L-14733, Sept. 30, 1960). And neither does it give rise to
an action for specific performance. Therefore, only actual
damages (wedding dress, etc.) may be asked; not moral
damages unless there is criminal or moral seduction or
abuse of a right.
(b) A is liable for actual, moral and exemplary damages.
His acts constituted a palpable, unjustifiable, and willful
violation of morals and good customs, for which he can
be held answerable for damages in accordance with Art.
21. And inasmuch as he acted in a wanton, reckless, and
oppressive manner, he should be made to pay moral and
exemplary damages pursuant to the provisions of Art.
2219, par. 10 and Art. 2232 of the Civil Code. (Wassmer
v. Velez, L-20089, Dec. 26, 1964).

Arturo de Guzman v. NLRC, et al.

GR 90856, Jul. 23, 1992
Under Art. 2219(10) of the Civil Code, moral dam-
ages may be recovered for the acts referred to in art. 21
which reads: “Any person who willfully causes loss or
injury to another in a manner that is contrary to mor-
als, good customs or public policy shall compensate the
latter for the damage.”
In Bert Osmeña & Associates v. CA (120 SCRA 396),
the Court held that “fraud and bad faith having been
established, the award of moral damages is in order.
And in Pan Pacific Co. (Phil.) v. Phil. Advertising Corp.

1333
Art. 2219 CIVIL CODE OF THE PHILIPPINES

(23 SCRA 977), moral damages were awarded against

the defendant for its wanton and deliberate refusal to
pay the just debt due the plaintiff. It is settled that the
court can grant the relief warranted by the allegation
and the proof even if it is not specifically sought by the
injured party. (Heirs of Celso Amarante v. CA, 185 SCRA
585).
In the case at bar, while the private respondents
did not categorically pray for damages, they did allege
that the petitioner, taking advantage of his position as
general manager, had appropriated the properties of
the Affiliated Machineries Agency Ltd. (AMAL) in pay-
ment of his own claims against the company. That was
averment enough of the injury they suffered as a result
of the petitioner’s bad faith. It is stressed that the pe-
titioners’ liability to the private respondents is a direct
liability in the form of moral and exemplary damages
and not a solidary liability with AMAL for the claims
of its employees against the company. He is being held
liable not because he is the general manager of AMAL
but because he took advantage of his position by applying
the properties of AMAL to the payment exclusively of
his own claims to the detriment of the other employees.
In the instant case, the fact that no actual or compensa-
tory damages was proven before the trial court does not
adversely affect the private respondents’ right to recover
moral damages. Thus, moral damages may be awarded in
the cases referred to in the Chapter on Human Relations
of the Civil Code (Arts. 19-31) without need of proof that
the wrongful act complained of had caused any physical
injury upon the complainant.

(8) Moral and Exemplary Damages Were NOT Given in the

Following Cases:
(a) When no evidence was introduced thereon, and the case
was submitted simply on a stipulation of facts. (Tabora
v. Montelibano, et al., L-8667, Apr. 3, 1956).
(b) When a complaint contained nothing derogatory to the
good name or reputation of the other party, and bad

1334
CIVIL CODE OF THE PHILIPPINES Art. 2219

faith was not shown. (Litam v. Espiritu, et al., L-7644,

Nov. 27, 1956).
(c) When there was no allegation or proof that a mayor, in
dismissing a policeman, had acted with motives other
than the promotion of the public interest. (Covacha v.
Amante, L-8358, May 25, 1956).
(d) When a broker believed in good faith that he was en-
titled to a commission for having intervened in a sale,
and thus sued unsuccessfully his principal. (Worcester v.
Lorenzana, 104 Phil. 234).
(e) When a common-law wife, Esther Peralta, was prohibited
by the court to represent herself as Mrs. Saturnino Silva,
or as the lawful wife of her paramour. In this case, the
court held that the unwarranted misrepresentation had
been made in GOOD FAITH, inasmuch as she did NOT
know that her common-law mate was already married to
another. (Elenita Ledesma Silva, et al. v. Esther Peralta,
L-13114, Aug. 29, 1961).
(f) In a case of a clearly unfounded or unreasonable suit.
Note that in a case like this, attorney’s fees may be
recovered (Art. 2208, No. 4) but NOT moral damages,
for this is not one of the cases contemplated under Art.
2219. (Malonzo v. Galang, et al., L-13581, Jul. 27, 1960).
It is true that Art. 2219 also provides that moral dam-
ages may be awarded in “analogous cases” but we do
not think the Code intended a “clearly unfounded civil
action proceeding” to be one of those analogous cases
wherein moral damages may be recovered or it would
have expressly mentioned it in Art. 2219 as it did in Art.
2208; or else incorporated Art. 2208 by reference in Art.
2219. Besides, Art. 2219 specifically mentions “quasi-
delicts causing physical injuries” as an instance when
moral damages may be allowed, thereby implying that
all other quasi-delicts not resulting in physical injuries
are excluded (Strebel v. Figueras, 96 Phil. 321), excepting
of course, the special torts referred to in Art. 309 (par.
9, Art. 2219) — relating to disrespect for the dead and
wrongful interference with funerals — and in Arts. 21,
26, 27, 28, 29, 30, 32, 34, and 35 on the chapter on Hu-

1335
Art. 2219 CIVIL CODE OF THE PHILIPPINES

man Relations. (par. 10, Art. 2219; Malonzo v. Galang,

et al., L-13851, Jul. 27, 1960).
(g) A brother cannot recover moral damages for his broth-
er’s death in 1937 caused by a negligent train engineer
(while this was under the old Civil Code which appar-
ently allowed such recovery, based on FRENCH decisions,
still the less severe sanction under the new Civil Code
should be applied (Art. 2257) and the new Civil Code is
clearly less severe because under the last paragraph of
Art. 2219, brothers and sisters are NOT among these
who can recover moral damages.)
(h) The passenger’s contributory negligence will justify the
deletion of moral damages.

Philippine National Railways v. CA

GR 55347, Oct. 4, 1985

FACTS: A train passenger insists in sitting on the

open platform between the coaches of the train and does
not hold on tightly to the upright metal bar found at
the said platform. Because of his precarious position, he
falls off the speeding train.
HELD: The passenger is chargeable with contribu-
tory negligence. But his contributory negligence will not
exempt the carrier from liability. It will merely justify
the deletion of moral damages.

(9) Liability of the State Governmental & Proprietary

Functions

Fontanilla v. Maliaman
GR 55913, Feb. 27, 1991

FACTS: On December 1, 1989, through its Second Divi-

sion, the Supreme Court rendered a decision declaring the
National Irrigation Administration (NIA) a government agency
performing proprietary functions. Like an ordinary employer,
NIA was held liable for the injuries, resulting in the death
of Francisco Fontanilla, caused by the fault or negligence of

1336
CIVIL CODE OF THE PHILIPPINES Art. 2219

NIA’s driver-employee Hugo Garcia. The Court ordered NIA

to pay the Fontanilla spouses, the victim’s parents, for the
death of the victim, for hospitalization and burial expenses,
for moral and exemplary damages, and attorney’s fees. NIA
moved for reconsideration, alleging that it does not perform
solely or primarily proprietary functions but as an agency of
the government tasked with governmental functions. Thus,
it may not be held liable for damages for injuries caused by
its employees to a third person.
HELD: The Supreme Court en banc denied the motion
for reconsideration and held that the National Irrigation
Administration is a government agency invested with a cor-
porate personality separate and distinct from the government
and thus is governed by the Corporation Law (now Corporate
Code). It had its own assets and liabilities. It also has corpo-
rate powers to be exercised by a Board of Directors. To quote
Sec. 2, subsection (f): “x x x and to transact such business, as
are directly or indirectly necessary, incidental or conducive
to the attainment of the above powers and objectives, includ-
ing the power to establish and maintain subsidiaries, and
in general, to exercise all the powers of a corporation under
the Corporation Law, insofar as they are not inconsistent
with the provisions of this Act.” (Sec. 2, subsection [f]). The
National Irrigation Administration is a government agency
with a juridical personality separate and distinct from the
government. It is not a mere agency of the government but
a corporate body performing proprietary functions. Therefore,
it may be held liable for damages caused by the negligent act
of its driver who was not its special agent.

(10) Closure of Bank Account Due to “Kiting”

Reyes v. Court of Appeals

GR 95535, Jan. 21, 1991
The bank is not liable for damages for closing a depositor’s
current account, where the latter is guilty of “kiting” activities
as defined in the Central Bank Manual, i.e., “where a deposi-
tor, having only one account of his own, can still engage in
kiting by using the account or accounts of other persons who
may be willing to act and cooperate with him.”

1337
Art. 2220 CIVIL CODE OF THE PHILIPPINES

(11) No Hard and Fast Rule

Ayala Integrated Steel

Manufacturing Co., Inc. v. CA
GR 94359, Aug. 2, 1991

Moral damages includes physical suffering, mental an-

guish, fright, serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar injury.
Though incapable of pecuniary computation, they may be
recovered if they are the proximate result of the defendant’s
wrongful act or omission. Damages are not intended to en-
rich the complainant at the expense of a defendant. They are
awarded only to alleviate the moral suffering that the injured
party had undergone by reason of the defendant’s culpable
action.
There is no hard and fast rule in the determination of
what would be a fair amount of moral damages, since each
case must be governed by its own peculiar circumstances.
Although the Court of Appeals increased the moral and ac-
tual damages awarded by the trial court, the awards are not
excessive but only commensurate with the mental anguish,
hardships, inconvenience, and expenses that respondent suf-
fered and incurred as a result of the malicious prosecutions
initiated by the petitioners against him.

Art. 2220. Willful injury to property may be a legal

ground for awarding moral damages if the court should
find that, under the circumstances, such damages are justly
due. The same rule applies to breaches of contract where
the defendant acted fraudulently or in bad faith.

COMMENT:

(1) Willful Injury to Property and Breaches of Contracts

If the breach of a contract is neither malicious nor fraudu-
lent, no award of moral damages may be given. (Francisco v.
GSIS, L-18155, Mar. 30, 1963).

1338
CIVIL CODE OF THE PHILIPPINES Art. 2221

(2) Case

Vicente & Michael Lim v. CA

GR 118347, Oct. 24, 1996
75 SCAD 574
The evidence shows that private respondent made little
more than taken effort to seek the ejectment of squatters
from the land, revealing her real intention to be finding a
way of getting out of her contract. Her failure to make use of
her resources and her insistence on rescinding the sale show
quite clearly that she was indeed just looking for a way to
get out of her contractual obligation by pointing to her own
abject failure to rid the land of squatters.
The award of moral damages is in accordance with Art.
2220 which provides that moral damages may be awarded
in case of a breach of contract where the defendant acted
fraudulently or in bad faith.
[NOTE: In view of Art. 2220, it has been held that
in culpa contractual or breach of contract, moral damages
may be recovered when the defendant acted in bad faith or
was guilty of gross negligence (amounting to bad faith) or
in wanton disregard of his contractual obligation. Since the
law presumes good faith, the person claiming moral damages
must prove bad faith or ill motive by clear and convincing
evidence. (MOF Co. v. Enriquez, GR 149280, May 9, 2002).]

Section 2
NOMINAL DAMAGES

Art. 2221. Nominal damages are adjudicated in order

that a right of the plaintiff, which has been violated or in-
vaded by the defendant, may be vindicated or recognized,
and not for the purpose of indemnifying the plaintiff for
any loss suffered by him.

COMMENT:
(1) The Grant of Nominal Damages — Reason Therefor
“There are instances when the vindication or recognition
of the plaintiff’s right is of the utmost importance to him as

1339
Art. 2221 CIVIL CODE OF THE PHILIPPINES

in the case of trespass upon real property. The awarding of

nominal damages does not therefore run counter to the maxim
de minimio non curat lex (the law does not cure or bother
with trifles).” (Report of the Code Commission, p. 74).

LRT v. Navidad,
GR 145804, Feb. 6, 2003

Nominal damages are adjudicated in order that a right

of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by
him. (Art. 2221).
It is an established rule that nominal damages cannot co-ex-
ists with compensatory damages. (Medina v. Cresencia, 99 Phil.
506). Nor is the award of nominal damages. Nor is the award of
nominal damages in addition to actual damages tenable.

(2) Effect of Granting Compensatory and Exemplary Dam-

ages
If compensatory and exemplary damages have been ex-
emplary damages have been awarded, this award is by itself a
judicial recognition that the plaintiff’s right has been violated.
Therefore, a further award, this time of nominal damages, is
unnecessary and improper. (Meding, et al. v. Cresencia, et al.,
L-8194, Jul. 11, 1956). It should be remembered that nominal
damages are merely for the VINDICATION of a right that
has been violated, not for indemnification of the loss suffered.
(Ventanilla v. Centeno, L-14333, Jan. 28, 1961).

Sumalpong v. CA
GR 123404, Feb. 26,1997
79 SCAD 969

FACTS: Some species of injury have been caused to

complainant because of the medical expenses he has incurred
in having his wounds treated, and the loss of income due to
his failure to work during his hospitalization.

1340
CIVIL CODE OF THE PHILIPPINES Art. 2221

ISSUE: In the absence of competent proof of the amount

of actual damages, is the complainant entitled only to nominal
damages?
HELD: Yes. Whenever there has been a violation of an
ascertained legal right, although no actual damages resulted
or none are shown, the award of nominal damages is proper.
Nominal damages are adjudicated in order that a right of
the plaintiff, which has violated or invaded by the defendant,
may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him.

Philippine Telegraph & Telephone Corp.

& Louie Cabalit v. CA & Lolita Sipe Escoro
GR 139268, Sep. 3, 2002

FACTS: Petitioner PT&T, for a fee, undertook to send

private respondent two telegraphic money orders in the sum
of P3,000. Petitioner, however, failed to deliver the money to
respondent immediately after the money order was transmitted
to its Cubao branch. It was almost two months from transmitted
that respondent was finally able to have her money. Issue: For
the violation of the right of private respondent to receive timely
delivery of the money transmitted thru petitioner corporation,
is an award of nominal damages appropriate?
HELD: Yes. An amount of P20,000 by way of nominal
damages, considering all that private respondent has had to go
thru, is reasonable and fair. “Nominal damages are adjudicated
in order that a right of the plaintiff, which has been violated
or invaded by the defendant, may be vindicated or recognized
and not for the purpose of indemnifying the plaintiff for any
loss suffered by him.” (Art. 2221, Civil Code). (Sumalpong v.
CA, 268 SCRA 764). Nominal damages may be awarded in
every obligation arising from any source enumerated in Art.
1157 or, generally, in every case where property right is in-
vaded.

(3) Liability of a Negligent Lawyer

A lawyer who thru negligence fails to deposit on time
the appeal bond, and to file the record of appeal within the
extension period (asked for by him) and granted by the Court,

1341
Arts. 2222-2224 CIVIL CODE OF THE PHILIPPINES

while not liable for actual damages, may nevertheless be liable

for nominal damages. This is discretionary on the part of the
Court. (Ventanilla v. Centeno, L-14333, Jan. 28, 1961).

Art. 2222. The court may award nominal damages in

every obligation arising from any source enumerated in
Article 1157, or in every case where any property right has
been invaded.

COMMENT:
When Nominal Damages May Be Awarded
The assessment of nominal damages is left to the discre-
tion of the court, according to the circumstances of the case.
(Ventanilla v. Gregorio Centeno, L-14333, Jan. 28, 1961). An
award of nominal damages precludes the recovery of actual,
moral, temperate, or moderate damages. (Ibid.).

Dee Hua Liong Electrical Equipment

Corp. v. Reyes
GR 72182, Nov. 25, 1986
Nominal damages may be awarded, although plaintiff is
not entitled to actual, moral, or exemplary damages.

Art. 2223. The adjudication of nominal damages shall

preclude further contest upon the right involved and all
accessory questions, as between the parties to the suit, or
their respective heirs and assigns.

COMMENT:
Effect of Granting Nominal Damages
The Article explains itself.

Section 3
TEMPERATE OR MODERATE DAMAGES

Art. 2224. Temperate or moderate damages, which are

more than nominal but less than compensatory damages,
may be recovered when the court finds that some pecuni-

1342
CIVIL CODE OF THE PHILIPPINES Art. 2224

ary loss has been suffered but its amount can not, from the
nature of the case, be proved with certainty.

COMMENT:
(1) Reason for allowing Temperate or Moderate Damages
“In some States of the American union, temperate dam-
ages are allowed. There are cases where from the nature of
the case, definite proof of pecuniary loss cannot be offered,
although the court is convinced that there has been such
loss. For instance, injury to one’s commercial credit or to the
goodwill of a business firm is often hard to show with cer-
tainty in terms of money. Should damages be denied for that
reason? The judge should be empowered to calculate moderate
damages in such cases, rather than that the plaintiff should
suffer, without redress, from the defendant’s wrongful act.”
(Report of the Code Commission, p. 75).

(2) Suffering of Some Pecuniary Loss

It is imperative under Art. 2224 that “some pecuniary loss
has been suffered” (though uncertain); otherwise, temperate
damages cannot be recovered. (See Victorino, et al. v. Nora
[C.A.] 52 O.G. 911). As long, however, as there has been an
injury (such as a physical injury) the fact that the same is
incapable of pecuniary estimation does not preclude the right
to an indemnity. Here the judge may calculate moderate dam-
ages. (Necesito v. Paras, 104 Phil. 75).

(3) Cases

Consolidated Plywood Industries, Inc., et al. v.

CA, et al.
GR 101706, Sep. 23, 1992
In the case at bar, there was no showing nor proof that
petitioner was entitled to an award of this kind of damages
in addition to the actual damages it suffered as a direct con-
sequence of private respondents’ act.
The nature of the contract between the parties is such
that damages which the innocent party may have incurred
can be substantiated by evidence.

1343
Arts. 2225-2226 CIVIL CODE OF THE PHILIPPINES

Ramos v. CA
GR 124354, Apr. 11, 2002

The amount of damages which should be awarded, if they

are to adequately and correctly respond to the injury caused,
should be one which compensates for pecuniary loss incurred
and proved, up to the time of trial, and one which would
meet pecuniary loss certain to be suffered but which could
not, from the nature of the case, be made with certainty.
Temperate damages can and should be awarded on top
of actual or compensatory damages in instances where the
injury is chronic and continuing. And because of the unique
nature of such cases, no incompatibility arises when both
actual and temperate damages are provided for. The reason
is that these damages cover two distinct phases.
As it would not be equitable — and certainly not in
the best interests of the administration of justice — for the
victim in such cases to constantly come before the courts and
invoke their aid in seeking adjustments to the compensatory
damages previously awarded — temperate damages are ap-
propriate. The amount given as temperate damages, though
to a certain extent speculative, should take into account the
cost of proper care.

Art. 2225. Temperate damages must be reasonable under

the circumstances.

COMMENT:
Reasonable Temperate Damages
What is reasonable is a question of fact, depending on
the relevant circumstances.

Section 4
LIQUIDATED DAMAGES

Art. 2226. Liquidated damages are those agreed upon

by the parties to a contract, to be paid in case of breach
thereof.

1344
CIVIL CODE OF THE PHILIPPINES Arts. 2227-2228

COMMENT:
Nature of Liquidated Damages
In effect, “liquidated damages” and “penalty” are the same.
Neither requires proof of actual damages. (Lambert v. Fox, 26
Phil. 588). After all, they had been previously agreed upon.

Art. 2227. Liquidated damages, whether intended as an

indemnity or a penalty, shall be equitably reduced if they
are iniquitous or unconscionable.

COMMENT:
(1) Equitable Reduction of Liquidated Damages
The reason is that in both, the stipulation is contra
bonos mores. It is a mere technicality to refuse to lessen the
damages to their just amount simply because the stipulation
is not meant to be a penalty. An immoral stipulation is none-
theless immoral because it is called an indemnity. (Report of
the Code Commission, p. 75).

(2) Effect of Partial or Irregular Performance

Under Art. 2227, liquidated damages shall be reduced
if iniquitous or unconscionable. Now then, suppose there
has been partial or irregular performance, can there also be
reduction?
HELD: Yes, because the fundamental rules governing
“liquidated damages” and “a penalty clause” are the same.
Moreover, the liquidated damages are presumed to be only
for a total breach. Therefore, if out of 500 television sets to
be delivered, 63 only are given, there can be a reduction in
the amount of liquidated damages. (Joe’s Electrical Supply v.
Alto Electronics, L-12376, Aug. 22, 1958).

Art. 2228. When the breach of the contract committed

by the defendant is not the one contemplated by the parties
in agreeing upon the liquidated damages, the law shall de-
termine the measure of damages, and not the stipulation.

1345
Art. 2229 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Rule if Breach Was Not Contemplated in the Agreement
on Liquidated Damages
The Article explains itself.

Section 5
EXEMPLARY OR CORRECTIVE DAMAGES

Art. 2229. Exemplary or corrective damages are imposed,

by way of example or correction for the public good, in ad-
dition to the moral, temperate, liquidated or compensatory
damages.

COMMENT:
(1) Reason for Imposing Exemplary or Corrective Damages
Although in the United States exemplary damages are
also called “punitive” damages, still the term “corrective” is
in harmony with the modern theory of penology.
Exemplary damages are required by public policy for
wanton acts must be suppressed. They are an antidote so
that the poison of wickedness may not run through the body
politic. (Report of the Code Com., pp. 75-76).
In the absence of moral, temperate, liquidated, or com-
pensatory damages, no exemplary damages can be granted, for
exemplary damages are allowed only in ADDITION to any of
the four kinds of damages mentioned. (Ventanilla v. Centeno,
L-14333, Jan. 28, 1961; Fores v. Miranda, 105 Phil. 266 and
Francisco v. GSIS, L-18155, Mar. 30, 1963). It is advisable
to specifically ask in the complaint for exemplary damages
(in the proper cases), but the general prayer in the complaint
for “other remedies which may be just and equitable in the
premises” can allow, if warranted, the grant of exemplary
damages. (See Darang v. Belizor, L-19487, Jan. 31, 1967).

Guilatco v. City of Dagupan and CA

GR 61516, Mar. 21, 1989
To serve as an example for the public good, it is high
time that the court should serve warning to the city or cities

1346
CIVIL CODE OF THE PHILIPPINES Art. 2229

concerned to be more conscious of their duty and responsibil-

ity to their constituents, especially when they are engaged
in construction work or when there are manholes on their
sidewalks or streets which are uncovered, to immediately
cover the same, in order to minimize or prevent accidents to
the poor pedestrians.
Too often in the zeal to put up “public impact” projects
such as beautification drives, the end is more important than
the manner in which the work is carried out. Because of this
obsession for showing off, such trivial details as misplaced
flower pots betray the careless execution of the projects, caus-
ing public inconvenience and inviting accidents.

Prudenciado v. Alliance Transport System, Inc.

GR 33836, Mar. 16, 1987

The rationale behind exemplary or corrective damages

is to provide an example or correction for the public good.
A driver running at full speed on a rainy day, on a slip-
pery road in complete disregard of the hazards to life and limb
of other people cannot be said to be acting on anything less
than gross negligence. The frequent incidence of accidents of
this nature caused by taxi drivers, indeed, demands corrective
measures.

(2) Examples of Exemplary Damages

(a) Exemplary damages were imposed against a corporation
which persisted in oppressively invading another’s rights
despite “cease and desist orders” from the Public Service
Commission. This imposition of exemplary damages would
be a reminder that economic power will never justify a
reckless disregard of the rights of others. (Castro, et al.
v. Ice and Cold Storage Industries, et al., L-10147, Dec.
27, 1958).
(b) A victim shot in the jaw by the minor son of the defend-
ant with the father’s gun was given an award of P18,000.
The Court said that this will remind licensed posses-
sors of firearms of their peremptory duty to adequately
safeguard such dangerous weapons at all times, and to

1347
Art. 2229 CIVIL CODE OF THE PHILIPPINES

take all requisite measures to prevent minors and other

unauthorized parties from having access thereto. Moreo-
ver, competent observers have recently called attention
to the fact that the growing teenage hooliganism in our
society is principally due to parent’s complacency in and
neglect of their progeny. (Araneta, et al. v. Arreglado, et
al., 104 Phil. 529).
(c) Exemplary damages in the amount of P2,000 was awarded
in a case where the overseer of a mango store abused
the confidence of a female customer by subjecting her
to indignities. According to the Court, this bespeaks of
a perverse nature, dangerous to the community. (Dom-
ing-ding and Aranas v. Ng, et al., 103 Phil. 111).
[NOTE: If a mayor in good faith dismisses an em-
ployee although the former was not authorized, exemplary
damages of P2,000 should be considered excessive, and
must be reduced to P1,000. Exemplary damages, in a case
like this, according to the Court, should be imposed only
to curtail the abuses that some public officials are prone
to commit upon coming to power, in utter disregard of
the civil service rules which constitute the only safeguard
of the tenure of office guaranteed by the Constitution.
(Diaz, et al. v. Amante, L-9228, Dec. 26, 1958)].

People v. Erlindo Talo

GR 125542, Oct. 25, 2000

FACTS: Accused-appellant Erlindo Talo was charged

and found guilty of forcible abduction with rape and sen-
tenced to death and to pay complainant Doris Saguindang
the amount of P30,000 as moral damages and costs of
the suit.
HELD: The trial court’s decision was upheld but
the penalty was reduced to reclusion perpetua and with
the damages awarded modified. In accordance with ju-
risprudence (People v. Baid, GR 129667, Jul. 31, 2000;
People v. Dreu, GR 126282, Jun. 20, 2000; and People
v. Licanda, GR 134084, May 4, 2000), complainant
Saguindang must be paid P50,000 as civil indemnity,
P50,000 as moral damages, and the additional amount of

1348
CIVIL CODE OF THE PHILIPPINES Art. 2229

P25,000 as exemplary damages, in view of the attendance

of aggravating circumstances, pursuant to Art. 2229 of
the Civil Code. (See People v. Santos, GR 131103, and
143472, Jun. 29, 2000).
(d) If an employee commits a wrongful act, may his employer
be required to pay exemplary damages? NO, except inso-
far as said employer had participated in or ratified the
act. The rule is that exemplary damages are imposed
primarily on the wrongdoer as a deterrent in the com-
mission of similar acts in the future. Since exemplary
damages are penal in character, the motive authorizing
their infliction will not be imputed by presumption to
the principal when the act is committed by an agent
or servant. Inasmuch as they are granted not by way
of compensation, but as a punishment to the offender
and as a warning to others, they can only be awarded
against one who has participated in the offense and the
principal therefore cannot be held liable for them merely
by reason of wanton, oppressive, or malicious intent on
the part of the agent. Moreover in this jurisdiction, in
case of crimes, exemplary damages may be imposed only
when the crime is committed with one or more aggravat-
ing circumstances. (Art. 2230, Civil Code and Rotea v.
Halili, L-1203, Sep. 30, 1960).

Phoenix Construction, Inc. v. IAC

GR 65295, Mar. 10, 1987
In a suit for damages arising from a quasi-delict
where the plaintiff’s negligence was contributory, the
demands of substantial justice may be satisfied by allo-
cating most of the damages (compensatory, moral, lucro
cesante on a 20-80 ratio). Thus, 20% of the damage.
awarded by the appellate court, except the award of
P10,000 as exemplary damages and P4,500 as attorney’s
fees and costs, shall be borne by defendant driver. Only
the balance of 80% needs to be paid by the driver and
his employer who shall be solidarily liable therefor to
the plaintiff. The award of exemplary damages shall be
borne exclusively by the defendants. The employer, of
course, is entitled to reimbursement from the driver.

1349
Art. 2229 CIVIL CODE OF THE PHILIPPINES

(3) Proper Court

If the amount of exemplary damages is NOT specific the
court can grant same only in an amount that should NOT
exceed its jurisdiction. (Singson, et al. v. Aragon, et al., 92
Phil. 514).

(4) Effect of Granting Exemplary Damages on a Claim for

Nominal Damages
If exemplary damages are granted, nominal damages
can not be given. (Medina, et al. v. Cresencia, et al., L-8194,
Jul. 11, 1956).

(5) Cases

Pan American World Airways, Inc.

v. IAC, et al.
L-74442, Aug. 31, 1987

A contract to transport passengers is quite different in

kind and degree from any other contractual relation. And this
is because of the relation which an air carrier sustains with
the public. Its business is mainly with the travelling public.
It invites people to avail of the comforts and advantages it
offers. The contract of carriage, therefore, generates a rela-
tion attended with a public duty. Neglect or malfeasance of
the carrier’s employees, naturally, could give ground for an
action for damages.
By not allowing Ms. Teofista P. Tinitigan to board Flight
431 on April 29, 1973, plaintiff was not able to sign a contract
with Mrs. Lilibeth Warner who had earlier placed an order
for a sizeable number of “capiz” shells in which transaction
Ms. Tinitigan expected to derive a profit of US$1,000. Ms.
Tinitigan had to return to the Hotel El Embajador from the
aircraft costing her US$20. She had to pay for additional
accommodations in said hotel for US$26.15 and the damage
to her personal property amounted to US$600. The carrier,
Pan American World Airways, Inc. should be held liable to
Ms. Tinitigan in the amount of US$1,646.15 or its equivalent
in Philippine currency at the present rate of exchange as
actual or compensatory damages. Pan Am having breached

1350
CIVIL CODE OF THE PHILIPPINES Art. 2229

its contract with Ms. Tinitigan in bad faith, it is not error

for the trial court to have awarded exemplary damages. The
rationale behind exemplary or corrective damages is, as the
name implies, to provide an example or correction for public
good. In view of its nature, it should be imposed in such
amount as to sufficiently and effectively deter similar breach
of contract in the future by Pan Am and other airlines.

Arturo de Guzman v. NLRC

GR 90856, Jul. 23, 1992
When moral damages are awarded, exemplary damages
may also be decreed. Exemplary damages are imposed by way
of example or correction for the public good, in addition to
moral, temperate, liquidated or compensatory damages.
According to the Code Commission, “exemplary damages
are required by public policy, for wanton acts must be sup-
pressed. They are an antidote so that the poison of wickedness
may not run through the body politic.” These damages are
legally assessible against him.

Sociedad Europea de Financiacion,

S.A., et al. v. Court of Appeals
GR 75787, Jan. 21, 1991

FACTS: Muñoz, representing a New York business

firm, Carum Trading, Inc. gave Rocha US$40,000 to open
an insurance company in the Philippines. With the money,
Rocha organized the Capital Insurance. Under Rocha’s direc-
tion, the company prospered. A sister corporation, Capital
Life, was later set up by Rocha. In 1958, Rocha transferred
all the Capital Insurance shares to Carum Trading. Garrido
replaced Rocha in the insurance corporation. Effective control
over Capital Insurance then passed to the hands of Socie-
dad Europea de Financiacion (SEF). Garrido exercised that
control, and was named General Manager of the insurance
firms. He also served as director of the companies, together
with Muñoz, Amat, Araneta and Gamboa. In 1966, Garrido
and Araneta proposed to the Board of Directors that Capital
Insurance obtain a loan of P600,000 from progressive Bank,
so that a better financial position could be projected when

1351
Art. 2229 CIVIL CODE OF THE PHILIPPINES

renewal was sought of the license of its sister corporation

Capital Life. Security of the loan would consist of the SEF
shares in Capital Insurance. Garrido and Araneta also gave
assurance that the loan will not be used and would instead
be placed on time deposit in Progressive Bank. The assurance
was of considerable weight since Progressive was owned by
Araneta and his family, and Garrido was himself a director
thereof. The Board approved the arrangement and the loan
was obtained with maturity of 90 days and interest at 11%
per annum. The money was deposited in favor of Capital
Life. In 1966, Garrido, as Capital Life President, executed a
deed assigning to Progressive all the rights of Capital Life
in said time deposit and granted Progressive full control of
the deposit of P600,000. On the pretext that the loan was
unpaid, Progressive caused the foreclosure of the pledged SEF
shares and its sale at public auction through a notary public,
resulting in said shares being auctioned off to Progressive.
SEF, Muñoz and Amat filed a derivative suit against Garrido,
Araneta and Progressive. They sued in their own behalf and
in behalf of Capital Insurance and prayed for annulment of
the loan and the accompanying pledge of SEF stock on the
ground of breach of trust on the part of Garrido, Araneta and
the latter’s bank. They also accused Garrido and Araneta of
mismanagement of the corporation and prayed for damages.
The trial court declared the loan and foreclosure null and
void. It ordered the return of the shares to Capital Insurance,
while Garrido, Araneta and Progressive were sentenced to pay
P100,000 as exemplary or corrective damages. The Court of
Appeals affirmed the judgment of the trial court.
HELD: The Supreme Court modified the judgment so as
to increase to P600,000 the exemplary or corrective damage
that Garrido, et al. were sentenced, jointly and severally, and
held that it finds inexplicable, not to say ludicrous, unjust
and inequitable, to hold petitioners liable to the Progressive
Bank for anything on account of the latter’s so-called “acco-
modation loan” of P600,000, considering that: (1) the proceeds
of the loan were immediately placed on time deposit with
the same lending institution; (2) a day after its placement,
the time deposit was assigned to the same Bank, together
with all rights to the interest thereon, full control of the

1352
CIVIL CODE OF THE PHILIPPINES Art. 2229

deposit being given to said Bank until the accommodation

loan was fully paid; (3) the Bank was at no time under any
risk whatsoever, for an “accommodation” that it could recall
at its pleasure because it retained total control of the loan
proceeds under time deposit with it; (4) while retaining full
disposition of the amount fictitiously loaned, said Bank re-
served and did exercise rights proper and appropriate only
to the lender under a genuine forbearance, such as charging
interests and later, even foreclosing on the security for alleged
nonpayment; there is no evidence that it ever set off interests
on the loan with interests that the time deposit should justly
have earned, only fair arrangement in the circumstances; (5)
as found by the trial court and affirmed by the Court of Ap-
peals, the loan and accompanying pledge were simulated and
the bank was a party to the simulation. The Court feels that
the award of P100,000 in exemplary or corrective damages
lets the respondents off too lightly for the part they played
in this affair. Both the trial court and the Court of Appeals
found that the defendants had concocted a scheme “to divest
SEF of its interests in capital insurance and for themselves
to own the controlling interest therein,” and carried out that
illicit objective. Said award of damages should be increased
to P600,000.

Northwest Airlines v. Dr. Jaime F. Laya

GR 145956, May 29, 2002

FACTS: Respondent Dr. Jaime F. Laya, a medical prac-

titioner, was bound for San Francisco via a first class booking
with Northwest Airlines (NWA). After his luggage passed and
was cleared thru the x-ray machine of the Ninoy Aquino In-
ternational Airport (NAIA). Laya proceeded to NWA’s check-in
counter and was issued a boarding pass. However, while on
his way requested to proceed to a long table where passengers
were lined up. There, the passenger’s Samsonite hand-carried
attaché cases were being subjected to further inspection. Since
he noticed that he was carrying an attaché case similar to those
being inspected, Laya acceded to the request.
In the course of the inspection, however, Laya noticed
that his attaché case was treated differently. While the other
passengers were eventually allowed to carry their cases on

1353
Art. 2229 CIVIL CODE OF THE PHILIPPINES

board the plane, he was asked to place his attaché case in

a black garbage bag for which he was handed two paper
envelopes where he could put its contents. Laya felt that he
was singled out for this extraordinary treatment. His situa-
tion was aggravated when the envelopes turned out to be too
fragile for the contents of his attaché case. The envelopes were
eventually torn. Laya asked for a replacement and provided
with a used Duty-Free bag.
On May 25, 1991, Laya wrote to NWA and reported the
rude treatment accorded him by its personnel. An exchange of
communication ensued but NWA did not heed his complaint.
On Oct. 31, 1991, he filed a complaint for damages against
NWA before Br. 84 of RTC QC. After trial, judgment was
rendered in favor of Laya, and against NWA. Both parties
appealed the decision. NWA appealed the unfavorable ruling
against it while Laya appealed the award in his favor of only
P1 million as moral damages and P500,000 exemplary dam-
ages. In its decision, promulgated on Aug. 16, 2000, the Court
of Appeals (CA) affirmed the trial court with modifications by
reducing the award of moral damages to P500,000 and the
exemplary damages to P250,000.
Its motion for reconsideration having been denied, NWA
went to the Supreme Court for relief, alleging the CA: (1)
gravely erred in ruling that respondent is entitled to the award
of damages, and (2) not ruling that the lower court erred in
finding that the United States Federal Airation Administra-
tion (FAA) Security Directive 91-11 is unreasonable and did
not coincide with the carrier’s promise of polite and gracious
service.
HELD: The Supreme Court is convinced that Laya suf-
fered mental anguish and serious anxiety because of his expe-
rience with NWA personnel for which he should be awarded
moral damages. He is also entitled to exemplary damages by
way of correction to the NWA for the public good (Art. 2229,
Civil Code) and in view of the malevolent manner by which
the NWA personnel treated him. Damages are not intended
to enrich a plaintiff at the expense of the defendant (See
Philtranco Services, Inc. v. CA, 273 SCRA 562 [1987]), hence,
the Court is further reducing the award of moral damages
form P500,000 to P100,000 and the amount of exemplary

1354
CIVIL CODE OF THE PHILIPPINES Art. 2229

damages is reduced from P250,000 to P50,000. The Court

likewise awards attorney’s fees in the amount of P25,000.
(Art. 2208, Civil Code).
On the other point raised in the instant case, the Supreme
Court opined that the tragic event that unfolded on Sept. 11,
2001 underscores, more than ever, that airport and airline
personnel cannot afford any lapse in the implementation of
security measures mean to ensure the safety of airplane crew
and passengers. Airline carriers hold the lives of passengers
in their hands and they must at all times be vigilant on mat-
ters affecting their safety.
After a careful review of the records of this case, the
Court finds that the security procedures adopted issued by
the NWA was only the result of a directive issued by the FAA
of which the NWA, being a U.S. carrier, is subject to FAA
Security Directive 91-11, which was in effect at the time of
the incident. Thus, on the action required by U.S. Air Car-
riers the following procedures, in part, shall be applied to
all hardshell black, brown, or burgundy samsonite briefcase
by all U.S. air carrier on flights departing Asia, Africa, and
Europe. All black, brown, or burgundy Samsonite briefcases
shall only be transported as check baggage. The air carrier
shall deny the passenger any access to the briefcase after it
has been tendered until the briefcase is claimed by the pas-
senger upon arrival at destination. Following the application
of the procedures above, the briefcase, shall be transported
as checked baggage. However, the contents of the briefcase
may be returned to the passenger for personal use aboard
the flight.
It may be true that Laya was greatly inconvenienced by
the act of the NWA when his attaché case was subjected to
further inspection and not allowed to bring it on board the
plane. Nevertheless, while the protection of passengers must
take precedence over convenience, the implementation of
security measures must be attended by basic courtesies. The
Court is inclined to believe the testimony of Laya that the
personnel who examined his attaché case were rude, brusque,
arrogant, and domineering. On this score, the Supreme Court
agrees with the trial court and the CA in stating that “[a]ny
security measure must coincide with the passenger’s right to

1355
Arts. 2230-2232 CIVIL CODE OF THE PHILIPPINES

be treated by the carrier with kindness, respect, and utmost

consideration in all matters relative to his trip.”

Art. 2230. In criminal offenses, exemplary damages as

a part of the civil liability may be imposed when the crime
was committed with one or more aggravating circumstances.
Such damages are separate and distinct from fines and shall
be paid to the offended party.

COMMENT:
Exemplary Damages in Criminal Offenses
If a driver, in a criminal case, is convicted and made
civilly liable, but exemplary damages are NOT IMPOSED,
the employer cannot in a subsequent case brought to recover
subsidiary civil liability against him — be made liable for
exemplary damages. As Justice JBL Reyes has aptly pointed
out — “No such damages were imposed on the driver, and
the master, as person subsidiarily liable, cannot incur greater
civil liability than his convicted employee, any more than a
guarantor can be held responsible for more than the principal
debtor. (Cf. Civil Code, Art. 2064).” (Vicente Bantoto, et al. v.
Salvador Bobis, et al. & Crispin Vallejo, L-18966, Nov. 22,
1966).

Art. 2231. In quasi-delicts, exemplary damages may be

granted if the defendant acted with gross negligence.

COMMENT:
Exemplary Damages in Quasi-Delicts
Here the defendant must have acted with GROSS NEG-
LIGENCE. And even then, the grant is only discretionary on
the part of the Court.

Art. 2232. In contracts and quasi-contracts, the court

may award exemplary damages if the defendant acted in
a wanton, fraudulent, reckless, oppressive, or malevolent
manner.

1356
CIVIL CODE OF THE PHILIPPINES Art. 2232

COMMENT:

(1) Exemplary Damages in Contracts and Quasi-Con-

tracts
Under Art. 2232, exemplary damages may be awarded in
contracts and quasi-contracts if defendant acts in a wanton,
fraudulent, reckless, oppressive, or malevolent manner. (MOF
Co. v. Enriquez, GR 149280, May 9, 2002).

(2) When Employer Is Also Liable for Exemplary Damages

Lourdes Munsayac v. Benedicta de Lara

L-21151, Jun. 26, 1968
FACTS: A driver of a jeepney was found recklessly negli-
gent in causing injuries to his passenger. Is the owner-operator
of the jeepney liable for exemplary damages (in addition to
other kinds of damages)?
HELD: Not necessarily. A principal or master can be
held liable for exemplary or punitive damages based upon the
wrongful act of his agent or servant only when he participated
in the doing of such wrongful act or has previously authorized
or subsequently ratified it, with full knowledge of the facts.
Exemplary damages punish the intent — and this cannot be
presumed on the part of the employer merely because of the
wanton, oppressive, or malicious intent on the part of the
agent.

Silverio Marchan and Philippine Rabbit Bus

Co., Inc. v. Arsenio Mendoza, et al.
L-24471, Jan. 31, 1969
FACTS: The driver of a common carrier, thru gross or
reckless negligence caused injury to some of the passengers.
Issue: May exemplary or corrective damages be awarded?
HELD: Yes, exemplary damages may be awarded in
contracts and quasi-contracts if the defendant company, thru
its driver, acted in a “wanton, fraudulent, reckless, oppressive
or malevolent manner.” (Art. 2232; see also Laguna-Tayabas
Bus Co. v. Diasanta, L-19882, Jun. 30, 1964).

1357
Arts. 2233-2234 CIVIL CODE OF THE PHILIPPINES

Noda v. Cruz-Arnaldo
GR 67322, Jun. 22, 1987

The insured’s claim or demand for exemplary damages

cannot be sustained if he fails to show that the insurer, in
contesting payment, had acted in a wanton, oppressive or
malevolent manner to warrant the imposition of corrective
damages.

Art. 2233. Exemplary damages cannot be recovered as

a matter of right; the court will decide whether or not they
should be adjudicated.

COMMENT:
Exemplary Damages Not a Matter of Right
The grant is discretionary. Be it noted, however, that in
the Court’s discretion, the same may be granted even if not
expressly pleaded or prayed for. (See Singson v. Aragon, 92
Phil. 514).

Isabelita Vital-Gozon v.
CA & Alejandro dela Fuente
GR 129132, Jul. 8, 1998
Under Art. 2233, exemplary damages cannot be recovered
as a matter of right; the court will decide whether or not they
should be adjudicated.
Considering that a public official is the culprit here, the
propriety of such an award cannot be questioned. It serves
as an example or deterrent so that other public officials be
always reminded that they are public servants bound to ad-
here faithfully to the constitutional injunction that a public
office is a public trust. That the aggrieved party happened to
be another public official will not serve to mitigate the effects
of petitioner’s having failed to observe the required degree of
accountability and responsibility.

Art. 2234. While the amount of the exemplary damages

need not be proved, the plaintiff must show that he is en-
titled to moral, temperate or compensatory damages before

1358
CIVIL CODE OF THE PHILIPPINES Art. 2234

the court may consider the question of whether or not

exemplary damages should be awarded. In case liquidated
damages have been agreed upon, although no proof of loss
is necessary in order that such liquidated damages may be
recovered, nevertheless, before the court may consider the
question of granting exemplary in addition to the liquidated
damages, the plaintiff must show that he would be entitled
to moral, temperate or compensatory damages were it not
for the stipulation for liquidated damages.

COMMENT:
(1) Amount of Exemplary Damages Need Not Be Proved
Exemplary damages need NOT be alleged and proved
(Singson, et al. v. Aragon, et al., 92 Phil. 514) but note the
conditio sine qua non in the article.

(2) Culpa Contractual

In a case of culpa contractual, while diligence of a good
father of a family in selecting and supervising employees is
NOT a proper or complete defense for the employer, still it
is important that such damages be shown or proved: firstly,
because the damages may be mitigated or decreased; and
secondly, because if this diligence be not shown, exemplary
damages may be charged against the employer. (See Villa Rey
Transit v. Bello, L-18957, Apr. 23, 1963).

(3) Case

Philippine National Bank v. CA, Spouses Antonio

So Hu & Soledad del Rosario and Spouses
Mateo Cruz & Carlita Ronquillo
GR 126908, Jan. 16, 2003

FACTS: Spouses So Hu have not sufficiently proved that

PNB acted maliciously and in bad faith when it foreclosed the
property. On the contrary, PNB believed, although mistakenly,
that it still had an unpaid claim for which the property stood
as a security.

1359
Art. 2235 CIVIL CODE OF THE PHILIPPINES

HELD: Records do not support any basis for awarding

moral damages to private respondents, spouses So Hu. Such
damages, to be recoverable, must be the proximate result
of a wrongful act or omission the factual basis for which is
satisfactorily established by the aggrieved party. (Expertravel
& Tours, Inc. v. CA, 309 SCRA 141 [1991]).

Art. 2235. A stipulation whereby exemplary damages

are renounced in advance shall be null and void.

COMMENT:
The Renouncing in Advance of Exemplary Damages
This renouncing is NULL and VOID.

1360
CIVIL CODE OF THE PHILIPPINES

TITLE XIX
CONCURRENCE AND PREFERENCE
OF CREDITS
Chapter 1
GENERAL PROVISIONS

Introductory Comment (Features of the Title)

“The title on ‘Concurrence and Preference of Credits’
characterized by four (4) features:
(1) the liens and mortgages with respect to specific movable
and immovable property have been increased;
(2) the proposed Civil Code and the Insolvency Law have
been brought into harmony;
(3) preferred claims as to the free property of the insolvent
have also been augmented; and
(4) the order of the preference laid down in articles 1926
and 1927 of the Civil Code, among claims with respect to
specific personal and real property, has been abolished,
except that taxes must first be satisfied.” (Report of the
Code Commission, pp. 163-164).

Art. 2236. The debtor is liable with all his property,

present and future, for the fulfillment of his obligations,
subject to the exemptions provided by law.

COMMENT:
(1) What Creditor Can Do if Debtor Has NO Money
If a debtor has no money, what can the creditor do to
collect the credit?

1361
Art. 2236 CIVIL CODE OF THE PHILIPPINES

ANS.:
(a) attach properties not exempt from attachment, forced
sale, or execution
(b) exercise accion subrogatoria (the right to exercise all
rights and actions except those inherent in the person)
(c) exercise accion pauliana (impugn or rescind acts or
contracts done by the debtor to defraud the creditors).
(Art. 1177; see Arts. 1380 to 1389).
(d) in certain cases ask for datio in solutom, cession (assign-
ment in favor of creditors), file insolvency proceedings
(provided all the requisite conditions are present)
(e) wait till the debtor has money or property in the future
(after all, liability is with present and future property).
[NOTE: The obligations must already be DUE.
(Jacinto v. De Leon, 5 Phil. 992).]

(2) Examples of Properties Exempt from Attachment

(a) the family home except in certain cases. (Art. 155, Fam-
ily Code).
(b) the right to support, annuities, pensions (in certain in-
stances).
(c) property in custodia legis. (Springer v. Odlin, 3 Phil.
348).
(d) properties of a municipal corporation used for govern-
mental purposes. (Viuda de Tan Toco v. Mun. Council
of Iloilo, 49 Phil. 52).
(e) in certain cases, homesteads acquired under the Public
Land Act. (See Beach v. PCC & Sheriff, 49 Phil. 365).
(f) those mentioned in Rule 39, Sec. 13, Rules of Court.

(3) Case

DBP v. Minister of Labor

GR 75801, Mar. 20, 1991
FACTS: The Samahan, in representation of its 1,000
members, filed a complaint against Riverside Mills Corporation

1362
CIVIL CODE OF THE PHILIPPINES Art. 2237

for non-payment of Presidential Decree 1713’s P1.00 daily wage

increase and P60 monthly emergency cost of living allowance
with the Ministry of Labor. The MOLE ordered Riverside to
pay the complainant-Samahan additional mandatory ECOLA
of P60 a month and P1.00 increase in the minimum wage,
retroactive as of August 1981. Thereafter, the balance of the
judgment award was computed at P3.3 million. It appears
that the Development Bank of the Philippines had instituted
extrajudicial foreclosure proceedings as early as 1983 on the
properties and other assets of Riverside, as a result of the
latter’s failure to meet its obligations on the loan it had pre-
viously secured from DBP. Thereafter, Samahan sought to
enforce the decision-award against DBP. A notice of garnish-
ment was served upon DBP for the amount of P3.3 million.
ISSUE: Whether a writ of garnishment may be issued
against the proceeds of Riverside’s properties foreclosed by
DBP and sold to Rosario Textile Mills, by the application of
the worker’s right of preference under Art. 110 of the Labor
Code.
HELD: The Supreme Court set aside the order of the
Ministry of Labor and held that the disputed garnishment of
the money paid by Rosario to DBP corresponding to the partial
installment of the sales price of RMC’s foreclosed properties is
not justified. The authority of the sheriff is limited to money
or properties belonging to the judgment debtor in the labor
case concerned. Hence, when the sheriff garnishes the moneys
paid by the employer (Rosario Textile Mills) to Development
Bank of the Philippines, the sheriff, in effect garnished funds
not belonging to the employer but to the DBP. This is viola-
tive of the basic rule that the power of the court or tribunal
in the execution of its judgment extends only over properties
unquestionably belonging to the judgment debtor. Undoubtedly,
when the sheriff garnished the funds belonging to the Devel-
opment Bank of the Philippines, he exceeded the authority
vested in him in the writ of execution, and when the Deputy
Minister of Labor sustained the same in his order, he acted
with grave abuse of discretion correctible by certiorari.

Art. 2237. Insolvency shall be governed by special laws

insofar as they are not inconsistent with this Code.

1363
Arts. 2238-2239 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Civil Code Superior to Special Laws on Insolvency
(a) In Velayo v. Shell Co. (Phil.) (100 Phil. 187), the Supreme
Court held that while the acts of a creditor who disposes
of his own credit, and not the insolvent’s property, but
in a scheme to remove such property from the possession
and ownership of the insolvent, may not come within the
purview of Sec. 37 of the Insolvency Law which makes
a person coming under it liable for double the value of
the property sought to be disposed of, still said creditor
can be so held liable for such damages under Arts. 2229,
2232, 2142 and 2143.
(b) It is clear under the Article that in case of conflict, it is
the Civil Code that prevails.

Art. 2238. So long as the conjugal partnership or abso-

lute community subsists, its property shall not be among
the assets to be taken possession of by the assignee for the
payment of the insolvent debtor’s obligations, except insofar
as the latter have redounded to the benefit of the family.
If it is the husband who is insolvent, the administration of
the conjugal partnership or absolute community may, by
order of the court, be transferred to the wife or to a third
person other than the assignee.

COMMENT:
Exemption of Properties of the Conjugal Partnership
or of the Absolute Community
The exemption applies provided that:
(a) the conjugal partnership or the absolute community
subsists AND
(b) the obligation did NOT redound to the benefit of the
family.

Art. 2239. If there is property, other than that mentioned

in the preceding article, owned by two or more persons,
one of whom is the insolvent debtor, his undivided share

1364
CIVIL CODE OF THE PHILIPPINES Art. 2240

or interest therein shall be among the assets to be taken

possession of by the assignee for the payment of the insol-
vent debtor’s obligations.

COMMENT:
Rule in Case of Co-Ownership
The undivided share or interest shall be possessed by
the assignee.

Art. 2240. Property held by the insolvent debtor as a

trustee of an express or implied trust, shall be excluded
from the insolvency proceedings.

COMMENT:
Property Held Because of an Express or Implied
Trust
The reason for the exemption is obvious: the trustee is
NOT the owner of the property held. Hence, it should not
respond for the insolvent trustee’s obligations.

1365
 CIVIL CODE OF THE PHILIPPINES

Chapter 2

CLASSIFICATION OF CREDITS

Art. 2241. With reference to specific movable property

of the debtor, the following claims or liens shall be pre-
ferred:
(1) Duties, taxes and fees due thereon to the State or
any subdivision thereof;
(2) Claims arising from misappropriation, breach of
trust, or malfeasance by public officials committed in the
performance of their duties, on the movables, money or
securities obtained by them;
(3) Claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the debtor,
up to the value of the same; and if the movable has been resold
by the debtor and the price is still unpaid, the lien may be en-
forced on the price, this right is not lost by the immobilization
of the thing by destination, provided it has not lost its form,
substance and identity, neither is the right lost by the sale of
the thing together with other property for a lump sum, when
the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the
things pledged are in the hands of the creditor, or those
guaranteed by a chattel mortgage, upon the things pledged
or mortgaged, up to the value thereof;
(5) Credits for the making, repairs, safekeeping or
preservation of personal property, on the movable thus
made, repaired, kept or possessed;
(6) Claims for laborers’ wages, on the goods manufac-
tured or the work done;
(7) For expenses of salvage, upon the goods sal-
vaged;

1366
CIVIL CODE OF THE PHILIPPINES Art. 2241

(8) Credits between the landlord and the tenant, aris-

ing from the contract of tenancy on shares, on the share of
each in the fruits or harvest;
(9) Credits for transportation, upon the goods carried,
for the price of the contract and incidental expenses, until
their delivery and for thirty days thereafter;
(10) Credits for lodging and supplies usually furnished
to travellers by hotel keepers, on the imovables belonging
to the guest as long as such movables are in the hotel, but
not for money loaned to the guests;
(11) Credits for seeds and expenses for cultivation
and harvest advanced to the debtor, upon the fruits har-
vested;
(12) Credits for rent for one year, upon the personal
property of the lessee existing on the immovable leased and
on the fruits of the same, but not on money or instruments of
credit;
(13) Claims in favor of the depositor if the depositary
has wrongfully sold the thing deposited, upon the price of the
sale.
In the foregoing cases, if the movables to which the lien
or preference attaches have been wrongfully taken, the credi-
tor may demand them from any possessor, within thirty days
from the unlawful seizure.

COMMENT:

(1) Credits Over Specific Personal Properties

(a) The order in this Article is NOT important.
(b) What is important is that:
1) those credits which enjoy preference with respect
to specific movables exclude all others to the extent
of the value of the personal property to which the
preference refers (Art. 2246);
2) if there are two or more credits with respect to the
same specific movable property, they shall be satis-

1367
Art. 2241 CIVIL CODE OF THE PHILIPPINES

fied pro rata, after the payment of duties, taxes and

fees due the State or any subdivision thereof. (Art.
2247).
3) Duties, taxes, and fees due the Government enjoy
priority only when they are with reference to a
specific movable property, under Art. 2241(1) of
the new Civil Code, or immovable property, under
Art. 2242(1) of the same Code –– with reference to
the other real and personal property of the debtor,
sometimes referred to as “free property,” the taxes
and assessments due the National Government,
other than those in Arts. 2241(1) and 2242(2) of
the new Civil Code, will come only in ninth place
in the order of preference. (In Re: Petition for As-
sistance in the Liquidation of the Rural Bank of
Bokod [Benguet], Inc., PDIC v. BIR, 511 SCRA 123
[2006]).

(2) Example
Sonia has one car, the taxes on which have not yet
been paid. Once, the car fell into the sea, was salvaged, was
repaired, and has now been pledged with a creditor. If Sonia
is insolvent and has not paid for any of the acts done on her
car, how will the following be paid: the State, the person who
salvaged it, the repairer, and the pledgee?
ANS.:
(a) All said 4 credits have preference over the car to the
exclusion of all other creditors. (Art. 2246).
(b) The State will first be paid for taxes on the car. (Art.
2247).
(c) The salvagor, the repairman, and the pledgee will all be
paid pro rata from the remaining value of the car. (Art.
2247). There is no preference as among them; there is
only a CONCURRENCE.

(3) Nature of the Claims or Credits

The claims or credits enumerated in Art. 2241 are con-
sidered:

1368
CIVIL CODE OF THE PHILIPPINES Art. 2241

(a) pledges of personal property;

(b) or liens within the purview of legal provisions governing
insolvency. (Art. 2243).
[NOTE: As liens, they are considered charges; gen-
erally, unless otherwise stated, they are NOT possessory
liens with the right of retention. (See Graño v. Paredes,
50 Phil. 6).]

(4) Par. 1 — Taxes, etc.

The duties, taxes, and fees referred to are those ON the
specific movable concerned.

(5) Par. 3 — Unpaid Price of Movables SOLD

There are two liens referred to here:
(a) possessory lien (as long as the property is still in the
possession of the debtor)
(b) ordinary lien on the PRICE (not a possessory lien) if the
property has been resold and still unpaid. (See Banco
Español-Filipino v. Peterson, 7 Phil. 409 and Hunter,
Kerr & Co. v. Murray, 48 Phil. 499).

(6) Par. 4 — Pledge or Chattel Mortgage

Under the old law, the Court held that a repairer has
preferential rights over a chattel mortgage of the same prop-
erty; thus, the chattel mortgagee cannot get the property from
the repairer without first paying for the services. (Bachrach
Motor Co. v. Mendoza, 43 Phil. 410; PCC v. Webb and Falcon,
51 Phil. 745 and Phil. Trust Co. v. Smith Navigation Co., 64
Phil. 830).
It would seem, however, that the preference has now
been abolished under Art. 2247 of the Civil Code.

(7) Par. 6 — Laborers’ Wages

(a) This applies only to personal, not to real property. (The
latter is governed by Par. 3 of Art. 2242).

1369
Art. 2242 CIVIL CODE OF THE PHILIPPINES

(b) The laborer must have been employed by the owner of

the goods, not by the contractor who in turn was em-
ployed to do the work. (See Bautista v. Auditor General,
97 Phil. 244).

(8) Last Paragraph — Wrongful Taking

This applies only when the debtor still OWNS the prop-
erty wrongfully taken, not when he has lost ownership over
the same. (See Peña v. Mitchell, 9 Phil. 588).

(9) Case

Ouano v. CA, et al.

GR 95900, Jul. 23, 1992

Art. 667 of the Code of Commerce, the period during

which the lien shall subsist is 20 days, has been modified by
the Civil Code. Article 2241, whereof, provides that credits
for transportation of the goods carried, for the price of the
contract and incidental expenses shall constitute a preferred
claim or lien on the goods carried until their delivery and for
30 days thereafter. During this period, the sale of the goods
may be requested, even though there are other creditors and
even if the shipper or consignee is insolvent. But this right
may not be made use of where the goods have been delivered
and were turned over to a third person without malice on the
part of the third person and for a valuable consideration. In
the present case, the cargo of cement was unloaded from the
vessel and delivered to the consignee on Oct. 3, 1980, without
any oral or written notice or demand having been made on
respondent Supreme Merchant Construction Supply, Inc. for
unpaid freight on the cargo. Consequently, after the lapse of
30 days from the date of delivery, the cargo of cement had
been released from any maritime lien for unpaid freight.

Art. 2242. With reference to specific immovable property

and real rights of the debtor, the following claims, mort-
gages and liens shall be preferred, and shall constitute an
encumbrance on the immovable or real right:

1370
CIVIL CODE OF THE PHILIPPINES Art. 2242

(1) Taxes due upon the land or building;

(2) For the unpaid price of real property sold, upon
the immovable sold;
(3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and contrac-
tors, engaged in the construction, reconstruction or repair
of buildings, canals or other works, upon said buildings,
canals or other works;
(4) Claims of furnishers of materials used in the con-
struction, reconstruction, or repair of buildings, canals and
other works, upon said buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Prop-
erty, upon the real estate mortgaged;
(6) Expenses for the preservation or improvement of
real property when the law authorizes reimbursement, upon
the immovable preserved or improved;
(7) Credits annotated in the Registry of Property, in
virtue of a judicial order, by attachments the executions,
upon the property affected, and only as to later credits;
(8) Claims of co-heirs for warranty in the partition
of an immovable among them, upon the real property thus
divided;
(9) Claims of donors of real property for pecuniary
charges or other conditions imposed upon the donee, upon
the immovable donated;
(10) Credits of insurers, upon the property insured, for
the insurance premium for two years.

COMMENT:
(1) Credits Over Specific Real Properties
Comments Nos. 1 and 2 in the preceding article are ap-
plicable to this article, except that the reference to “movables”
should now apply to “real property or immovables.” (See Arts.
2248 and 2249, Civil Code).

1371
Art. 2242 CIVIL CODE OF THE PHILIPPINES

(2) Concurrence, Not Preference

Again, it must be stressed that with the sole exception
of the State, the creditors with respect to the SAME specific
immovable merely CONCUR; there is NO PREFERENCE.
(See Arts. 2248 and 2249, Civil Code).

(3) Case

Carried Lumber Co. v. ACCFA

L-21836, Apr. 22, 1975

FACTS: The owner of a certain warehouse was

indebted to two persons: the mortgagee thereof, and the
person who furnished materials used in its construction.
There are no other creditors. Is there a need for insol-
vency proceedings?
HELD: There is no need for insolvency proceedings,
because the two credits can be satisfied PRO RATA from
the amount that can be obtained in the foreclosure sale
of the warehouse, applying Arts. 2242 and 2249 of the
Civil Code.

(4) Refectionary Credit

This is a credit for the repair or reconstruction of some-
thing that had previously been made. (See Art. 2242, No. 3).
Ordinarily, an entirely new work is not included, although
Spanish jurisprudence appears to have sanctioned this broader
conception in certain cases. (Director of Public Works v. Sing
Joco, 53 Phil. 205).

(5) Case

Atlantic Erectors, Inc. v. Herbal

Cove Realty Corp.
GR 146568, Mar. 20, 2003
FACTS: Petitioner avers that its money claim on the
cost of labor and materials for the townhouses it constructed
on the respondent’s land is a proper lien that justifies the
annotation of a notice of lis pendens on the land titles. For

1372
CIVIL CODE OF THE PHILIPPINES Art. 2242

petitioner, the money claim constitutes a lien that can be

enforced to secure payment for the said obligations. It argues
that, to preserve the alleged improvement it had made on
the subject land, such annotation on the property titles of
respondent is necessary.
Respondent Herbal Cove, upon the other hand, argues
that the annotation, is bereft of any factual or legal basis,
because petitioner’s complaint does not directly affect the title
to the property, or the use of the possession thereof. It also
claims that petitioner’s complaint did not assert ownership of
the property or any right to possess it. Respondent attacks as
baseless the annotation of the Notice of Lis Pendens thru the
enforcement of a contractor’s lien under Art. 2242. It points
out that the said provision applies only to cases in which
there are several creditors carrying on a legal action against
an insolvent debtor.
Petitioner proceeds on the premise that its money claim
involves the enforcement of a lien and since the money claim
is for the non-payment of materials and labor used in the
construction of townhouses, the lien referred to would have
to be that provided under Art. 2242, which describes a con-
tractor’s lien over an immovable property.
ISSUE: Whether or not money claims representing costs
of materials for and labor on the houses constructed on prop-
erty are a proper lien for annotation of lis pendens on the
property title.
HELD: The pendency of a simple collection suit arising
from the alleged non-payment of construction services, ma-
terials, unrealized income, and damages does not justify the
annotation of a notice of lis pendens on the title to a property
where construction has been done.
A careful examination of petitioner’s complaint, as well
as the relief it seeks, reveals that no such lien or interest over
the property was ever alleged. The complaint merely asked
for the payment of construction services and materials plus
damages, without mentioning — much less asserting — a
lien or an encumbrance over the property. Verily, it was a
purely personal action and a simple collection case. It did

1373
Art. 2243 CIVIL CODE OF THE PHILIPPINES

not contain any material avertment of any enforceable right,

interest or lien in connection with the subject property. As
it is, petitioner’s money claim cannot be characterized as an
action that involves the enforcement of a lien or an encum-
brance, one that would warrant the annotation, of the Notice
of Lis Pendens. Indeed, the nature of an action is determined
by the allegations of the complaint. (Producers Bank of the
Phils. v. Bank of the Philippine Islands, 340 SCRA 87 [2000]
and City of Olongapo v. Stallholders of the East Bajac-Bajac
Public Market of Olongapo City, 343 SCRA 705 [2000]).
Even assuming that petitioner has sufficiently alleged
such lien or encumbrance in its complaint, the annotation of
the Notice of Lis Pendens would still be unjustified, because a
complaint for collection and damages is not the proper mode
of the enforcement of a contractor’s lien.
Clearly then, neither Art. 2242 nor the enforcement of
the lien thereunder is applicable here, because petitioner’s
complaint failed to satisfy the requirement. Nowhere does it
show that respondent’s property was subject to the claims of
other creditors or was insufficient to pay for all concurring
debts. Moreover, the complaint did not pertain to insolvency
proceedings or to any other action in which the adjudication
of claims of preferred creditors could be ascertained.

Art. 2243. The claims or credits enumerated in the

two preceding articles shall be considered as mortgages
or pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency. Taxes
mentioned in No. 1, Article 2241, and No. 1, Article 2242,
shall first be satisfied.

COMMENT:
(1) Nature of the Claims or Credits
They are considered as pledges or mortgages.

(2) Comment of the Code Commission

“The question as to whether the Civil Code and the In-
solvency Law can be harmonized is settled in this article. The

1374
CIVIL CODE OF THE PHILIPPINES Art. 2244

preference named in Arts. 2241 and 2242 are to be enforced

in accordance with the Insolvency Law. Taxes on the specific
property will be paid first.” (Report of the Code Commission, p.
164).

Art. 2244. With reference to other property, real and

personal, of the debtor, the following claims or credits shall
be preferred in the order named:
(1) Proper funeral expenses for the debtor, or children
under his or her parental authority who have no property
of their own, when approved by the court;
(2) Credits for services rendered the insolvent by em-
ployees, laborers, or household helpers for one year preced-
ing the commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or
of his or her spouse and children under his or her parental
authority, if they have no property of their own;
(4) Compensation due the laborers or their dependents
under laws providing for indemnity for damages in cases of
labor accident, or illness resulting from the nature of the
employment;
(5) Credits and advancements made to the debtor for
support of himself or herself, and family, during the last
year preceding the insolvency;
(6) Support during the insolvency proceedings, and
for three months thereafter;
(7) Fines and civil indemnification arising from a
criminal offense;
(8) Legal expenses, and expenses incurred in the ad-
ministration of the insolvent’s estate for the common interest
of the creditors, when properly authorized and approved
by the court;
(9) Taxes and assessments due the national govern-
ment, other than those mentioned in Articles 2241, No. 1,
and 2242, No. 1;

1375
Art. 2244 CIVIL CODE OF THE PHILIPPINES

(10) Taxes and assessments due any province, other

than those mentioned in Articles 2241, No. 1, and 2242, No.
1;
(11) Taxes and assessments due any city or municipal-
ity, other than those mentioned in Articles 2241, No. 1, and
2242, No. 1;
(12) Damages for death or personal injuries caused by
a quasi-delict;
(13) Gifts due to public and private institutions of char-
ity or beneficence;
(14) Credits which, without special privilege, appear
in (a) a public instrument; or (b) in the final judgment, if
they have been the subject of litigation. These credits shall
have preference among themselves in the order of prior-
ity of the dates of the instruments and of the judgments,
respectively.

COMMENT:
(1) Order of Preference in Connection With OTHER Prop-
erties
(a) The order of preference here in Art. 2244 is VERY IM-
PORTANT. (See Art. 2251).
(b)
The order of preference here does not refer to specific
real or personal property. It refers to other property.
(2) Example
A, an insolvent, owes P500,000 in favor of a funeral
parlor, P1 million for the hospital expenses during the cancer
illness of his late wife, and P100,000 in favor of a pedestrian
whom he had hurt while driving his car carelessly and for
which he was held criminally and civilly liable. Unfortunately,
he has only P600,000 and an automobile, the purchase price
of which he has not yet paid. Give the order of preference of
the various creditors involved.
ANS.:
(a) With respect to the automobile specific personal property
the unpaid seller shall be preferred. (Art. 2241).

1376
CIVIL CODE OF THE PHILIPPINES Art. 2244

(b) With respect to the P600,000 Art. 2244 (should be ap-

plied). The funeral parlor comes first, then the hospital,
then the pedestrian. Here there is NO pro rata sharing;
there is a preference. Therefore, the funeral parlor will
be given P500,000; the hospital only P100,000. The hos-
pital cannot recover the deficiency of P900,000; and the
pedestrian cannot recover his P100,000.

(3) Taxes
Note that under Art. 2244, taxes (duties, assessments)
are placed only as Nos. 9, 10, 11. This rule applies to property
other than specific. If the property is specific, taxes are given
first preference. (See Arts. 2243, 2247, 2249).

(4) Re Par. 14 (Ordinary Credits and Final Judgments)

It would seem here that an ordinary credit evidenced by
a public instrument and a final judgment are placed on an
EQUAL PLANE; hence, if both are of the same date, there
will be a pro rata sharing.

(5) Some Decided Cases

Jesus Gigante v. Republic Savings Bank

and Rolando Mallari
L-29696, Nov. 29, 1968
FACTS: A parcel of land located in Caloocan City was
registered in the name of Rolando Mallari, but a house thereon
was in the name of his father, Dominador Mallari (in the tax
assessment rolls of Caloocan City). However, the son, Rolando,
declared the house to be in his name; he presented the tax
declaration in his name, and had the tax declaration by his
father cancelled.
On Apr. 23, 1959, Rolando borrowed P18,000 from the
Republic Bank, with the land and the house as security in the
form of a mortgage; the mortgage was duly registered on Apr.
24, 1959, Rolando failed to pay the loan; the Bank foreclosed
on the mortgaged; the Bank then bought on Jun. 28, 1960
the land and the house, and a Torrens Transfer Certificate
of Title was issued to it on Jul. 5, 1961.

1377
Art. 2244 CIVIL CODE OF THE PHILIPPINES

In the meantime the father, Dominador, had borrowed

from one Jesus Gigante P1,570. And on May 6, 1958, for
failure to pay, Dominador was ordered to give Jesus the sum
borrowed with interest and attorney’s fees. Pursuant to a writ
of execution, the Sheriff levied — on May 29, 1961 — the
house in question. Jesus bought the house at public auction
on Jun. 23, 1961, and asked for a writ of possession. Neither
judgment nor levy nor sale was recorded on the Torrens Title.
The Bank blocked this writ of possession on the ground that
it was already the owner of the land and the house. Jesus,
alleging ownership to the house, now sues the Bank and
Rolando on the ground that the transfer from Dominador
to Rolando was fictitious and void, but Dominador was not
made a party to the suit. Issue: Who should be considered
the owner of the house?
HELD:
(a) The Republic Bank should be considered the owner of
the house (and of the land). Reason: The judgment, levy
and sale in Jesus’ favor is not recorded on the Torrens
Title. Upon the other hand, the Bank’s right is based
on a real estate mortgage duly recorded on Apr. 24,
1959. The Bank’s registered mortgage is thus superior
to both said judgment and levy and sale. By virtue of
the foreclosure sale, the land and the house cannot now
be taken by Jesus. Note that the Bank never acted in
bad faith.
(b) The transfer of the house — alleged to be fictitious and
fraudulent — from Dominador, the father, to Rolando, the
son, cannot prosper — for Dominador, an indispensable
party, is not a party to the present case. Dominador is
entitled to be heard to defend the validity of the transfer
to his son, Rolando.

Reyes v. De Leon
L-22331 Jun. 6, 1967
FACTS: To secure an obligation, a house owner
sold it a retro to X (the evident purpose was to create an
equitable mortgage). This sale a retro was unrecorded.

1378
CIVIL CODE OF THE PHILIPPINES Art. 2244

Later, the owner mortgaged the same property to Y. This

time, the mortgage was registered. Which mortgagee is
preferred?
HELD: The second mortgagee is preferred because
the mortgage in his favor was registered. It would have
been different had the equitable mortgage (in the guise
of the pacto de retro sale) been registered.

Manabat v. Laguna Federation of Facomas

L-23888, Mar. 18, 1967

FACTS: Over a certain real property, several at-

tachments and executions were annotated in the Registry
of Property — the 1st for P17,000; the 2nd for P3,000;
the 3rd for P12,000; and the 4th for P26,000. If a public
sale is made and the property is sold for only P37,000,
who should share in this amount of P37,000?
HELD: It is true that under the New Civil Code,
there is no preference among specific creditors over the
same property (except the government’s preference as
taxes over the specific property involved); instead, there
merely is pro rata concurrence. BUT there is one excep-
tion to this: when there have been attachments and
executions, there is still preference among them in order
of time they were levied upon in the Registry; otherwise,
the advantage of attachments and executions would be
lost by the simple expedient of simply obtaining other
attachments and executions, no matter how much later in
point of time. Therefore, the P37,000 should satisfy first
the first three attachments (total of P32,000). The excess
P5,000 can now be applied to the 4th attachment.

DBP v. Hon. Labor Arbiter

Ariel C. Santos, et al.
GR 78261-62, Mar. 8, 1989
Owing to the fact that a declaration of bankruptcy
or a judicial liquidation must be present before the
worker’s preference may be enforced, such is not con-
fined to the situation contemplated in Arts. 2236-2245

1379
Art. 2245 CIVIL CODE OF THE PHILIPPINES

of the Civil Code, where all the preferred creditors must

necessarily be convened and the import of their claims
ascertained.

Art. 2245. Credits of any other kind or class or by any

other right or title not comprised in the four preceding
articles, shall enjoy no preference.

COMMENT:
All Other Kinds of Credits
No preference — this is the rule indicated for these
credits.

1380
CIVIL CODE OF THE PHILIPPINES

Chapter 3

ORDER OF PREFERENCE OF CREDITS

Art. 2246. Those credits which enjoy preference with

respect to specific movables, exclude all others to the extent
of the value of the personal property to which the prefer-
ence refers.

COMMENT:
Preference of the Credits Over Specific Movables
See comments under Art. 2241.

Art. 2247. If there are two or more credits with respect

to the same specific movable property, they shall be satis-
fied pro rata, after the payment of duties, taxes and fees
due the State or any subdivision thereof.

COMMENT:
Pro Rata Sharing
See comments under Art. 2241.

Art. 2248. Those credits which enjoy preference in re-

lation to specific real property or real rights, exclude all
others to the extent of the value of the immovable or real
right to which the preference refers.

COMMENT:
Preference of the Credits Over Specific Immovables
See comments under Art. 2242.

1381
Arts. 2249-2251 CIVIL CODE OF THE PHILIPPINES

Art. 2249. If there are two or more credits with respect

to the same specific real property or real rights, they shall
be satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real right.

COMMENT:
Pro Rata Sharing
See comments under Art. 2242.

Art. 2250. The excess, if any, after the payment of the

credits which enjoy preference with respect to specific prop-
erty, real or personal, shall be added to the free property
which the debtor may have, for the payment of the other
credits.

COMMENT:
What Should Be Done With the Excess
The Article explains itself.

Art. 2251. Those credits which do not enjoy any pref-

erence with respect to specific property, and those which
enjoy preference, as to the amount not paid, shall be satis-
fied according to the following rules:
(1) In the order established in Article 2244;
(2) Common credits referred to in Article 2946 shall
be paid pro rata regardless of dates.

COMMENT:
Order of Preference
See comments under Art. 2244.

1382
CIVIL CODE OF THE PHILIPPINES

TRANSITIONAL PROVISIONS

Art. 2252. Changes made and new provisions and rules

laid down by this Code which may prejudice or impair vested
or acquired rights in accordance with the old legislation
shall have no retroactive effect.
For the determination of the applicable law in cases
which are not specified elsewhere in this Code, the follow-
ing articles shall be observed.

COMMENT:

(1) Comment of the Code Commission (Re Non-Impairment

of Vested Rights)
“Laws shall have no retroactive effect, unless the contrary
is provided. The question of how far the new Civil Code should
be made applicable to past acts and events is attended with
the utmost difficulty. It is easy enough to understand the
abstract principle that laws have no retroactive effect because
vested or acquired rights should be respected. But what are
vested or acquired rights? The Commission did not venture
to formulate a definition of a vested or acquired right seeing
that the problem is extremely complicated.
“What constitutes a vested or acquired right will be de-
termined by the courts as each particular issue is submitted
to them, by applying the transitional provisions sets forth, and
in case of doubt, by observing Art. 9 governing the silence
or obscurity of the law. In this manner, the Commission is
confident that the judiciary with its enlightenment and high
sense of justice will be able to decide in what cases the new
one should be binding. This course has been preferred by the
Commission, which did not presume to be able to foresee and
adequately provide for each and every question that may rise.”
(Report of the Code Commission, pp. 165-166).

1383
Art. 2252 CIVIL CODE OF THE PHILIPPINES

(2) When Retroactivity Is Allowed

By implication, new provisions of the Code that do not
prejudice vested rights can be given retroactive effect. Ex-
amples are those found in the chapter on Human Relations.
(Velayo v. Shell Co., 100 Phil. 187).

(3) ‘Vested Right’ Defined

In the case of Benguet Consolidated Mining Co. v. Pineda
(L-7231, Mar. 28, 1951), the Supreme Court defined a vested
right as property which has become fixed and established, and
is no longer open to doubt or controversy. “It is an immediately
fixed right of present or future enjoyment.” Rights are “vested”
in contradistinction to being “expectant or contingent.” (See
Balboa v. Farrales, 51 Phil. 498).
Under the Code of Commerce, a “sociedad anonima”
could extend its corporate life; under the Corporation Law,
corporate life cannot be extended beyond the original period;
and said period must not exceed 50 years. Now then, if a “so-
ciedad anonima” organized in 1903 could extend its corporate
existence apparently without limit, could the Corporation Law
passed in 1906 limit its life to 50 years? In the Benguet Case,
the Court held that the answer was in the affirmative, for in
1903, the “sociedad’’ did not have any vested right to have a
life longer than 50 years. The Court said that the prolonga-
tion of corporate existence in 1906 was merely a possibility
in futuro, a contingency that did not fulfill the requirement
of a vested right entitled to constitutional protection.
In said case, it was also held that there can be no vested
interest in any rule of law entitling a person to insist that it
shall remain unchanged for his benefit.

(4) Example of the Non-Impairment of a Vested Right

In Manalansan v. Manalang, et al. (L-13646, Jul. 26,
1960), it was held that Art. 1607 (requiring a judicial order
before the registration of the cobsolidation of ownership in the
vendee a retro for failure to redeem) cannot be applied to a
sale con pacto de retro executed in 1949, for to do so would
impair and diminish the rights that had already vested in
the vendee a retro under the old Code.

1384
CIVIL CODE OF THE PHILIPPINES Art. 2253

Art. 2253. The Civil Code of 1889 and other previous

laws shall govern rights originating, under said laws, from
acts done or events which took place under their regime,
even though this Code may regulate them in a different
manner, or may not recognize them. But if a right should
be declared for the first time in this Code, it shall be ef-
fective at once, even though the act or event which gives
rise thereto may have been done or may have occurred
under the prior legislation, provided said new right does
not prejudice or impair any vested or acquired right, of
the same origin.

COMMENT:

(1) Comment of the Code Commission (When the Old and

the New Codes Apply)
“The first sentence is an application of the fundamental
principle of respect for vested or acquired rights. But the
second sentence gives a retroactive effect to newly created
rights, provided they do not prejudice or impair any vested or
acquired right. The retroactive character of the new right is
the result of the exercise of the sovereign power of legislation,
when the law-making body is persuaded that the new right
is called for by considerations of justice and public policy.
But such new right must not encroach upon a vested right.”
(Report of the Code Commission, p. 167).

(2) Recovery of Damages

Damages recoverable under Art. 21 can be given effect
even if the acts complained of were done before the effective
date of the new Code. (Gatus v. Si Huy, [C.A.] 53 O.G. 866).

(3) Successional Rights

New successional rights cannot be granted if the deceased
died under the old Code, for ownership over the estate is
transferred from the moment of death. Hence, a vested right
was acquired upon such death under the old law. (Uson v.
Del Rosario, et al., 92 Phil. 530).

1385
Arts. 2254-2255 CIVIL CODE OF THE PHILIPPINES

Art. 2254. No vested or acquired right can arise from

acts or omissions which are against the law or which in-
fringe upon the rights of others.

COMMENT:

(1) Comment of the Code Commission (Acts Contrary to

Law)
“It is evident that no one can validly claim any vested
or acquired right if the same is founded upon his having vio-
lated the law or invaded the rights of others. The principle
is universally accepted.” (Report of the Code Commission, p.
167).

(2) Against Whom Prohibition Is Directed

The prohibition referred to in this Article is directed
against the OFFENDER, not the offended party. Hence, if
a husband committed concubinage prior to the effectivity of
the new Civil Code, and an absolute divorce action was filed
also before the new Civil Code, the case can continue now.
The offended party in a sense acquired a vested right to still
prosecute; the offender cannot, however, claim any vested
right. (Raymundo v. Penas, 96 Phil. 311).

Art. 2255. The former laws shall regulate acts and con-
tracts with a condition or period, which were executed or
entered into before the effectivity of this Code, even though
the condition or period may still be pending at the time
this body of laws goes into effect.

COMMENT:
Acts and Contracts With a Condition or Period
(a) The reason for the Article is that the legal relation was
already created, although the condition or period is still
pending. (Report of the Code Commission, p. 167).
(b) Art. 1687 providing for an extension in lease cannot ap-
ply to lease contracts entered into prior to the new Civil

1386
CIVIL CODE OF THE PHILIPPINES Arts. 2256-2257

Code. (Acasio v. Corporacion de los P.P. Dominicos de

Filipinas, 100 Phil. 523).
(c) A sale a retro executed in 1949 is governed by the old
Code, not by the new Civil Code. And this is so even if the
resolutory condition of the repurchase was still pending at
the time the new Civil Code became effective. (Manalansan
v. Manalang, et al., L-13646, Jul. 26, 1960).

Flores and Gallano v. So

L-28527, Jun. 16, 1988

Since the pacto de retro sale executed in Feb., 1950,

before the effectivity of the New Civil Code in Aug. of
1950, was a contract with a resolutory condition, and
the condition was still pending at the time the new law
went into effect, the provisions of the old Civil Code
would still apply.

Art. 2256. Acts and contracts under the regime of the

old laws, if they are valid in accordance therewith, shall
continue to be fully operative as provided in the same, with
the limitations established in these rules. But the revoca-
tion or modification of these acts and contracts after the
beginning of the effectivity of Code, shall be subject to the
provisions of this new body of Laws.

COMMENT:
Revocation and Modification of Acts and Contracts
Reason for the second sentence — “These subsequent acts
being executed after the new legislation has taken effect, the
new requirements must of course be fulfilled.” (Report of the
Code Commission, p. 168).

Art. 2257. Provisions of this Code which attach a civil

sanction or penalty or a deprivation of rights to acts or
omissions which were not penalized by the former laws,
are not applicable to those who, when said laws were in
force, may have executed the acts or incurred in the omis-
sion forbidden or condemned by this Code.

1387
Art. 2257 CIVIL CODE OF THE PHILIPPINES

If the fault is also punished by the previous legislation,

the less severe sanction shall be applied.
If a continuous or repeated act or omission was com-
menced before the beginning of the effectivity of this Code,
and the same subsists or is maintained or repeated after
this body of laws has become operative, the sanction or pen-
alty prescribed in this Code shall be applied, even though
the previous laws may not have provided any sanction or
penalty therefor.

COMMENT:
(1) Comment of the Code Commission (Re: Civil Sanctions
and Penalties)
“The article is just, for penalties and forfeitures with a
retroactive effect cannot be countenanced. The last paragraph
is just, for the reason that when continuous or repeated acts,
though begun before the new Civil Code, extend beyond the
termination of the old Code, the effect of the new body of
laws must necessarily apply to them.” (Report of the Code
Commission, p. 168).

(2) Application of the Less Severe Sanction

Receiver for North Negros Sugar Co.,

Inc. v. Ybañez
L-22183, Aug. 30, 1968

FACTS: In 1937, Cesar V. Ybañez, riding in a car, was

killed in a collision with a train owned by the North Negros
Sugar Company. The mishap having been caused by the
train’s negligence, the Sugar Company was held liable for
actual damages such as lost earnings, death indemnity, and
funeral expenses, and said damages were paid to a brother,
Pedro Ybañez. The brother, however, also asked for MORAL
DAMAGES, because of the mental anguish suffered by him.
Issue: Should said moral damages be granted the brother?
HELD: The accident having taken place in 1937, the old
Civil Code (Art. 1902) should be applied. Under said Article,
apparently any one who suffered, whether he was a relative or

1388
CIVIL CODE OF THE PHILIPPINES Art. 2258

not, and even if the damage was only moral, could recover (in
view of the generality of the Article). In view of the absence of
a precedent in Spanish and Filipino jurisprudence, reference
was made to French decisions of persuasive authority (since
Art. 1383 of the French Civil Code was more or less identical
with Art. 1902 of the old Civil Code). Under French decisions,
under Article 1383 of the French Civil Code, moral damages
were awarded to brothers and sisters, among others. If we
were to stop here, the brother would be entitled to recover
moral damages for the death of the victim. BUT under Art.
2257 of the new Civil Code, if an act is punished both under
the old and the new legislation, the “less severe sanction shall
be applied.”
Now then under Art. 2206 of the new Civil Code, those
who can recover moral damages for DEATH caused by a
crime or quasi-delict includes only the spouse, ascendants
(whether legitimate of illegitimate) and descendants (whether
legitimate or illegitimate); note that brothers and sisters are
NOT INCLUDED. Inasmuch as the new Civil Code is less
severe on this point, it should be applied; hence, the brother
cannot obtain the moral damages sought.

(3) Moral and Exemplary Damages

In the case of Jalandoni v. Martin Guanzon, et al., (54
O.G. 2907), the Court said that the moral and exemplary (cor-
rective) damages allowed under the new Civil Code cannot
be given for acts that occurred prior to the new Civil Code.
The reason is because of their deterrent, punitive character.

Art. 2258. Actions and rights which came into being but
were not exercised before the effectivity of this Code, shall
remain in full force in conformity with the old legislation;
but their exercise, duration and the procedure to enforce
them shall be regulated by this Code and by the Rules of
Court. If the exercise of the right or of the action was com-
menced under the old laws, but is pending on the date this
Code takes effect, and the procedure was different from that
established in this new body of laws, the parties concerned
may choose which method or course to pursue.

1389
Arts. 2259-2261 CIVIL CODE OF THE PHILIPPINES

COMMENT:
Actions and Right Under the Old Law, Whether Exer-
cised or Not
“The article makes the new provisions on the exercise,
duration, and procedure to enforce rights applicable to those
that came into being before the effectivity of the new Code.
In other words, the adjective law whereby such rights are
put into operation is made retroactive. Adjective provisions
may be properly made retroactive according to the principle
accepted in modern legislation. These adjective rules are mere
methods for rendering substantive law effective.” (Report of
the Code Commission, p. 169).

Art. 2259. The capacity of a married woman to execute

acts and contracts, is governed by this Code, even if her
marriage was celebrated under the former laws.

COMMENT:
Capacity of a Married Woman
Note that the new Family Code governs said capacity.
This is true even if the marriage was celebrated under the
old laws.

Art. 2260. The voluntary recognition of a natural child

shall take place according to this Code, even if the child
was born before the effectivity of this body of laws.

COMMENT:
Voluntary Recognition of a Natural Child
The Article explains itself. See the Family Code.

Art. 2261. The exemption prescribed in Article 302 shall

also be applicable to any support, pension or gratuity already
existing or granted before this Code becomes effective.

1390
CIVIL CODE OF THE PHILIPPINES Arts. 2262-2263

COMMENT:

Exemption for Support, Pension, or Gratuity

“As an aftermath of the last World War, there are thou-
sands of persons receiving pension. The foregoing Article is
calculated to protect them.” (Report of the Code Commission,
p. 170).

Art. 2262. Guardians of the property of minors, ap-

pointed by the courts before this Code goes into effect, shall
continue to act as such, notwithstanding the provisions of
Article 320.

COMMENT:
Guardians of the Property of Minors
“These guardians should continue as such, to avoid dis-
turbances in the administration of property of minor children.”
(Report of the Code Commission, p. 170).

Art. 2263. Rights to the inheritance of a person who

died, with or without a will, before the effectivity of this
Code, shall be governed by the Civil Code of 1889, by other
previous laws, and by the Rules of Court. The inheritance
of those who, with or without a will, die after the begin-
ning of the effectivity or this Code, shall be adjudicated
and distributed in accordance with this new body of laws
and by the Rules of Court; but the testamentary provisions
shall be carried out insofar as they may be permitted by
this Code. Therefore, legitimes, betterments, legacies and
bequests shall be respected; however, their amount shall be
reduced if in no other manner can every compulsory heir
be given his full share according to this Code.

COMMENT:
(1) Successional Rights
“The decisive fact which gives origin to the right of the
heirs, devisees, and legatees is the DEATH of the decedent.

1391
Arts. 2264-2266 CIVIL CODE OF THE PHILIPPINES

This is the basis of the foregoing rule. No heir, devisee, or

legatee has any vested right until the moment of such death.’’
(Report of the Code Commission, p. 170).

(2) Proofs of Filiation

Proofs of filiation allowed under the new Code are use-
less in the case of natural child claiming recognition in order
to inherit from an alleged natural father who died BEFORE
the new Civil Code became effective. (Vidaurrazaga v. Court
of Appeals, et al., 91 Phil. 492). (See, however, the Family
Code).

Art. 2264. The status and rights of natural children

by legal fiction referred to in Article 89 and illegitimate
children mentioned in Article 287, shall also be acquired
by children born before the effectivity of this Code.

COMMENT:
See the Family Code.

Art. 2265. The right; of retention of real or personal

property arising after this Code becomes effective, includes
those takings which came into the creditor’s possession
before said date.

COMMENT:
Right of Retention of Real or Personal Property
The Article explains itself.

Art. 2266. The following shall have not only prospective

but also retroactive effect:
(1) Article 315, whereby a descendant cannot be com-
pelled, in a criminal case, to testify against his parents and
ascendants;
(2) Articles 101 and 88, providing against collusion in
cases of legal separation and annulment of marriage;

1392
CIVIL CODE OF THE PHILIPPINES Arts. 2267-2268

(3) Articles 283, 284, and 289, concerning the proof of

illegitimate filiation;
(4) Article 838, authorizing the probate of a will on
petition of the testator himself;
(5) Articles 1359 to 1369, relative to the reformation
of instruments;
(6) Articles 476 to 481, regulating actions to quiet
title;
(7) Articles 2029 to 2031, which are designed to pro-
mote compromises.

COMMENT:
Provisions Which Have Both Prospective and Retroac-
tive Effect
Reason — These are “remedial” in character and do not
affect substantive rights already acquired. (Report of the Code
Commission, p. 172).

Art. 2267. The following provisions shall apply not only

to future cases but also to those pending on the date this
Code becomes effective:
(1) Article 29, relative to criminal prosecutions wherein
the accused is acquitted on the ground that his guilt has
not been proved beyond reasonable doubt;
(2) Article 33, concerning cases of defamation, fraud
and physical injuries.

COMMENT:
Provisions Appertaining to Procedure
The Article explains itself.

Art. 2268. Suits between members of the same family

which are pending at the time this Code goes into effect
shall be suspended, under such terms as the court may
determine, in order that a compromise may be earnestly

1393
Art. 2269 CIVIL CODE OF THE PHILIPPINES

sought, or, in case of legal separation proceedings, for the

purpose or effecting, if possible, a reconciliation.

COMMENT:
See the Family Code.

Art. 2269. The principles upon which the preceding

transitional provisions are based shall, by analogy, be ap-
plied to cases not specifically regulated by them.

COMMENT:
(1) Application by Analogy of the Transitional Principles
“The Article is calculated to cover cases other than those
specifically regulated by the transitional provisions. The Court
will be able by analogy, to decide every question that may
come up as regards the applicability of the old laws or of the
new Code.” (Report of the Code Commission, p. 174).

(2) Rule in Case of Conflict

In case of conflict between this chapter, and specific
transitional provisions elsewhere in the Civil Code, the specific
provisions will naturally apply. (Art. 2252, par. 2).

1394
CIVIL CODE OF THE PHILIPPINES

REPEALING CLAUSE

Art. 2270. The following laws and regulations are hereby

repealed:
(1) Those parts and provisions of the Civil Code of
1889 which are in force on the date when this new Civil
Code becomes effective;
(2) The provisions of the Code of Commerce governing
sales, partnership, agency, loan, deposits and guaranty;
(3) The provisions of the Code of Civil Procedure on
prescription as far as inconsistent with this Code; and
(4) All laws, Acts, parts of Acts, rules of court, ex-
ecutive orders, and administrative regulations which are
inconsistent with this Code.
Approved, June 18, 1949.

COMMENT:
(1) When Spanish Civil Code Was Repealed
The Spanish Civil Code of 1889 was repealed on August
30, 1950, the date of effectivity of the new Civil Code. (See
Lara v. Del Rosario, 50 O.G. 1957 and Daney & Aznar v.
Garcia & Comporendondo, L-11483, Feb. 14, 1958).

(2) What the New Civil Code Does Not Repeal

The new Civil Code has not “superseded the Administra-
tive Code of Mindanao and Sulu, or the Public Land Law,
since these statutes are, in this regard, SPECIAL ACTS,
and implied repeals are not favored.” Therefore, a deed of
sale of real property executed by a non-Christian inhabitant
of Mindanao or Sulu, without the approval of the provincial
governor, or his representative duly authorized in writing for

1395
Art. 2270 CIVIL CODE OF THE PHILIPPINES

the purpose as required by Sec. 145(b) of the Administrative

Code of Mindanao and Sulu, is null and void ab initio — un-
less of course there should be a special law repealing such
provision. (See Mangayco, et al. v. Lasud, et al., L-19252, May
29, 1964).

(3) Complete Repeal of the Civil Code of 1889

Note that the Spanish Civil Code of 1889 is completely
repealed with respect to the provision of said Code still in
force on the effective date of this new Code. Those provisions
of said Spanish Civil Code no longer in force were either
repealed previously or had never been enforced here.

(4) The Family Code

Executive Order 209, as amended by EO 227, is other-
wise known as “The Family Code of the Philippines.” Said
Code has practically amended about 80% of the Civil Code’s
provisions on family relations (marriage, legal separation,
rights and obligations between husband and wife, the family,
paternity and filiation, adoption, support, parental authority,
emancipation and age of majority). Added were Titles XI and
XII, respectively, dealing with Summary Judicial Proceedings
in the Family Law and Final Provisions.

1396
 CIVIL CODE
of the
PHILIPPINES
ANNOTATED
By

EDGARDO L. PARAS,† Litt. B., LL.B., LL.M., LL.D.

Associate Justice, Supreme Court
(1986-1992)

SIXTEENTH EDITION
2008

VOLUME FIVE
ARTS. 1458-2270
(SPECIAL CONTRACTS)

Published & Distributed by

856 Nicanor Reyes, Sr. St.

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Philippine Copyright, 1959, 1961, 1963, 1965, 1967, 1969,
1971, 1974, 1977, 1979, 1982, 1986, 1990, 1995, 2000, 2008

by

EDGARDO L. PARAS

ISBN 978-971-23-4503-6

No portion of this book may be copied or

reproduced in books, pamphlets, outlines or notes,
whether printed, mimeographed, typewritten, copied
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and Eugene; my caring daughter-in-law
Ylva Marie, and my intelligent grandchil-
dren Yla Gloria Marie and Edgardo III
— in all of whom I have found inspiration
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iii
iv
 PUBLISHER’S PREFACE TO THE 2008 EDITION

The family of the late–revered Supreme Court Justice Edgardo

L. Paras (who died in the grace of our Lord on September 3, 1994)
would like to express their gratitude to the users of this book, now
on its 16th edition, for continued patronage.
Law practice is a continuing course whereby one must keep
himself abreast of all leading developments in law and jurisprudence,
particularly on matters relating to Agency, Credit Transactions,
Damages, Lease, Partnership, and Sales.
For the release of this 2008 edition, the Paras family values
the invaluable research assistance of Dr. Edgardo C. Paras, Jr.,
who finished his LL.M. and D.C.L., summa cum laude, from the
U.S.T. Graduate School of Law, and, a product of the United States
(Harvard), Europe (Hague Academy of International Law), and Asia
(National University of Singapore, UA & P, Ateneo de Manila, San
Beda, and UST Graduate School) and also Prof. Emmanuel C. Paras
(a senior partner of the Sycip, Salazar, Hernandez & Gatmaitan law
offices) and Prof. Eugene C. Paras, who is now RTC Judge of Makati
City, Metro Manila.

Rex Book Store, Inc.

Publisher

v
vi
 CONTENTS
Volume V

Title VI. SALES ....................................................................................... 1

CHAPTER 1 — NATURE AND FORM
OF THE CONTRACT ................................................ 1
ARTICLE 1458 ................................................................................... 1
COMMENT: (1) ‘Sale’ Defined, 1; (2) Historical Notes, 1; (3) Es-
sential Characteristics of the Contract of Sale, 2; (4) Elements
of the Contract of Sale, 3; Aguinaldo v. Esteban, GR 27289,
Apr. 15, 1985, 3; Leabres v. CA, GR 41837, Dec. 12, 1986,
3; (5) Stages in the Contract of Sale, 4; (6) Kinds of Sales, 4;
People’s Homesite v. Court of Appeals, L-61623, Dec. 26, 1984,
6; Zambales v. Court of Appeals, GR 54070, Feb. 28, 1983, 6;
Almendra v. IAC, GR 76111, Nov. 21, 1991, 6; Sps. Vivencio
Babasa and Elena Cantos Babasa v. CA, et al., GR 124045, May
21, 1993, 8; Heirs of Romana Ingjugtiro, et al. v. Sps. Leon V.
Casals & Lilia C. Casals, et al., GR 134718, Aug. 20, 2001, 8;
Ortigas and Co. v. Herrera, GR 36098, Jan. 21, 1983, 9; (7) ‘Sale’
Distinguished from ‘Dation in Payment’ (Adjudicacion en Pago,
or Dacio en Pago or Dacio en Solutum), 9; (8) Bar Question,
10; (9) ‘Contract of Sale’ Distinguished from ‘Contract to Sell’,
10; (10) ‘Sale’ Distinguished from ‘Assignment of Property in
Favor of Creditors’ (Cession or Cesion de Bienes), 11; (11) ‘Sale’
Distinguished from a ‘Loan’, 12; (12) ‘Sale’ Distinguished from
‘Lease’, 12; (13) Kinds of Extrajudicial Foreclosre Sale, 12.
ARTICLE 1459 ................................................................................... 13
COMMENT: (1) Lawfulness of the Object and Right to Transfer
Ownership, 13; (2) Licit Object, 13; Artates and Pojas v. Urbi, et
al., L-29421, Jan. 30, 1971, 13; (3) Transfer of Ownership, 14; (4)
Comment of the Code Commission, 15; (5) Illustrative Cases, 16;
Santos v. Macapinlac and Pinlac, 51 Phil. 224, 16; Lichauco v.
Olegario and Olegario, 43 Phil. 540, 16; Uy Piaco v. McMicking,
et al., 10 Phil. 286, 16; Martin v. Reyes, et al., 91 Phil. 666, 17;
Delpher Trades Corp. v. IAC, GR 69259, Jan. 26, 1989, 17.
ARTICLE 1460 ................................................................................... 18
COMMENT: (1) Meaning of Determinate, 18; Yu Tek v. Gonzales,
29 Phil. 384, 19; (2) Rule if New Agreement is Needed, 19.

vii
ARTICLE 1461 ................................................................................. 19
COMMENT: (1) Things With a Potential Existence, 19; (2)
Emptio Rei Sperati and Emptio Spei, 20; (3) Vain Hope or
Expectancy, 21.
ARTICLE 1462 ................................................................................. 21
COMMENT: (1) Sale of Goods, 21; (2) Future Goods, 21.
ARTICLE 1463 .................................................................................. 22
COMMENT (1) Sale of an Undivided Interest, 22; (2) Source
of Article, 22.
ARTICLE 1464 ................................................................................. 23
COMMENT: Sale of Share in a Specific Mass, 23.
ARTICLE 1465 .................................................................................. 23
COMMENT: Sale of Things Subject to a Resolutory Condition,
23.
ARTICLE 1466 .................................................................................. 24
COMMENT: (1) Distinctions Between a ‘Contract of Sale’ and
an ‘Agency to Sell’ (like a Consignment for Sale), 24; (2) Bar
Question, 24; Quiroga v. Parsons Hardware Co., 38 Phil. 501,
25; Ker and Co., Ltd. v. Jose B. Lingad, L-20871, Apr. 30,
1971, 26.
ARTICLE 1467 .................................................................................. 26
COMMENT: (1) Rules to Determine if the Contract is One of
Sale or a Piece of Work, 26; Inchausti v. Cromwell, 20 Phil.
435, 27; (2) Schools of Thought, 27; (3) Query, 27.
ARTICLE 1468 .................................................................................. 27
COMMENT: Rules to Determine Whether Contract is One of
Sale or Barter, 28.
ARTICLE 1469 .................................................................................. 28
COMMENT: (1) Certainty of the Price, 29; Reparations Com-
mission v. Judge Morfe, GR 35796, Jan. 31, 1983, 29; (2) When
No Specific Amount is Stipulated, 29; (3) Illustrative Cases,
30; McCullough v. Aenille and Co., 3 Phil. 285, 30; Barretto v.
Santa Maria, 26 Phil. 200, 30; (4) Refusal of One Party to Go
Ahead with an Agreed Appraisal, 31.
ARTICLE 1470 .................................................................................. 31
COMMENT: (1) Effect of Gross Inadequacy of Price, 31; (2) In
Case Contract Was Really a Donation, 32.
ARTICLE 1471 .................................................................................. 32
COMMENT: (1) Simulated Price, 32; (2) Fictitious Sale, 33;
Castillo v. Castillo, L-18238, Jan. 22, 1980, 33; Ida C. Labagala

viii
 v. Nicolasa T. Santiago, Amanda T. Santiago & CA, GR 132305,
Dec. 4, 2001, 33.
ARTICLE 1472 .................................................................................. 33
COMMENT: (1) Certainty of Price of Securities, 34; (2) If Stock
Market Price Cannot Be Ascertained, 34.
ARTICLE 1473 .................................................................................. 34
COMMENT: (1) Price Cannot Be Left to One Party’s Discretion,
34; (2) Problem, 34.
ARTICLE 1474 .................................................................................. 35
COMMENT: Effect if the Price Cannot Be Determined, 35.
ARTICLE 1475 .................................................................................. 35
COMMENT: (1) Nature of Contract, 35; Pacific Oxygen and
Acetylene Co. v. Central Bank, L-21881, Mar. 1, 1968, 36;
Pacific Oxygen and Acetylene Co. v. Central Bank, L-23391,
Feb. 27, 1971, 36; Obana v. CA, GR 36249, Mar. 29, 1985, 36;
Lu v. IAC, Heirs of Santiago Bustos and Josefina Alberto, GR
70149, Jan. 30, 1989, 37; (2) Requirements for Perfection, 37;
Atkins, Kroll and Co., Inc. v. B. Cua Hian Tek, L-9871, Jan.
31, 1958, 38; Roque v. Lapuz, L-32811, Mar. 31, 1980, 38;
Republic v. Court of Appeals, L-52774, Nov. 29, 1984, 39; (3)
Before Perfection, 39; Roman v. Grimalt, 6 Phil. 96, 39; (4) Ac-
cepted Bilateral Promise to Buy and Sell, 39; (5) Formalities
for Perfection, 40; Cirilo Paredes v. Jose L. Espino, L-23351,
Mar. 13, 1968, 40; (6) Some Problems, 41; (7) Perfection in the
Case of Advertisements, 44; (8) Transfer of Ownership, 44; (9)
The Sales Tax, 45; (10) Effect of Perfection, 46; Bucton, et al.
v. Gabar, et al., L-36359, Jan. 31, 1974, 46.
ARTICLE 1476 ................................................................................ 47
COMMENT: (1) When Sale by Auction is Perfected, 47; (2) Be-
fore the Fall of the Hammer, 47; (3) When Seller Can Bid, 48;
(4) When Seller May Employ Others to Bid for Him, 48; Veazie
v. Williams, et al., 12 L. Ed. 1081, 49; (5) Right of Owner to
Fix Conditions for the Sale by Auction, 49; Leoquinco v. Postal
Savings Bank, 47 Phil. 772, 49; (6) Rule in Case of a Private
Sale, 50; CFI of Rizal and Elena Ong Escutin v. CA and Felix
Ong, Jul. 25, 1981, 50.
ARTICLE 1477 .................................................................................. 50
COMMENT: (1) When Ownership is Transferred, 50; (2) Kinds
of Delivery, 51; C.N. Hodges, et al. v. Jose Manuel Lezama, et
al., L-20630, Aug. 31, 1965, 51.
ARTICLE 1478 .................................................................................. 51
COMMENT: When Ownership is Not Transferred Despite
Delivery, 52; Sun Brother’s Appliances v. Perez, L-17527, Apr.
30, 1963, 52.

ix
ARTICLE 1479 .................................................................................. 53
COMMENT: (1) Distinction Between the First (Mutual Promise)
and the Second Paragraphs (Accepted Unilateral Promise), 53;
Atkins, Kroll & Co., Inc. v. B. Cua Hian Tek, L-9871, Jan. 31,
1958 (also cited under Art. 1476), 55; (2) Meaning of ‘Policita-
cion’, 57; (3) Bilateral Promise, 57; Borromeo v. Franco, 5 Phil
49, 57; Palay, Inc. v. Clave, GR 56076, Sep. 21, 1983, 58; (4)
Unilateral Promise, 58; Bar, 59; Filemon H. Mendoza, et al. v.
Aquilina Comple, L-19311, Oct. 29, 1965, 60; (5) Contract to
SELL is NOT an Absolute Sale, 60; Roque v. Lapuz, L-32811,
Mar. 31, 1980, 61; Palay, Inc. v. Clave, GR 56076, Sep. 21,
1983, 61; Sps. Lorenzo v. Lagandaon, Cecilia T. Lagandaon
& Overseas Agricultural Development Corp. v. CA, et al., GR
102526-31, May 21, 1998, 61.
ARTICLE 1480 .................................................................................. 62
COMMENT: (1) Who Bears the Risk of Loss?, 62; Roman v.
Grimalt, 6 Phil. 96, 62; Song Fo & Co. v. Oria, 33 Phil. 3, 63;
(2) Examples, 66; (3) Meaning of “Fungibles”, 67.
ARTICLE 1481 .................................................................................. 68
COMMENT: (1) Definitions of Sale By Description or By Sam-
ple, 68; (2) Effect of Mere Exhibition of Sample, 69; (3) Problem,
69; (4) Cases, 69; Pacific Com. Co. v. Ermita Market & Cold
Stores, 56 Phil. 617, 69; Cho Chit v. Hanson, Orth & Stevenson,
et al., L-8439, May 30, 1958, 70.
ARTICLE 1482 .................................................................................. 70
COMMENT: (1) ‘Earnest Money’ Defined, 70; (2) Significance
of Earnest Money, 70; (3) Example, 70; San Miguel Properties
Phils., Inc. v. Sps. Alfredo Huang & Grace Huang, GR 137290,
Jul. 31, 2000, 71; Vicente & Michael Lim v. CA & Liberty H.
Luna, GR 118347, Oct. 24, 1996, 72; (4) When Arras Must be
Returned, 72.
ARTICLE 1483 .................................................................................. 72
COMMENT: (1) Statute of Frauds, 73; (2) If Sale Is Made
Thru an Agent, 73; (3) Effect if Notary Public is Not Author-
ized, 73.
ARTICLE 1484 ................................................................................ 73
COMMENT: (1) Requisite Before Art. 1484 May Be Applied,
74; (2) Purpose of the Rules For Sale of Personal Property on
the Installment Plan, 74; (3) Alternative Remedies, 75; (4)
Examples of the Remedies, 75; Zayco v. Luneta Motor Co.,
L-30583, Oct. 23, 1982, 76; Ridad v. Filipinas Investment and
Finance Corporation, GR 39806, Jan. 28, 1983, 76; Pascual v.
Universal Motors Corporation, L-27862, Nov. 20, 1974, 77; Bor-
bon II v. Servicewide Specialists, Inc., 72 SCAD 111 (1996) 78;
(5) Cancellation Requires Mutual Restitution, 78; (6) Instances

x
 When Art. 1484 Cannot Be Applied, 79; (7) Compounding of
a Criminal Prosecution, 80; United General Industries, Inc.
v. Jose Paler and Jose dela Rama, L-30205, Mar. 15, 1982,
80; (8) Foreclosure and Actual Sale of Mortgage Chattel, 81;
Sps. Romulo de la Cruz & Delia de la Cruz, et al. v. ASIAN
Consumer of Industrial Finance Corp. & the CA, GR 94828,
Sep. 20, 1992, 81.
ARTICLE 1485 .................................................................................. 82
COMMENT: (1) Reason for Rule on Lease of Personal Property
With Option to Buy, 82; (2) Meaning of the Clause “when the
lessor has deprived the lessee of the possession or enjoyment of
the thing”, 82; (3) When “Lease” Construed as “Sale”, 82.
ARTICLE 1486 .................................................................................. 82
COMMENT: (1) Non-Return of Installments Paid, 82; (2) Ex-
ample, 83; SALE OF REAL PROPERTY IN INSTALLMENT,
REPUBLIC ACT NO. 6552 (Maceda Law), 83; (3) ‘Raison d’
Etre’ of the Maceda Law, 85; (4) Case, 86; Delta Motor Sales
Corp. v. Niu Kim Duan & Chan Fue Eng, GR 61043, Sep. 2,
1992, 86.
ARTICLE 1487 .................................................................................. 86
COMMENT: Who Pays for Expenses in Execution and Regis-
tration, 86.
ARTICLE 1488 .................................................................................. 87
COMMENT: (1) Nature of Expropriation, 87; (2) When Trans-
action Is One of Sale, 87; (3) ‘Eminent Domain’ Distinguished
From ‘Expropriation’, 87; (4) Essential Requisites for Expropria-
tion, 87; (5) ‘Just Compensation’ Defined, 88; Pedro Arce and
Carmen Barrica de Arce v. Genato, L-40587, Feb. 27, 1976, 88;
Province of Camarines Sur v. CA, 41 SCRA 388 (1993), 89.

CHAPTER 2 — CAPACITY TO BUY OR SELL ................................ 90

ARTICLE 1489 .................................................................................. 90
COMMENT: (1) Incapacity to Buy May Be Absolute or Relative,
90; (2) Purchase By Minors, 90; Felipe v. Aldon, GR 60174, Feb.
16, 1983, 90; (3) Husbands, 91; Bar, 91; Castillo v. Castillo,
L-18238, Jan. 22, 1980, 92; Godinez v. Fong, 120 SCRA 223
(1983), 92.
ARTICLE 1490 .................................................................................. 92
COMMENT: (1) Reason Why Generally a Husband and Wife
Cannot Sell to Each Other, 92; (2) Effect of Sale, 92; (3) Prob-
lems, 93.
ARTICLE 1491 .................................................................................. 95
COMMENT: (1) Persons Relatively Incapacitated to Buy, 95;
(2) Reason for the Law, 95; (3) Purchase Thru Another, 96; (4)

xi
 Purchase By Agent for Himself, 96; (5) Purchase By Attorney,
97; Florentino B. del Rosario v. Eugenio Millado, Adm. Case
724, Jan. 31, 1969, 97; Fabillo v. IAC, GR 68838, Mar. 11, 1991,
98; Valencia v. Cabanting, Adm. Case 1391, Apr. 26, 1991, 101;
(6) Meaning of “Any others specially disqualified by law”, 101;
(7) Status of the Sale, 102; Republic v. CA, L-59447, Dec. 27,
1982, 102; (8) Some Cases, 103; Maharlika Publishing Corp. v.
Tagle, GR 65594, Jul. 9, 1986, 103; Fornilda, et al. v. Branch
164, RTC of Pasig, et al., GR 72306, Jan. 24, 1989, 103.
ARTICLE 1492 .................................................................................. 103
COMMENT: (1) Applicability of Relative Incapacity to Legal
Redemption, Compromises, and Renunciation, 103; (2) Cross-
Reference, 103.
CHAPTER 3 –– EFFECTS OF THE CONTRACT WHEN
THE THING SOLD HAS BEEN LOST .................. 104
ARTICLE 1493 .................................................................................. 104
COMMENT: (1) Loss of Object Before Sale, 104; (2) Complete
Loss Distinguished from Partial Loss, 104.
ARTICLE 1494 .................................................................................. 105

COMMENT: Loss of Specific Goods, 105.

CHAPTER 4 — OBLIGATIONS OF THE VENDOR ......................... 106

Section 1 – GENERAL PROVISIONS .......................................... 106

ARTICLES 1495 ................................................................................ 106
COMMENT: (1) Obligations of Vendor, 106; (2) Case, 106;
Hermogena G. Engreso with Sps. Jose Engreso v. Nestoria de
la Cruz & Herminio de la Cruz, GR 148727, Apr. 9, 2003, 106;
(3) Failure to Deliver on Time, 107; (4) Effect of Non-Delivery,
107; (5) Duty to Deliver at Execution Sales, 107.
ARTICLE 1496 .................................................................................. 108
COMMENT: (1) Ownership is Transferred Generally Only by
Delivery, 108; Bar, 108; (2) Effect of Delivery to Buyer (Who
Used Another’s Money), 108.
Section 2 — DELIVERY OF THE THING SOLD .............................. 109
ARTICLE 1497 .................................................................................. 109
COMMENT: (1) Real or Actual Delivery, 109; Smith, Bell & Co.
v. Gimenez, L-17167, Jun. 29, 1963, 109; (2) When Ownership
is Not Transferred Despite Delivery, 110; Masiclat, et al. v.
Centeno, L-8420, May 31, 1956, 110; (3) Meaning of Tradition,
111; Albert v. University Publishing Co., L-9300, Sep. 17, 1958,
111; Roque v. Lapuz, L-32811, Mar. 31, 1980, 112; (4) Kinds of
Delivery or Tradition, 112; (5) Case, 113; Victorias v. Leuen-
berger and CA, GR 31189, Mar. 31, 1987, 113.

xii
ARTICLE 1498 .................................................................................. 114
COMMENT: (1) Two Kinds of Constructive Delivery (Thru Le-
gal Formalities and Thru Traditio Simbolica), 114; Power Com-
mercial and Industrial Corp. v. CA, Sps. Reynaldo & Angelito R.
Quiambao, and PNB, GR 119745, Jun. 20, 1997, 84 SCAD 67,
114; (2) Rules on Constructive Delivery, 115; Addison v. Felix,
38 Phil. 404, 115; Roque v. Lapuz, L-32811, Mar. 31, 1980, 116;
Vda. de Sarmiento v. Lesaca, L-15385, Jun. 30, 1960, 116; Asun-
cion, et al. v. Hon. Plan, GR 52359, Feb. 24, 1981, 117; Norkis
Distributors, Inc. v. CA, GR 91029, Feb. 7, 1990, 118; (3) Effect
of Non-Payment of Price, 118; Puatu v. Mendoza and David, 64
Phil. 457, 118; (4) Delivery Thru Execution of a Quedan, 119;
(5) Bar, 119; (6) Bar, 119; (7) Case, 120; Zenaida M. Santos v.
Calixto Santos, et al., GR 133895, Oct. 2, 2001, 120.
ARTICLE 1499 .................................................................................. 120
COMMENT: Traditio Longa Manu and Traditio Brevi Manu,
120.
ARTICLE 1500 .................................................................................. 121
COMMENT: Traditio Constitutum Possessorium, 121.
ARTICLE 1501 .................................................................................. 121
COMMENT: Delivery of Incorporeal Property, 121; North
Negros Sugar Co. v. Co. General de Tabacos, L-9277, Mar. 29,
1957, 122.
ARTICLE 1502 .................................................................................. 123
COMMENT: (1) Transaction ‘On Sale or Return’, 123; (2)
Transaction ‘On Approval or On Trial or Satisfaction’, 124; (3)
Problems on ‘On Sale or Return’, 124; (4) Bar, 125; (5) Some
Rules on Sale ‘On Approval or Trial or Satisfaction’, 126; (6)
Case, 127; Imperial Textile Manufacturing, Co. of the Phils.,
Inc. v. LPJ Enterprises, Inc., GR 66140, Jan. 21, 1993, 127.
ARTICLE 1503 .................................................................................. 127
COMMENT: (1) Reservation of Ownership Despite Delivery,
128; Chrysler Phil. Corp. v. CA, L-55684, Dec. 19, 1984, 128; (2)
Instances When Seller Is Still Owner Despite Delivery, 129.
ARTICLE 1504 .................................................................................. 129
COMMENT: (1) Risk of Loss, 130; (2) Some Problems, 130.
ARTICLE 1505 .................................................................................. 131
COMMENT: (1) Generally, Buyer Acquires Merely the Seller’s
Rights, 131; (2) Exceptions, 132; (3) Illustrative Questions, 132;
(4) Some Recording Acts, 133; (5) Bar, 133.
ARTICLE 1506 .................................................................................. 134
COMMENT: (1) Effect if Seller Has Only a Voidable Title, 134;
(2) Reasons for the Law, 134; (3) Purchase from a Thief, 134.

xiii
ARTICLE 1507 .................................................................................. 135
COMMENT: (1) What ‘Document of Title’ Includes, 135; (2)
Negotiable Document of Title, 136; (3) Effect of Typographical
or Grammatical Error, 136.
ARTICLE 1508 .................................................................................. 136
COMMENT: (1) How Negotiable Document of Title is Negoti-
ated, 137; (2) When Mere Delivery is Sufficient, 137.
ARTICLE 1509 .................................................................................. 137
COMMENT: (1) Negotiation By Indorsement and Delivery, 138;
(2) Effect of Undated Indorsement, 138; (3) Effect of Indorse-
ment and Delivery, 138.
ARTICLE 1510 .................................................................................. 139
COMMENT: Effect of Placing the Word ‘Non-Negotiable’,
139.
ARTICLE 1511 .................................................................................. 139
COMMENT: (1) Effect of Delivery When Document Cannot be
Negotiated by Mere Delivery, 139; (2) Effect of Negotiation and
Indorsement of Non-Negotiable Instrument, 140.
ARTICLE 1512 .................................................................................. 140
COMMENT: (1) Who May Negotiate Negotiable Document of
Title, 140; (2) Who Bears Loss in Case of Unauthorized Nego-
tiation, 141.
ARTICLE 1513 .................................................................................. 141
COMMENT: (1) Rights of Person to Whom Negotiable Docu-
ment Is Negotiated, 141; (2) Purpose of the Article, 142.
ARTICLE 1514 .................................................................................. 142
COMMENT: (1) Rights of Mere Transferee, 142; (2) Who Can
Defeat Rights of Transferee, 142.
ARTICLE 1515 .................................................................................. 143
COMMENT: Rule if Indorsement Is Needed for Negotiation,
143.
ARTICLE 1516 .................................................................................. 143
COMMENT: (1) Warranties in Negotiation or Transfer, 144; (2)
Effect of Indorsee’s Knowledge of Forged Indorsement, 144.
ARTICLE 1517 .................................................................................. 144
COMMENT: (1) Non-liability of Indorser for Failure of Bailee
to Comply, 144; (2) Reason, 144.
ARTICLE 1518 .................................................................................. 145
COMMENT: Effect if Owner of Document Was Deprived of
It, 145.

xiv
ARTICLE 1519 .................................................................................. 145
COMMENT: Generally No Attachment or Surrender, 145.
ARTICLE 1520 .................................................................................. 146
COMMENT: Right of Creditor, 146.
ARTICLE 1521 ................................................................................ 146
COMMENT: (1) Specifications for the Delivery, 147; (2) Place
of Delivery, 147; (3) Time of Delivery, 148; (4) Manner of Deliv-
ery When Goods Are in the Hands of a Third Person, 148; (5)
Expenses To Be Shouldered by Seller, 149; (6) When Demand
or Tender of Delivery Must Be Made, 149.
ARTICLE 1522 ................................................................................ 149
COMMENT: (1) Rule When the Quantity Is LESS than that
Agreed Upon, 150; Chrysler Phil. Corp. v. Court of Appeals,
L-55684, Dec. 19, 1984, 150; (2) Rules when the Quantity Is
MORE than the Agreement, 151; (3) Implied Acceptance, 152;
(4) Rule when Quality is Different, 152; Adam Krockles Sons
Co. v. Rockford Oak Leather Co., 240 Mich. 524, 152.
ARTICLE 1523 .................................................................................. 152
COMMENT: (1) When Delivery to Carrier is Delivery to Buyer,
153; (2) Kinds of Delivery to Carrier, 153; (3) Problem, 154.
ARTICLE 1524 .................................................................................. 155
COMMENT: (1) When Vendor is Not Bound To Deliver, 155; (2)
Effect if Period is Fixed for Payment, 155; (3) Bar, 155.
ARTICLE 1525 .................................................................................. 156
COMMENT: When Seller is Deemed an “Unpaid Seller,” 156.
ARTICLE 1526 .................................................................................. 156
COMMENT: (1) Rights of an Unpaid Seller, 157; (2) Posses-
sory Lien, 157.
ARTICLE 1527 .................................................................................. 158
COMMENT: (1) When Seller Has Possessory Lien, 158; (2)
Problem, 158.
ARTICLE 1528 .................................................................................. 159
COMMENT: (1) Possessory Lien After Partial Delivery, 159.
ARTICLE 1529 .................................................................................. 159
COMMENT: (1) When Possessory Lien is Lost, 160; (2) Prob-
lems, 160.
ARTICLE 1530 .................................................................................. 161
COMMENT: (1) Right of Stoppage in Transitu, 161; (2) Mean-
ing of Insolvency in the Article, 162; (3) Who May Exercise the
Right of Stoppage in Transitu, 162.

xv
ARTICLE 1531 .................................................................................. 162
COMMENT: (1) When Goods are in Transit or Not, 163; (2)
Effect of Refusal to Receive, 163.
ARTICLE 1532 .................................................................................. 163
COMMENT: (1) How the Right of Stoppage in Transitu May Be
Exercised, 164; (2) To whom Notice is Given, 164; (3) Effects of
the Exercise of the Right, 164.
ARTICLE 1533 .................................................................................. 165
COMMENT: (1) Right of Resale, 165; (2) Right, Not Duty, to
Resell, 166; (3) Meaning of Perishable, 166; (4) Deficiency or
Excess in the Price, 166.
ARTICLE 1534 .................................................................................. 166
COMMENT: (1) Right to Rescind the Transfer of Title, 167; (2)
Effect of Replevin Suit, 167.
ARTICLE 1535 .................................................................................. 167
COMMENT: Effect if Buyer Has Already Sold the Goods,
168.
ARTICLE 1536 .................................................................................. 168
COMMENT: (1) When Seller is Not Bound to Deliver Because
Buyer Has Lost the Benefit of the Term, 168; (2) Example,
169.
ARTICLE 1537 .................................................................................. 169
COMMENT: (1) Accessions and Assessories, 169; (2) Duty to
Preserve, 169; (3) Right to the Fruits, 169.
ARTICLE 1538 .................................................................................. 170
COMMENT: (1) Effect of Loss, Deterioration or Improvement
Before Delivery, 170; (2) Article 1189, 170.
ARTICLE 1539 .................................................................................. 171
COMMENT: (1) Sale of Real Estate By the Unit, 171; (2) Unit
Price Contract, 172; Virgilio Dionisio v. Hon. Vicente Paterno,
L-49654, Feb. 26, 1981, 172.
ARTICLE 1540 .................................................................................. 172
COMMENT: Rule When Actually the Area or Number is
Greater, 173.
ARTICLE 1541 .................................................................................. 173
COMMENT: The Rule in Judicial Sales, 173.
ARTICLE 1542 .................................................................................. 173
COMMENT: (1) Sale for a Lump Sum (A Cuerpo Cierto), 174;
(2) Example, 174; (3) Another Example, 174; (4) Delivery of All

xvi
 the Land Included in the Boundaries, 175; (5) Effect of Gross
Mistake, 175; (6) Effect if Buyer Took the Risk as to Quantity,
175; (7) Meaning of “More or Less”, 176.
ARTICLE 1543 .................................................................................. 176
COMMENT: Prescriptive Period, 176.
ARTICLE 1544 .................................................................................. 176
COMMENT: (1) Rules of Preference in Case of Double Sale,
176; Remalate v. Tibe, GR 59514, Feb. 25, 1988, 179; Caram,
Jr. v. Laureta, L-28740, Feb. 24, 1981, 181; (2) Illustration of
Rules as to Personal Property, 181; (3) Illustration of Rules as
to Real Property, 181; (4) Cases, 182; DBP v. Mangawan, et
al., L-18861, Jun. 30, 1964, 182; Astorga v. Court of Appeals,
L-58530, Dec. 26, 1984, 182; Po Sun Tun v. Price, 54 Phil.
192, 182; Victoriano Hernandez v. Macaria Katigbak Viuda
de Salas, 69 Phil. 744, 183; (5) Query, 185; Maria Bautista
Vda. de Reyes v. Martin de Leon, L-22331, Jun. 6, 1967, 185;
Casica, et al. v. Villaseca, et al., L-9590, Apr. 30, 1957, 186; (6)
Problem, 187; (7) Cases, 187; Manuel Buason, et al. v. Mariano
Panuyas, L-11415, May 25, 1959, 187; Sanchez v. Ramos, 40
Phil. 614, 188; Aviles v. Arcega, 44 Phil. 924, 189; Soriano, et
al. v. Heirs of Magali, L-15133, Jul. 31, 1963, 189; Bautista
v. Sioson, 39 Phil. 615, 190; Cruzado v. Bustos and Escobar,
34 Phil. 17, 190; Carpio v. Exevea, (C.A.) 38 O.G. 1356, 190;
Diosdado Sta. Romana v. Carlos Imperio, et al., L-17280, Dec.
29, 1965, 191; Dagupan Trading Company v. Rustico Macam,
L-18497, May 31, 1965, 191; Felix de Villa v. Anacleto Trinidad,
et al., L-24918, Mar. 20, 1968, 193; Teodoro Almirol v. Register
of Deeds of Agusan, L-22486, Mar. 20, 1968, 194; Guzman v.
CA, GR 40935, Dec. 21, 1987, 196; Bernales v. IAC, GR 71491,
Jun. 28, 1988, 196; Jomoc v. Court of Appeals, GR 92871, Aug.
2, 1991, 196; Abarquez, et al. v. CA, et al., GR 95843, Sep.
2, 1992, 197; Agricultural & Home Extension Development
Groups v. CA & Librado Cabautan, GR 92310, Sep. 3, 1992, 198;
Rufina Bautista, et al. v. Court of Appeals, et al., GR 106042,
Feb. 28, 1994, 48 SCAD 629, 199; Vda. de Alcantara v. CA,
67 SCAD 347, 252 SCRA 457 (1996), 200; Rosita Tan, et al. v.
CA & Fernando Tan Kiat, GR 125861, Sep. 9, 1998, 200; Rev.
Fr. Dante Martinez v. CA, et al., GR 123547, May 21, 2001,
201; Castorio Alvarico v. Amelita L. Sola, GR 138953, Jun. 6,
2002, 202; Lu v. Sps. Manipon, GR 147072, May 7, 2002, 204;
Naawan Community Rural Bank, Inc. v. CA & Sps. Alfredo &
Annabelle Lumo, GR 128573, Jan. 13, 2002, 205; Problem, 206;
Another Problem, 206.

Section 3 — CONDITIONS AND WARRANTIES .............................. 206

ARTICLE 1545 .................................................................................. 206
COMMENT: Presence of Conditions and Warranties, 207.

xvii
 ARTICLE 1546 .................................................................................. 207
COMMENT: (1) When Is There a Warranty?, 207; (2) Effect
of Dealer’s Talk, 208; (3) Rule When There Is No Deliberate
Lie, 208.
ARTICLE 1547 .................................................................................. 208
COMMENT: Implied Warranties Against Eviction and Against
Hidden Defect, 209; Republic of the Phils. v. Hon. Umali, GR
80687, Apr. 10, 1989, 209.
Subsection 1 — WARRANTY IN CASE OF EVICTION .................. 209
ARTICLE 1548 .................................................................................. 209
COMMENT: (1) Warranty in Case of Eviction, 210; Serfino v.
CA, GR 40858, Sep. 16, 1987, 210; (2) Seller’s Fault, 211; (3) Re-
sponsibility of Seller, 211; (4) Essential Elements for Eviction,
211; (5) Plaintiff in Suit, 212; (6) Defendant in Suit, 212.
ARTICLE 1549 .................................................................................. 212
COMMENT: Vendee Need Not Appeal, 212.
ARTICLE 1550 .................................................................................. 212
COMMENT: Effect if Adverse Possession Began Before the
Sale, 213.
ARTICLE 1551 .................................................................................. 213
COMMENT: Effect of Non-Payment of Taxes, 213.
ARTICLE 1552 .................................................................................. 213
COMMENT: Eviction in Case of Judicial Sales, 213; Bobis v.
Provincial Sheriff of Camarines Norte, GR 29838, Mar. 18,
1983, 213.
ARTICLE 1553 .................................................................................. 214
COMMENT: Effect of Stipulation Waiving Liability for Evic-
tion, 214.
ARTICLE 1554 .................................................................................. 214
COMMENT: (1) Waiver By the Buyer, 214; (2) Effects, 215.
ARTICLE 1555 .................................................................................. 215
COMMENT: (1) What Seller Must Give in Case of Eviction, 216;
(2) Rule as to Income or Fruits, 216; (3) Costs of Suit, 216; (4)
Damages, 216; (5) Query: Why is Rescission Not a Remedy in
Case of TOTAL Eviction?, 216.
ARTICLE 1556 .................................................................................. 217
COMMENT: (1) Rules in Case of Partial Eviction, 217; (2)
Rescission, 217; (3) When Enforcement of the Warranty Is the
Proper Remedy, 217.

xviii
 ARTICLE 1557 .................................................................................. 218
COMMENT: Necessity of Final Judgment, 218.
ARTICLE 1558 .................................................................................. 218
COMMENT: (1) Necessity of Summoning the Seller in the Suit
for the Eviction of the Buyer, 218; (2) Reason for the Summon-
ing, 219.
ARTICLE 1559 .................................................................................. 219
COMMENT: (1) Seller Must Be Made Co-Defendant With the
Buyer, 219; (2) Rule in Registration Proceedings, 219; (3) Ap-
plicability of the Rules of Court, 220.
ARTICLE 1560 .................................................................................. 220
COMMENT: (1) Rules in Case of Non-Apparent Servitudes, 220;
(2) Effect if Burden or Easement is Registered, 221; (3) Effect
of Form of the Sale, 221.
Subsection 2 — WARRANTY AGAINST HIDDEN DEFECTS
OF OR ENCUMBRANCES UPON THE
THING SOLD ............................................................. 221
ARTICLE 1561 .................................................................................. 221
COMMENT: (1) Requisites of Recover Because of Hidden
Defects, 221; (2) Meaning of “unfit for the use intended”, 222;
(3) Note Meaning of ‘Hidden’, 222; (4) Effect of Long Inaction,
222.
ARTICLE 1562 .................................................................................. 222
COMMENT: (1) Meaning of Merchantable Quality, 223; (2) Rule
When Quantity, Not Quality, Is Involved, 223.
ARTICLE 1563 .................................................................................. 223
COMMENT: Effect of Sale Under the Patent Name or Trade
Name, 223.
ARTICLE 1564 .................................................................................. 224
COMMENT: Effect of Usage of Trade, 224.
ARTICLE 1565 .................................................................................. 224
COMMENT: Rule in Case of ‘Sale By Sample’, 224.
ARTICLE 1566 .................................................................................. 224
COMMENT: Responsibility for Hidden Defects Even if Seller
Was in Good Faith, 224; De Santos v. IAC, GR 69591, Jan. 25,
1988, 225; De la Cruz v. IAC, GR 72981, Jan. 29, 1988, 225.
ARTICLE 1567 ................................................................................. 225
COMMENT: (1) Remedies in Case of Hidden Defects, 226; (2)
Applicability to Lease, 226.

xix
ARTICLE 1568 ................................................................................. 226
COMMENT: Effect of Loss of the Thing Because of the Hidden
Defects, 226.
ARTICLE 1569 .................................................................................. 226
COMMENT: (1) Effect if Cause of Loss Was a Fortuitous Event
and Not the Hidden Defect, 226; (2) Problem, 227.
ARTICLE 1570 .................................................................................. 227
COMMENT: Applicability to Judicial Sales, 227.
ARTICLE 1571 .................................................................................. 228
COMMENT: (1) Prescriptive Period, 228; (2) Effect of Mere
Notification, 228.
ARTICLE 1572 .................................................................................. 228
COMMENT: Sale of Two or More Animals Together, 228.
ARTICLE 1573 .................................................................................. 228
COMMENT: Applicability of Art. 1572 to Sale of Other Things,
229.
ARTICLE 1574 .................................................................................. 229
COMMENT: When No Warranty Against Hidden Defects Ex-
ists, 229.
ARTICLE 1575 .................................................................................. 229
COMMENT: Void Sales of Animals, 229.
ARTICLE 1576 ................................................................................. 229
COMMENT: Definition of Redhibitory Defect, 229.
ARTICLE 1577 .................................................................................. 230
COMMENT: Prescriptive Period, 230; Bar, 230.
ARTICLE 1578 .................................................................................. 230
COMMENT: Effect if Animal Dies Within 3 Days, 230.
ARTICLE 1579 .................................................................................. 231
COMMENT: Effect if Sale of the Animal is Rescinded, 231.
ARTICLE 1580 .................................................................................. 231
COMMENT: (1) Remedies of Buyer of Animals with Redhibitory
Defects, 231; (2) Prescriptive Period for Either Remedy 40 days
from date of delivery to the buyer, 231.
ARTICLE 1581 .................................................................................. 231
COMMENT: Form of Sale of Large Cattle, 231.

xx
CHAPTER 5 — OBLIGATIONS OF THE VENDEE ......................... 232
ARTICLE 1582 .................................................................................. 232
COMMENT: (1) Principal Obligations of the Buyers, 232; Soco
v. Judge Militante, GR 58961, Jan. 28, 1983, 232; (2) Bar,
232; (3) Effect of Delivery When No Time Has Been Fixed for
Payment of the Price, 233; (4) Effect of Deviations from the
Contract, 233.
ARTICLE 1583 .................................................................................. 234
COMMENT: (1) Generally No Delivery By Installments, 234;
(2) Rules in Case of Installment Deliveries, 234; Antipolo Re-
alty Corp. v. National Housing Authority, GR 50444, Aug. 31,
1987, 234.
ARTICLE 1584 .................................................................................. 236
COMMENT: (1) When Buyer Has Right to Examine, 236;
Grageda v. IAC, GR 67929, Oct. 27, 1987, 236; (2) When Buyer
Has No Right to Examine, 237.
ARTICLE 1585 .................................................................................. 237
COMMENT: When There is Acceptance of the Goods, 238; Kerr
& Co. v. De la Rama, 11 Phil. 453, 238.
ARTICLE 1586 .................................................................................. 238
COMMENT: Even if Buyer Accepts, Seller Can Still Be Li-
able, 238.
ARTICLE 1587 .................................................................................. 238
COMMENT: Effect if Buyer Justifiably Refuses to Accept the
Delivery, 239.
ARTICLE 1588 .................................................................................. 239
COMMENT: Effect if Buyer Unjustifiably Refuses to Accept
the Delivery, 239.
ARTICLE 1589 .................................................................................. 239
COMMENT: When Buyer Has to Pay for Interest on the Price,
240; (2) The Three Cases Contemplated, 240; (3) Rule for Mon-
etary Obligations, 240.
ARTICLE 1590 .................................................................................. 240
COMMENT: (1) When Buyer May Suspend the Payment of the
Price, 241; (2) Problem, 241; Bareng v. Court of Appeals, et al.,
L-12973, Apr. 25, 1960, 241.
ARTICLE 1591 .................................................................................. 242
COMMENT: (1) When Seller May Immediately Sue for the
Rescission of the Sale, 242; (2) Rule if Neither Ground Exists,
242.

xxi
 ARTICLE 1592 .................................................................................. 243
COMMENT: (1) Rescission of Sale of Real Property, 243; (2)
Example of this Article, 244; (3) The Demand Needed, 244; (4)
Rule in Contracts to Sell, 245; Legarda Hermanos and Jose
Legarda v. Felipe Saldaña v. Court of Appeals, L-26578, Jan.
28, 1974, 246; Roque v. Lapuz, L-32811, Mar. 31, 1980, 246;
Joseph and Sons Enterprises, Inc. v. CA, GR 46765, Aug. 29,
1986, 246; Leberman Realty Corp. & Aran Realty & Develop-
ment Corp. v. Joseph Typingco and CA, GR 126647, Jul. 29,
1998, 246; (5) Effect of Stipulation Allowing the Taking of
Possession, 247.
ARTICLE 1593 .................................................................................. 247
COMMENT: (1) Rescission of Sale of Personal Property, 247;
(2) Example of the Article, 248; (3) Right, Not Obligation, to
Rescind, 248.
CHAPTER 6 — ACTIONS FOR BREACH OF CONTRACT
OF SALE OF GOODS ............................................... 249
ARTICLE 1594 .................................................................................. 249
COMMENT: (1) Governing Law for Actions for Breach of
the Contract of Sale of Goods, 249; (2) Remedy of Buyer in a
Contract of Sale by the NAMARCO, 249; NAMARCO, etc. v.
Cloribel, L-26585, Mar. 13, 1968, 249.
ARTICLE 1595 .................................................................................. 250
COMMENT: Rules if Buyer Refuses to Pay, 250.
ARTICLE 1596 .................................................................................. 251
COMMENT: (1) Remedy of Seller if Buyer Refuses to Accept
and Pay, 252; (2) Measure of Damages, 252; (3) Query, 252.
ARTICLE 1597 .................................................................................. 253
COMMENT: When Seller May Totally Rescind the Contract
of Sale, 253.
ARTICLE 1598 .................................................................................. 253
COMMENT: Rule When Seller Has Broken a Contract to De-
liver Specific or Ascertained Goods, 253.
ARTICLE 1599 .................................................................................. 254
COMMENT: (1) Remedies of the Buyer if Seller Commits a
Breach of Warranty, 255; (2) Effect if Buyer Selects Any of the
Four Remedies Given, 255; (3) Effect if Buyer Still Accepted
the Goods Despite His Knowledge of the Breach of the War-
ranty, 256.
CHAPTER 7 — EXTINGUISHMENT OF SALE ............................... 257
ARTICLE 1600 .................................................................................. 257

xxii
 COMMENT: (1) How Sales Are Extinguished, 257; Bert Os-
meña v. Court of Appeals, GR 36545, Jan. 28, 1983, 257; (2)
Applicability of the Article to Both Consummated and Perfected
Contracts, 257; (3) Effect of a Claim for Damages, 257.

Section 1 — CONVENTIONAL REDEMPTION ............................... 258

ARTICLE 1601 .................................................................................. 258
COMMENT: (1) When Conventional Redemption Takes Place,
258; Hulganza v. CA, GR 56196, Jan. 7, 1987, 258; (2) Effect
of Inadequacy of Price, 259.
ARTICLE 1602 .................................................................................. 259
COMMENT: (1) When a Pacto de Retro Sale Can Be Presumed
an Equitable Mortgage, 260; (2) Definition of Equitable Mort-
gage, 260; (3) Effect of Stipulation Providing for a Renewal of
the Pacto de Retro, 261; (4) Effect of Stipulation Allowing Buyer
to Have the Usufruct in the Meantime, 261; Angel Villarica,
et al. v. Court of Appeals, et al., L-19196, Nov. 29, 1968, 261;
Magtira v. Court of Appeals, L-27547, Mar. 31, 1980, 262; De
Bayquen v. Baloro, GR 28161, Aug. 13, 1986, 263.
ARTICLE 1603 .................................................................................. 263
COMMENT: Effect of Doubt, 263.
ARTICLE 1604 .................................................................................. 263
ARTICLE 1605 .................................................................................. 264
COMMENT: Remedy of Reformation, 264; Raymundo Tolen-
tino & Lorenzo Roño, substituted by the Heirs, represented
by Emmanuela Roño, as Attorney-in-Fact v. CA, GR 128759,
Aug. 1, 2002, 264.
ARTICLE 1606 .................................................................................. 265
COMMENT: (1) Time Within Which to Redeem, 266; (2) Reason
for Limiting the Period of Redemption, 266; (3) Some Cases as
to the Period Contemplated, 266; (4) Extension of the Period
Within Which to Redeem, 267; (5) Effect of Excess Period, 268;
(6) Effect of the Last War on Period of Redemption, 268; (7) Is
Consignation Necessary?, 268; (8) Right to Redeem Even After
Final Judgment, 270; Pedro Tapas and Maria Oriña de Tapas
v. Court of Appeals, et al., L-22202, Feb. 27, 1976, 271; Ronaldo
P. Abilla & Geralda A. Dizon v. Carlos Ang Gobonseng, Jr. &
Theresita Mimie Ong, GR 146651, Aug. 6, 2002, 272; Ronaldo
P. Abilla & Geralda A. Dizon v. Carlos Ang Gobonseng, Jr. &
Theresita Mimie Ong, GR 146651, Jan. 17, 2002, 272.
ARTICLE 1607 .................................................................................. 275
COMMENT: (1) Reason for the Judicial Order Before Regis-
tration of the Consolidation of Ownership, 275; (2) Requisite
for Registration of Consolidation of Ownership, 275; Francisco

xxiii
 Crisologo, et al. v. Isaac Centeno, et al., L-20014, Nov. 27, 1968,
275; (3) Query: Is There a Necessity of a Judicial Order for the
Consolidation Itself?, 276; (4) Effect of Failure to Comply With
a Certain Condition, 277; (5) Case, 277; De Bayquen v. Baloro,
GR 28161, Aug. 13, 1986, 277.
ARTICLE 1608 .................................................................................. 277
COMMENT: Right of Sellers a retro to Redeem Property from
Persons Other than the Buyer a retro, 278.
ARTICLE 1609 .................................................................................. 278
COMMENT: (1) Subrogation of Buyer in the Seller’s Rights
and Action, 278; (2) Examples of Rights of Vendor Transferred
to the Vendee, 279; (3) Effect of Registration, 279; (4) Limita-
tions, 279.
ARTICLE 1610 .................................................................................. 279
COMMENT: (1) When Seller’s Creditor can use Seller’s Right
of Redemption, 279; (2) Reason why there should first be an
Exhaustion, 280; (3) Creditors may of course Exercise other
Rights, 280; (4) Effect of Creditor’s Exercise of Right of Re-
demption, 280.
ARTICLE 1611 .................................................................................. 280
COMMENT: (1) When Seller May be Required to Redeem the
Whole Property Although he had sold only part thereof, 281;
(2) Reasons for the Law, 281.
ARTICLE 1612 .................................................................................. 281
COMMENT: Rule When Property Owned in Common is Sold by
the Co-Owners Jointly and in the Same Contract, 281.
ARTICLE 1613 .................................................................................. 282
COMMENT: (1) When Buyer Cannot Be Compelled to Consent
to a Partial Redemption, 282; (2) Reason for the Law, 282.
ARTICLE 1614 .................................................................................. 282
COMMENT: (1) When Co-Owners Sell Their Shares Separately,
283; (2) Example, 283.
ARTICLE 1615 .................................................................................. 283
COMMENT: Rule if Buyer Dies, Leaving Several Heirs, 283.
ARTICLE 1616 .................................................................................. 284
COMMENT: (1) What Seller Must Give Buyer if Redemption
is Made, 284; (2) Price to Be Returned Not the Value, 284;
(3) The Expenses of the Contract, 284; (4) The Necessary and
Useful Expenses, 285; (5) No Reimbursement for Land Taxes,
285; (6) Effect if Buyer Tells Seller That Redemption Would Be
Refused, 285; (7) Bar, 286.

xxiv
 ARTICLE 1617 .................................................................................. 286
COMMENT: (1) Rule with Respect to Fruits, 286; (2) Reason
for Prorating in the Second Paragraph, 287.
ARTICLE 1618 .................................................................................. 287
COMMENT: (1) Property to Be Freed Generally From Charges
and Mortgages, 287; (2) Query, 287; (3) Lease, 287.

Section 2 — LEGAL REDEMPTION ................................................... 288

ARTICLE 1619 .................................................................................. 288
COMMENT: (1) Legal Redemption, 288; (2) Examples of Legal
Redemption, 288; Arnel Sy v. CA, State Investment House, Inc.
and the Register of Deeds of Rizal, GR 88139, Apr. 12, 1989,
290; (3) Pre-emption and Redemption Distinguished, 293; (4)
Basis of Legal Redemption, 293; (5) Property Affected, 293; (6)
Sheriff’s Sale, 294.
ARTICLE 1620 .................................................................................. 294
COMMENT: (1) Right of Legal Redemption of Co-Owner, 294;
Oscar C. Fernandez, et al. v. Sps. Carlos & Narcisa Tarun, GR
143868, Nov. 14, 2002, 294; (2) Who Can Exercise the Right
of Legal Redemption, 295; Federis v. Sunga, L-34803, Jan. 17,
1985, 296; (3) Entire Amount of Redemption, 296.
ARTICLE 1621 .................................................................................. 297
COMMENT: (1) Legal Redemption by Adjacent Owner of Ru-
ral Property, 297; (2) Against Whom Right Can Be Exercised,
297; Fabia v. Intermediate Appellate Court, L-66101, Nov. 22,
1984, 298.
ARTICLE 1622 .................................................................................. 298
COMMENT: Legal Pre-emption and Redemption by Adjacent
Owners of Urban Property, 298; Ortega v. Orcine and Esplana,
L-28317, Mar. 31, 1971, 299; Fidela Legaspi v. Court of Appeals,
et al., L-39877, Feb. 20, 1976, 299.
ARTICLE 1623 .................................................................................. 300
COMMENT: (1) Within What Period Right May Be Exercised,
300; Doromal v. Court of Appeals, L-36083, Sep. 5, 1975, 301;
(2) Preference of Co-owners, 301; (3) Problem, 301; (4) Notifica-
tion to Buyer that Redemption Would Be Exercised, 302; (5)
Redemption Offer Must Be With Legal Tender, 302; (6) Cases,
302; Etcuban v. CA, GR 45164, Mar. 16, 1987, 302; Cabrera v.
Villanueva, GR 75069, Apr. 15, 1988, 303; Mariano v. CA, 41
SCAD 927 (1993), 304; Adalia B. Francisco v. Zenaida Boiser,
GR 137677, May 31, 2000, 305.

xxv
CHAPTER 8 — ASSIGNMENT OF CREDITS AND
OTHER INCORPOREAL RIGHTS ........................ 306
ARTICLE 1624 .................................................................................. 306
COMMENT: (1) Assignment of Credit and Rights, 306; (2)
Perfection of Assignment, 306.
ARTICLE 1625 .................................................................................. 306
COMMENT: (1) Effectivity Against Third Persons, 306; (2)
Mortgage, 307; (3) Gratuitous Assignments, 307.
ARTICLE 1626 .................................................................................. 307
COMMENT: (1) Rule If Debtor Pays Creditor Before Former
Knows of the Assignment, 307; (2) Some Cross References,
307; (3) Rule if a Third Party Has the Funds, 308; (4) Case,
308; South City Homes, Inc., Fortune Motors (Phils.), Palawan
Lumber Manufacturing Corp. v. BA Finance Corp., GR 135462,
Dec. 7, 2001, 308.
ARTICLE 1627 .................................................................................. 309
COMMENT: Rights Included in the Assignment of a Credit,
309.
ARTICLE 1628 .................................................................................. 309
COMMENT: (1) Warranties in the Assignment of a Credit,
309; (2) Example, 310; (3) ‘Assignment of Credit’ Defined, 310;
Nyco Sales Corp. v. BA Finance Corp., GR 71694, Aug. 16,
1991, 310.
ARTICLE 1629 .................................................................................. 312
COMMENT: (1) Duration of the Warranty for the Debtor’s
Solvency, 312; (2) Example, 313.
ARTICLE 1630 .................................................................................. 313
COMMENT: (1) Warranty of a Person Who Sells an Inheritance
Without an Enumeration of the Things Included Therein, 313;
(2) Sale of Future Inheritance, 314.
ARTICLE 1631 .................................................................................. 314
COMMENT: Sale For a Lump Sum of the Whole of Certain
Rights, Rents, or Products, 314.
ARTICLE 1632 .................................................................................. 314
COMMENT: Rule if Vendor Still Profits Despite Sale of the
Inheritance, 314.
ARTICLE 1633 .................................................................................. 314
COMMENT: Corresponding Duty of a Buyer, 314.
ARTICLE 1634 .................................................................................. 315

xxvi
 COMMENT: Sale of a Credit or Other Incorporeal Rights in
Litigation, 315.
ARTICLE 1635 .................................................................................. 316
COMMENT: Instances When the Legal Redemption is Denied,
316.
CHAPTER 9 — GENERAL PROVISIONS .......................................... 317
ARTICLE 1636 .................................................................................. 317
COMMENT: Definition of Certain Terms, 318.
ARTICLE 1637 .................................................................................. 318
COMMENT: Protection to Innocent Third Persons in Connec-
tion With the Sale of REAL Property, 318; Republic v. Aquino,
GR 33983, Jan. 27, 1983, 318.
Title VII. BARTER OR EXCHANGE ................................................... 319
ARTICLE 1638 .................................................................................. 319
COMMENT: (1) ‘Barter’ Defined, 319; (2) Consummation and
Perfection of the Contract, 319; (3) Strict Construction of the
Price Control Law, 319.
ARTICLE 1639 .................................................................................. 320
COMMENT: Effect if Giver was NOT the Owner of the Thing
Delivered, 320.
ARTICLE 1640 .................................................................................. 320
COMMENT: Effect of Eviction in Case of Barter, 320.
ARTICLE 1641 .................................................................................. 320
COMMENT: Supplemental Use of the Provision on Sales,
321.
Title VIII. LEASE .................................................................................... 322

CHAPTER 1 — GENERAL PROVISIONS .......................................... 322

ARTICLE 1642 .................................................................................. 322
COMMENT: (1) ‘Lease’ (In General) Defined, 322; (2) Kinds of
Leases (From the Viewpoint of Subject Matter), 322.
ARTICLE 1643 .................................................................................. 322
COMMENT: (1) ‘Lease of Things’ Defined, 323; (2) Character-
istics or Requisites for Lease of Things, 323; LL and Company
Development and Agro Industrial Corp. v. Huang Chao Chun
& Yang Tung Fa, GR 142378, Mar. 7, 2002, 325; (3) ‘Rent’ De-
fined, 326; (4) Share Tenancy –– When House is Constructed,
327; Ceferino Marcelo v. Nazario de Leon, L-12902, Jul. 29,
1959, 327; (5) Distinctions Between ‘Lease of Things’ and ‘Other

xxvii
 Contracts’, 328; (6) Queries, 332; (7) Cases, 333; Syquia v. CA,
GR 61932, Jun. 30, 1987, 333; Imelda R. Marcos v. Sandigan-
bayan, GR 126995, Oct. 6, 1998, 333; (8) Membership in a
Homeowner’s Assoc. is Voluntary and cannot be Unilaterally
Forced, 334; Sta. Clara Homeowner’s Assoc. (thru its Board
of Directors) v. Sps. Victor Ma. Gaston & Lydia Gaston, GR
141961, Jan. 23, 2002, 334.
ARTICLE 1644 .................................................................................. 337
COMMENT: (1) Lease of ‘Work’ or ‘Service’, 337; (2) Distinctions
Between the Lease of Services and Contract for a Piece of Work,
337; (3) Examples, 338; (4) Similarities, 339; (5) Distinctions
Between ‘Lease of Services’ and ‘Agency’, 339; Nielsen & Co.,
Inc. v. Lepanto Consolidated Mining Co., L-21601, Dec. 28,
1968, 339; (6) Compensation in Lease of Services, 341.
ARTICLE 1645 .................................................................................. 342
COMMENT: (1) General Rule for Lease of Consumable Goods,
342; (2) Exceptions, 342.

CHAPTER 2 — LEASE OF RURAL AND URBAN LANDS ........... 343

Section 1— GENERAL PROVISIONS ................................................. 343
INTRODUCTORY COMMENT: (1) ‘Rural Lands’ Defined
(Product-Producing Lands), 343; (2) ‘Urban Lands’ Defined
(Non-Product Producing Lands), 343; (3) Problem, 343; (4) Form
for the Contract of Lease of Things, 343.
ARTICLE 1646 .................................................................................. 344
COMMENT: Persons Disqualified to Be Lessees Because Dis-
qualified to Buy, 344.
ARTICLE 1647 .................................................................................. 345
COMMENT: (1) Purpose in Recording a Lease, 345; (2) Proper
Authority Required, 345; (3) Administration of Paraphernal
Property, 345; Chua v. Court of Appeals, L-60015, Dec. 19,
1984, 346; (4) Authority of Husband to Lease Paraphernal
Property to Others, 346; Tan Queto v. Court of Appeals, GR
35648, May 16, 1983, 347; (5) Reason for Requiring the Special
Power of Attorney if the Lease is to be Recorded in the Registry
of Property, 347; (6) Authority of Father Administering Child’s
Real Estate, 347.
ARTICLE 1648 .................................................................................. 347
COMMENT: (1) Recording of Lease of Real Property, 347; (2)
Effects if the Lease of Real Property is Not Registered, 348.
ARTICLE 1649 .................................................................................. 348
COMMENT: (1) Assignment of the Lease, 349; (2) Reason for
the Law, 349; Dakudao v. Judge Consolacion, GR 54753, Jun.

xxviii
 24, 1983, 349; (3) When ‘Assignment’ is Not Really an Assign-
ment, 350; (4) Mortgage of the Lease Rights, 350.
ARTICLE 1650 .................................................................................. 350
COMMENT: (1) Right of Lessee to Sublease, 350; (2) ‘Sublease’
Distinguished from ‘Assignment’, 351; Manlapat v. Salazar, 98
Phil. 356, 351; (3) Effect of Implied Prohibition to Sublease,
352; (4) Problem, 352; (5) Another Problem, 353; (6) Case, 354;
Filoil Refinery Corp., et al. v. Judge Mendoza, et al., GR 55526,
Jun. 15, 1987, 354.
ARTICLE 1651 .................................................................................. 354
COMMENT: (1) Liability of Sublessee Towards Lessor, 354; (2)
Direct Action by the Lessor (Accion Directa), 354; (3) Problem,
355; (4) Case, 355; Marimperio Compañia Naviera, SA v. CA,
GR 40234, Dec. 14, 1987, 355.
ARTICLE 1652 .................................................................................. 356
COMMENT: (1) Subsidiary Liability of Sublessee for the Rent,
356; (2) Reason for the Disregard in General of Advanced Pay-
ment, 356; (3) Effect on Sublessee if the Lessee is Ousted, 356;
Sipin, et al. v. CFI of Manila, 74 Phil. 649, 357; Brodett v. De
la Rosa, 77 Phil. 572, 357; Phil. Consolidated Freight Lines,
Inc. v. Ajon, et al., L-10206-08, Apr. 16, 1958, 357; Syjuco v.
CA and Pilipinas Bank, GR 80800, Apr. 12, 1989, 358; Julius
C. Oreano v. CA, et al., GR 95900, Jul. 23, 1992, 359.
ARTICLE 1653 .................................................................................. 359
COMMENT: (1) Lessor’s Warranties, 359; (2) Partial Delivery of
the Land, 359; (3) Liability of Lessor for Hidden Defects, 359.
Section 2 — RIGHTS AND OBLIGATIONS OF THE
LESSOR AND THE LESSEE .................................. 360
ARTICLE 1654 .................................................................................. 360
COMMENT: (1) Three Important Duties of the Lessor, 360;
(2) The Duty to Deliver, 360; (3) The Duty to Make Necessary
Repairs, 361; (4) Maintenance in Possession, 362.
ARTICLE 1655 .................................................................................. 363
COMMENT: (1) Effect of Total or Partial Destruction, 363;
(2) Example, 363; (3) Cases, 364; Roces v. Rickards, (C.A.) 45
O.G. (Supp.), p. 97, 364; Shotwell v. Manila Motor Co., 53 O.G.
1423, L-7637, Dec. 29, 1956, 364; (4) Partial Destruction, 364;
(5) Illustrative Problem, 365.
ARTICLE 1656 .................................................................................. 365
COMMENT: (1) Lessor’s Right to Continue Engaging in Same
Business or Industry, 365; (2) May Lessor ‘Begin’ the Business?,
365; (3) Example, 366.

xxix
ARTICLE 1657 .................................................................................. 366
COMMENT: (1) Duty of Lessee to Pay the LEASE PRICE
(RENT), 366; Limpin Investment Corp. v. Lim Sy, GR 31920,
Apr. 8, 1988, 367; Filoil Refinery Corp., et al. v. Mendoza, GR
55526, Jun. 15, 1987, 367; Ramon Magsaysay Award Founda-
tion v. Court of Appeals, L-55998, Jan. 17, 1985, 370; Legarda
v. Zarate, 36 Phil. 68, 370; Velasco v. Lao Tam, 23 Phil. 495,
370; Parrada v. Jo-Juayco, 4 Phil. 710, 370; Trinidad de Leon
Vda. de Roxas v. Court of Appeals, L-39146, Mar. 25, 1975, 371;
Cabatan v. Court of Appeals, L-44875-76, L-45160, L-46211-
12, Jan. 12, 1980, 371; (2) Duty of Lessee to Use Properly the
Thing Leased, 371; (3) Duty of Lessee to Pay the Expenses for
the Deed of Lease, 372.
ARTICLE 1658 .................................................................................. 372
COMMENT: (1) When Lessee May Suspend the Payment of the
Rent, 372; (2) Effect if Cause for the Suspension Ceases, 372;
(3) Effectivity of the Suspension, 373.
ARTICLE 1659 .................................................................................. 373
COMMENT: (1) Alternative Remedies of Aggrieved Party
in Case of Non-fulfillment of Duties, 373; Baens v. Court of
Appeals, GR 57091, Nov. 23, 1983, 373; (2) Rescission, 374;
Montenegro v. Roxas de Gomez, 58 Phil. 726, 374; Phil. Amuse-
ment Ent., Inc. v. Natividad, GR 21876, Sep. 29, 1967, 374;
(3) Query, 375; (4) The Remedy of Damages, 375; Summers
v. Mahinay, (C.N.) 40 O.G. (Supp.), Nov. 1, 1941, p. 40, 375;
Limjap v. Animas, L-53334, Jan. 17, 1985, 376.
ARTICLE 1660 .................................................................................. 376
COMMENT: (1) Rule When Place Is Dangerous to Life or
Health, 376; (2) Reason for the Law, 376.
ARTICLE 1661 .................................................................................. 377
COMMENT: (1) Alteration of the Form of the Lease by the
Lessor, 377; (2) Alteration by the Lessee, 377.
ARTICLE 1662 .................................................................................. 377
COMMENT: (1) Rule in Case of Urgent Repairs, 377; (2) Length
of Time for Repairs, 378.
ARTICLE 1663 .................................................................................. 378
COMMENT: (1) Duties of Lessee Concerning Usurpation and
Repairs, 378; (2) Effect if Lessee Fails to Comply, 379; (3) Ef-
fects if Lessor Fails to Make the Urgent Repairs, 379.
ARTICLE 1664 .................................................................................. 379
COMMENT: Two Kinds of Trespass With Respect to the Prop-
erty Leased, 379; Vda. de Villaruel, et al. v. Manila Motor Co.
and Colmenares, L-10394, Dec. 13, 1958, 380.

xxx
ARTICLE 1665 .................................................................................. 385
COMMENT: (1) Duty of Lessee to Return the Property Leased,
385; (2) How the Returning is Made, 385; (3) When Return Must
be Made, 385; (4) Case, 385; Syjuco v. CA and Pilipinas Bank,
GR 80800, Apr. 12, 1989, 385.

ARTICLE 1666 .................................................................................. 386

COMMENT: Presumption That Lessee Had Received the

Things in Good Condition, 386.

ARTICLE 1667 .................................................................................. 386

COMMENT: (1) Responsibility for Deterioration or Loss

–– General Rule, 386; (2) Exception, 387; Gonzales v. Mateo,
74 Phil. 673, 387.

ARTICLE 1668 .................................................................................. 387

COMMENT: (1) Deterioration Caused by Others, 387; (2) Rea-

son, 387; (3) Query, 388.

ARTICLE 1669 .................................................................................. 388

COMMENT: (1) When Lease is Supposed to End, 388; (2) Neces-

sity or Non-necessity of Demand, 388; Bernardo v. People, GR
62114, Jul. 5, 1983, 389; Dakudao v. Judge Consolacion, GR
54753, Jun. 24, 1983, 389; Caballero v. CA, GR 59888, Jan. 29,
1993, 389; Lesaca v. Judge Cuevas, GR 48419, Oct. 27, 1993,
390; (3) Offer to Sell, 390; (4) Rules on Extension of the Lease
Period, 391; Litao v. National Association of Retired Civil Em-
ployees, L-18998, Jul. 31, 1963, 392; Ramon Magsaysay Award
Foundation v. Court of Appeals, L-55998, Jan. 17, 1985, 392.

ARTICLE 1670 .................................................................................. 393

COMMENT: (1) Implied New Lease (Tacita Reconduccion), 393;

Pulido v. Lazaro, GR 72870, Feb. 23, 1988, 393; (2) Effects of
the Implied New Lease, 394; Gustilo v. Court of Appeals, GR
61083, Feb. 28, 1983, 394; Miranda, et al. v. Lim Shi, L-18494,
Dec. 24, 1964, 394; (3) When There Is No Implied New lease,
395; (4) Illustrative Problem, 395; (5) Effect of Implied New
Lease On Exceptional Conditions in the Contract, 396; Dizon
v. Magsaysay, L-23399, May 31, 1974, 396; (6) No Implied Re-
newal of Lease, 397; Amiano Torres & Josefina Torres v. C.A.
& Adela B. Flores, GR 92540, Dec. 11, 1992, 397.

ARTICLE 1671 .................................................................................. 397

COMMENT: Rule if Lessor Objects to Lessee’s Continued Pos-

session, 397; Dakudao v. Judge Consolacion, GR 54753, Jun.
24, 1983, 398; Uichangco, et al. v. Laurilla, L-13935, Jun. 30,
1960, 398.

xxxi
ARTICLE 1672 .................................................................................. 399
COMMENT: Effect of Implied New Lease on Sureties and
Guarantors, 399.
ARTICLE 1673 .................................................................................. 399
COMMENT: (1) Causes for Ejectment of the Lessee, 400;
Cruz v. Judge Puno, Jr., GR 50998, Jan. 31, 1983, 400; Peran
v. Presiding Judge, GR 57259, Oct. 13, 1983, 400; Amending
Certain Provisions of Republic Act No. 6359 Entitled “An Act
To Regulate Rentals for Two Years of Dwelling Units or of a
Land on Which Another’s Dwelling Is Located and Penalizing
Violations Thereof, and for Other Purposes,” 401; Caburnay v.
Ongsiako, GR 57321, Feb. 24, 1983, 402; Sinclair v. CA, GR
52435, Jul. 20, 1982, 402; Republic Act 9161, 402; Overview,
402; Grounds for Judicial Ejectment, 404; Prohibition Against
Ejectment by Reason of Sale of Mortgage, 405; Rent-to-Own
Scheme, 405; Application of Civil Code and Rules of Court, 406;
Miscellaneous Matters, 406; (2) Laws Affecting Urban Land
Reform, 407; (3) Cases, 407; Bermudez v. IAC, GR 73206, Aug.
6, 1986, 407; House International Building Tenants Associa-
tion, Inc. v. IAC, GR 75287, Jun. 30, 1987, 408; (4) Expiration
of the Period, 408; Cruz v. Puno, Jr., GR 50998, Jan. 31, 1983,
409; Santos, et al. v. Court of Appeals, GR 45071, May 30,
1983, 409; Cruz v. Puno, Jr., GR 50998, Jan. 31, 1983, 409;
Francisco Saure v. Hon. Pentecostas, L-46468, May 21, 1981,
409; Baens v. Court of Appeals, GR 57091, Nov. 25, 1983, 409;
Limpin Investment Corp. v. Lim Sy, L-31920, Apr. 8, 1988,
410; (5) Non-Payment of Rent, 410; Trinidad de Leon Vda. de
Roxas v. Court of Appeals, L-39146, Mar. 25, 1975, 411; Petra
Vda. de Borromeo v. Pogoy, GR 63277, Nov. 29, 1983, 412; (6)
Violation of Contractual Conditions, 413; (7) No Authority to
use Force and Violence, 413; Heirs of Pedro Laurora & Leonora
Laurora v. Sterling Technopark III & S.P. Properties, Inc., GR
146815, Apr. 9, 2003, 413.
ARTICLE 1674 .................................................................................. 413
COMMENT: (1) Writ of Preliminary Mandatory Injunction in
Ejectment Cases, 414; Ubarra v. Tecson, Administrative Mat-
ter No. R-4-RTJ, Jan. 17, 1985, 414; Roxas v. IAC, GR 74279,
Jan. 20, 1988, 414; Top Rate International Services, Inc. v. CA,
et al., GR 84141, Feb. 8, 1989, 416; (2) Conditions Before the
Writ of Preliminary Mandatory Injunction May Be Availed of In
Unlawful Detainer Cases, 416; (3) Illustrative Problems, 417.

ARTICLE 1675 .................................................................................. 418

COMMENT: When the Legal Periods for the Lease Cannot be

availed of, 418; La Jolla, Inc. v. CA & Pelagia Viray Aguilar,
GR 115851, Jun. 20, 2001, 418.

ARTICLE 1676 .................................................................................. 418

xxxii
 COMMENT: (1) Rules in case the Leased Land is Sold to a
Buyer, 419; (2) Query: Must a pruchaser of property respect
a lease thereon?, 419; (3) Illustrative Problems, 419; (4) Some
Doctrines and Cases, 420; Pang Lim and Galvez v. Lo Seng, 42
Phil. 282, 420; Quimson v. Suarez, 45 Phil. 901, 421; (5) Rural
Leases, 421.

ARTICLE 1677 .................................................................................. 422

COMMENT: When Buyer A Retro Can Eject, 422; Dorado and

Vista v. Verina, 34 Phil. 264, 422.

ARTICLE 1678 .................................................................................. 423

COMMENT: (1) Right of Lessee to Useful Improvements and
Ornamental Expenses, 423; (2) Example with Reference to
Useful Improvement, 423; Salonga v. Farrales, L-47088, Jul.
10, 1981, 424; (3) Rule Under the Old Law, 424; (4) Comment
of the Code Commission, 424; (5) Meaning of ‘Good Faith’ in
the Article, 424; (6) Rule if Lessor Refuses to Reimburse, 425;
Juanito A. Rosario v. CA & Alejandro Cruz, GR 89554, Jul. 10,
1992, 425; (7) Bar, 425; (8) Rule if Useful Improvements Are
Not Suitable, 426; (9) Rule if There Is No True Accession, 426;
(10) Query, 427; (11) Stipulation Giving Lessor the Improve-
ments, 427; (12) Conclusive Presumption, 428; Sps. Dario &
Matilde Lacap v. Jouvet Ong Lee, represented by Reynaldo de
los Santos, GR 142131, Dec. 11, 2002, 428.
ARTICLE 1679 .................................................................................. 428
COMMENT: (1) Rules Regarding Place of Payment of the Rent,
428; (2) Rules Regarding Time of Payment of the Rent, 429;
(3) Prescription in Unlawful Detainer, 429; Peran v. Presid-
ing Judge, GR 57259, Oct. 13, 1983, 429; (4) Judgment in an
Ejectment Case, 429; Salinas v. Judge Navarro, GR 50299,
Nov. 29, 1983, 429.
Section 3 — SPECIAL PROVISIONS FOR LEASES
OF RURAL LANDS ................................................... 430
ARTICLE 1680 .......................................................................... 430
COMMENT: (1) Effect of Sterility of Land in Case of Rural
Lease, 430; (2) Effect of LOSS Due to a Fortuitous Event, 430;
(3) Illustrative Case, 431; Cuyugan v. Dizon, 79 Phil. 80, 431; (4)
Amount of Reduction, 431; (5) Problem, 431; (6) Non-Reduction
of Rent Even if Business Where Lessee Is Engaged In Becomes
Poor, 432; Laguna Tayabas Bus Co. v. Manabat, L-23546, Aug.
29, 1974, 432.
ARTICLE 1681 .................................................................................. 432
COMMENT: Loss of Fruits After Separation from Stalk, Root,
or Trunk, 432.
ARTICLE 1682 .................................................................................. 433

xxxiii
 COMMENT: Duration of Rural Lease, 433; Iturralde v. Gar-
duno, 9 Phil. 605, 433.
ARTICLE 1683 .................................................................................. 433
COMMENT: (1) Use of the Premises for Preparatory Labor, 434;
(2) Ownership of Pending Crops, 434; (3) Example of a Proper
Action Under the Article, 434.
ARTICLE 1684 .................................................................................. 434
COMMENT: (1) Rule for Land Tenancy on Shares, 434; (2)
Meaning of ‘Tenant,’ 435; (3) When a Tenant Works for Differ-
ent Landowners, 435.
ARTICLE 1685 .................................................................................. 436
COMMENT: (1) Ejectment of Tenant on Shares, 436; Adriano
Amante v. Court of Agrarian Relations and Sergio Pama, L-
21283, Oct. 22, 1966, 436; (2) Some Doctrines, 437; Joson, et al.
v. Lapuz, L-10793, May 30, 1958, 438; Maristela, et al. v. Reyes
and Valerio, L-11537, Oct. 31, 1958, 438; (3) Rural Leases, 440;
Rolando Sigre v. CA & Lilia Y. Gonzales, as co-administratrix
of the Estate of Matias Yusay, GR 109568, Aug. 8, 2002; 440;
(4) Pertinent Provisions on Agricultural Lessees, 443; (5) Agri-
cultural Leasehold Relationship, 443; Milestone Realty & Co. v.
CA, GR 135999, Apr. 19, 2002, 443; (6) Agricultural Leasehold
Relation not Extinguished by Death or Incapacity of the Parties,
444; Dionisia L. Reyes v. Ricardo L. Reyes, Lazaro L. Reyes,
Narciso L. Reyes & Marcelo L. Reyes, GR 140164, Sep. 6, 2002,
444; (7) Appropriate Mode of Appeal from Decisions of Special
Agrarian Courts, 446; Land Bank of the Phils. v. Arlene de Leon
& Bernardo de Leon, GR 143275, Mar. 20, 2003, 446; (8) Case,
446; Rodolfo Arzaga & Francis Arzaga v. Salvacion Copias &
Prudencio Calandria, GR 152404, Mar. 28, 2003, 446.

Section 4 — SPECIAL PROVISIONS FOR THE LEASE

OF URBAN LANDS ................................................... 447
ARTICLE 1686 .................................................................................. 447
COMMENT: (1) Repairs for Which Urban Lessor is Liable, 447;
(2) Rule in Case of Doubt, 448.
ARTICLE 1687 .................................................................................. 448
COMMENT: (1) General Rules if Duration of Lease Is Not
Fixed, 448; Crisostomo v. CA, L-43427, Aug. 30, 1982, 449;
Roxas v. Alcantara, L-49659, Mar. 25, 1982, 449; (2) When Art.
1687 Applies, 450; Divinagracia Agro-Commercial, Inc. v. CA
and Rufino Fernandez, L-47350, Apr. 21, 1981, 450; Ligaya S.
Santos v. CA & Phil. Geriatrics Foundation, Inc., GR 135481,
Oct. 23, 2001, 450; (3) When Art. 1687 Will Not Apply, 451;
Rivera v. Florendo, GR 60066, Jul. 31, 1986, 452; (4) Fixing
of the Longer Period (As a Sort of Reward), 453; Divinagracia
Agro-Commercial, Inc. v. CA and Rufino Fernandez, L-47350,

xxxiv
 Apr. 21, 1981, 453; Guiang v. Samano, GR 50501, Apr. 22, 1991,
453; La Jolla, Inc. v. CA & Pelagia Viray de Aguilar, GR 115851,
Jun. 20, 2001, 454; Eulogia ‘Eugui’ Lo Chua v. CA, et al., GR
140886, Apr. 19, 2001, 454; Acasio v. Corporacion de los P.P.
Dominicos de Filipinas, 100 Phil. 523, 455; F.S. Divinagracia
Agro-Commercial, Inc. v. CA and Rufino Fernandez, L-47350,
Apr. 21, 1981, 456; Divinagracia Agro-Commercial, Inc. v. CA
and Rufino Fernandez, L-47350, Apr. 21, 1981, 457; Heirs of
Manuel T. Suico v. CA, GR 120615, Jan. 21, 1997, 78 SCAD
159, 457.
ARTICLE 1688 .................................................................................. 458
COMMENT: Duration of Lease of Furniture if Premises Are
Also Leased, 458.

CHAPTER 3 — WORK AND LABOR ................................................... 459

Section 1 — HOUSEHOLD SERVICE ................................................. 459

ARTICLE 1689 .................................................................................. 459
COMMENT: (1) Scope of Household Service, 459; (2) Service
Without Compensation, 459.
ARTICLE 1690 .................................................................................. 459
COMMENT: (1) Medical Attendance, 459; (2) Head of the
Family, 460.
ARTICLE 1691 .................................................................................. 460
COMMENT: Education of House Helper, 460.
ARTICLE 1692 .................................................................................. 460
COMMENT: (1) Duration of Contract for Household Service,
460; (2) Formalities of the Contract, 461.
ARTICLE 1693 .................................................................................. 461
COMMENT: Clothing of House Helper, 461.
ARTICLE 1694 ................................................................................. 461
COMMENT: Treatment of the House Helper, 461.
ARTICLE 1695 .................................................................................. 461
COMMENT: (1) Ten Hours Work Daily, 462; (2) Additional
Compensation, 462; (3) Computation of Period, 462; (4) Rule
for Yayas, 462; (5) Vacation for Helper, 462.
ARTICLE 1696 .................................................................................. 463
COMMENT: Rule if Helper Dies, 463.
ARTICLE 1697 .................................................................................. 463
COMMENT: Termination of the Contract if Period is Fixed,
463.

xxxv
 ARTICLE 1698 .................................................................................. 463
COMMENT: Rule if Term is Not Fixed, 464.
ARTICLE 1699 .................................................................................. 464
COMMENT: Written Certification by Head of Family or by
Employer, 464.
Section 2 — CONTRACT OF LABOR ................................................. 464

INTRODUCTORY COMMENT: Comment of the Code Com-

mission, 464; National Housing Corporation v. Juco, L-64313,
Jan. 17, 1985, 465.
ARTICLE 1700 .................................................................................. 465
COMMENT: (1) ‘Contract of Labor’ Defined, 465; (2) Essential
Characteristics of the Contract of Labor, 465; Pan American
World Airways, Inc. v. Tomas M. Espiritu and Court of Appeals,
L-35401, Jan. 20, 1976, 466; (3) Labor Union or Organization,
467; Montaner v. National Labor Relations Commission, GR
55814, Feb. 21, 1983, 467; (4) ‘Collective Bargaining’ Defined,
467; (5) ‘Strike’ and ‘Lockout’ Distinguished, 467; (6) When
a Strike is Lawful, 468; Philippine Marine Officers Guild v.
Compañia Maritima, et al., L-20662, Mar. 19, 1968, 468; United
CMC Textile Workers Union v. Ople, GR 62037, Jan. 27, 1983,
469; (7) Pay of Laborers During the Strike, 469; Philippine As-
sociation of Free Labor Unions v. Court of First Instance, GR
49580, Jan. 17, 1983, 470; (8) ‘Closed Shop’ as Distinguished
from an ‘Open Shop’ and a ‘Closed Union Shop with Open Un-
ion’, 470; (9) Case, 471; Visayan Transportation Co. v. Pablo
Java, 93 Phil. 962, 471; (10) National Labor Relations Commi-
sion (NLRC), 471; (11) Regular Employment, 471; Paguio v.
NLRC & Metromedia Times Corp., GR 147816, May 9, 2003,
471; (12) Muslim Holiday Pay, 473; San Miguel Corp. v. CA,
GR 14775, Jan. 30, 2002, 473; (13) Voluntary Arbitration, 474;
Union of Nestlé Workers Cagayan de Oro Factory (UNWCF) v.
Nestlé Phils., Inc., GR 148303, Oct. 17, 2002, 474.
ARTICLE 1701 .................................................................................. 474
COMMENT: (1) Protection for Capital, Labor, and the Public,
474; (2) Examples of ‘Unfair Labor Practices’ (BAR), 475; (3)
Some Rights Particularly Affecting Filipino Women Laborers or
Employees, 476; (4) Remedy, 476; Kapisanan (KMP) v. Trajano,
L-62306, Jan. 21, 1985, 476; (5) Illegal Recruitment, 476; People
v. Angeles, GR 132376, Apr. 11, 2002, 476; (6) Elements Present
in an Employer-Employee Relationship, 477; (7) Quitclaims are
Contracts of Waiver, 478; MC Engineering v. CA, GR 104047,
Apr. 3, 2002, 478.
ARTICLE 1702 .................................................................................. 478
COMMENT: Rule in Case of Doubt, 478.

xxxvi
ARTICLE 1703 .................................................................................. 479
COMMENT: Involuntary Servitude Prohibited, 479.
ARTICLE 1704 .................................................................................. 479
COMMENT: (1) Formation of Bargaining Units, 479; George
and Peter Lines v. Associated Labor Unions, L-51602, Jan. 17,
1985, 479; (2) Factors Which May Be Considered by the Court
to Determine Whether or Not a Bargaining Unit Has Been
Properly Formed, 480; (3) Certification Proceedings, 480; (4)
Case, 481; Samahang v. Noriel, L-56588, Jan. 17, 1985, 481.
ARTICLE 1705 .................................................................................. 481
COMMENT: (1) Payment of Wages in Legal Currency, 481;
(2) Rule Re Government Employees, 481; (3) Jurisdiction of
Labor Arbiters Re Wages, Etc., 481; (4) Cases, 482; Congson v.
NLRC, GR 114250, Apr. 5, 1995, 60 SCAD 324, 482; Willington
Investment & Manufacturing Corp. v. Trajano, GR 114698, Jul.
3, 1995, 62 SCAD 284, 482; Metro Transit Organization, Inc. v.
NLRC, GR 116008, Jul. 11, 1995, 62 SCAD 477, 482.
ARTICLE 1706 .................................................................................. 483
COMMENT: Withholding of Wages, 483.
ARTICLE 1707 .................................................................................. 483
COMMENT: (1) Wage Lien, 483; (2) Query, 483; (3) Terms
Defined, 484.
ARTICLE 1708 .................................................................................. 484
COMMENT: (1) Generally, Wages Are Not Subject to Execution,
484; (2) Salaries of Government Employees, 484.
ARTICLE 1709 .................................................................................. 485
COMMENT: No Seizure or Retention by Employer, 485.
ARTICLE 1710 .................................................................................. 485
COMMENT: (1) Dismissal of Laborers, 485; Alzosa v. National
Labor Relations Commission, GR 50296, Feb. 14, 1983, 486;
Nicanor M. Baltazar v. San Miguel Brewery, L-23076, Feb.
27, 1969, 486; Polymedic General Hospital v. NLRC, L-64190,
Jan. 31, 1985, 487; Villadolid v. Inciong, GR 52364, Mar. 25,
1983, 487; Bustillos v. Inciong, GR 45396, Jan. 27, 1983, 487;
FEM’s Elegance Lodging House v. Murillo, GR 117442-43, Jan.
11, 1995, 58 SCAD 79, 487; Marcelo v. NLRC, GR 113458, Jan.
31, 1995, 58 SCAD 643, 487; General Textile, Inc. v. NLRC, GR
102969, Apr. 4, 1995, 60 SCAD 296, 488; Unicraft Industries
International Corp., etc. v. CA, etc., GR 134903, Jan. 16, 2002,
488; (2) Some Justifiable Causes for Dismissal, 488; Sumandi v.
Leogardo, L-67635, Jan. 17, 1985, 489; (3) Reinstatement Pro-
vided There is No Laches, 489; (4) BAR, 490; (5) Unfair Labor
Practice Committed on Agricultural Laborers, 491.

xxxvii
 ARTICLE 1711 .................................................................................. 491
COMMENT: Death or Injuries to Laborer, 491.
ARTICLE 1712 .................................................................................. 491
COMMENT: (1) Background of Compensation Laws for Death
or Injuries, 492; (2) Rules Re Employer’s Liability, 492; (3)
Cases, 493; Avendaño v. Employee’s Compensation Commission,
GR 48593, Apr. 30, 1980, 493; Cayco v. ECC, GR L-49755, Aug.
21, 1980, 494; Ajero v. ECC, GR L-44597, Dec. 29, 1980, 494;
Mandapat v. ECC, 191 Phil. 47 (1981), 494; Nemaria v. ECC,
GR L-57889, Oct. 28, 1987, 494; De Leon v. ECC, GR L-46474,
Nov. 14, 1988, 495; (4) Retirement Benefits, 495; Gamogamo v.
PNOC Shipping & Transport Corp., GR 141707, May 7, 2002,
495; Norma Orate v. CA, ECC, SSS (Manila Bay Spinning Mills,
Inc.), GR 132761, Mar. 26, 2003, 495.

Section 3 — CONTRACT FOR A PIECE OF WORK ....................... 499

ARTICLE 1713 .................................................................................. 499
COMMENT: (1) ‘Contract for a Piece of Work’ Distinguished
from ‘Lease of Services’, 500; (2) Elements of the Contract of
Work, 500; (3) ‘Contractor’ Defined, 500; (4) Test, 500; (5) What
Contractor May Furnish, 500; (6) Contract for a Piece of Work
Distinguished from the Contract of Sale, 501; (7) ‘Pakyao’ Ar-
rangement, 501; Dingcong v. Guingona, GR 76044, Jun. 28,
1988, 501.
ARTICLE 1714 .................................................................................. 502
COMMENT: Duties of Contractor Who Furnishes Both Work
and the Material, 502.
ARTICLE 1715 .................................................................................. 502
COMMENT: Remedy of Employer in Case of DEFECTS, 503.
ARTICLE 1716 .................................................................................. 503
COMMENT: Agreement Waiving or Limiting Contractor’s
Liability, 503.
ARTICLE 1717 .................................................................................. 503
COMMENT: (1) Risk of Loss if Contractor Furnished Also the
Material, 504; (2) Fortuitous Event or Unavoidable Accident,
504.
ARTICLE 1718 .................................................................................. 504
COMMENT: (1) Arts. 1718 and 1717 Distinguished (Re Risk
of Loss), 505; (2) Problem, 505.
ARTICLE 1719 .................................................................................. 505
COMMENT: (1) Effect When Employer Accepts the Work, 506;
(2) Filing of a Complaint, 506; (3) Inspection of a Concrete
Wall, 506.

xxxviii
ARTICLE 1720 .................................................................................. 506
COMMENT: (1) Place of Payment, 506; Gonzales v. Court of
Appeals, GR 55943, Sep. 21, 1983, 507; (2) Applicability of Ar-
ticle to Partial Delivery, 507; Pasay City Government v. CFI,
Manila, L-32162, Sep. 28, 1984, 507.
ARTICLE 1721 .................................................................................. 507
COMMENT: Default of the Employer, 507.
ARTICLE 1722 .................................................................................. 508

COMMENT: (1) Non-completion Due to Defective Materials or

Orders from Employer, 508; (2) Rules of Professional Organi-
zations, 508.

ARTICLE 1723 .................................................................................. 508

COMMENT: (1) Liability for Collapse of a Building, 509; (2)

Reason for the Liability, 509; (3) Collapse of a Building During
an Earthquake, 509.
ARTICLE 1724 .................................................................................. 510
COMMENT: (1) Applicability of the Article Re Structure, 510;
Nakpil and Sons v. CA, GR 47851, Oct. 3, 1986, 510; (2) Gen-
eral Rule, 510; (3) Exception, 510; Royal Lines, Inc. v. CA, GR
27239, Aug. 20, 1986, 511; Arenas, et al. v. CA and Cruz, GR
56524, Jan. 27, 1989, 511; (4) Purpose of Requiring Written
Authorization, 511.
ARTICLE 1725 .................................................................................. 511
COMMENT: (1) Withdrawal by Owner, 512; (2) Effect of Ad-
vance Payment, 512.
ARTICLE 1726 .................................................................................. 512
COMMENT: Instances When Contract Can Be Rescinded,
513.
ARTICLE 1727 .................................................................................. 513
COMMENT: Contractor’s Responsibility for His Own Employ-
ees, 513.
ARTICLE 1728 .................................................................................. 514
COMMENT: Effect of Death or Physical Injuries, 514.
ARTICLE 1729 .................................................................................. 514
COMMENT: (1) Subsidiary Liability of Owners to Laborers
and Materialmen, 514; (2) Special Law Regarding Contractor’s
LABOR BOND, 515; Act 3959, 515; (3) Remedies Under Act
3688, 516; New Manila Lumber Co. v. Republic, L-14248, Apr.
28, 1960, 516.

xxxix
 ARTICLE 1730 .................................................................................. 517
COMMENT: (1) Satisfactory Completion of the Work, 517; (2)
Effect of Certification by Owner’s Architect, 517; (3) Effect if
There Is No Stipulation Requiring Approval by a Third Person,
517.
ARTICLE 1731 .................................................................................. 517
COMMENT: (1) Possessory Lien of Worker, 517; (2) Some
Doctrines, 518.

Section 4 — COMMON CARRIERS ..................................................... 518

Subsection 1 — GENERAL PROVISIONS ......................................... 518
INTRODUCTORY COMMENT: (1) A ‘Carrier’ Defined, 518;
Japan Airlines v. CA, et al., GR 118664, Aug. 7, 1998, 519;
(2) Private Carrier Distinguished from Common Carrier, 519;
Sarkies Tour Philippines v. Intermediate Appellate Court,
GR 63723, Sep. 2, 1983, 519; Home Insurance Company v.
American Steamship Agencies, Inc., et al., L-25599, Apr. 4,
1968, 520; (3) Liability for Damages if Common Carriage Has
Been Transferred, 520; Perez v. Gutierrez, 53 SCRA 149, 520;
(4) Prescription, 520.
ARTICLE 1732 .................................................................................. 521
COMMENT: (1) Test Whether Carrier Is Common or Private,
521; (2) Distinction Between a ‘Common or Public Carrier’ and
a ‘Private or Special Carrier’, 521; Phil. American General
Insurance Co. v. PKS Shipping Co., GR 149038, Apr. 9, 2003,
521; (3) Examples, 522; (4) Contract of Towage, 523; (5) Some
Cases, 523; De Guzman v. CA and Cendaña, L-47822, Dec. 22,
1988, 523; Chua Yek Hong v. IAC, et al., GR 74811, Sep. 30,
1988, 523; FGU Insurance Corp. v. G.P. Sarmiento Trucking
Corp. & Lambert M. Eroles, GR 141910, Aug. 6, 2002, 524; (6)
Findings of Fact, 526; Phil. American General Insurance Co. v.
PKS Shipping Co., GR 149038, Apr. 9, 2003, 526.
ARTICLE 1733 .................................................................................. 527
COMMENT: Extraordinary Diligence, 527; Zulueta v. Pan
American World Airways, Inc., 43 SCRA 397, 528; Davila v.
Phil. Air Lines, 49 SCRA 497, 528; Samar Mining Co. v. Nor-
deutecher Lloyd, L-28873, Oct. 23, 1984, 528; Eastern Ship-
ping lines, Inc. v. CA, GR 94151, Apr. 30, 1991, 528; Belgian
Overseas Chartering & Shipping N.V. and Jardine Davies
Transport Services, Inc. v. Phil. First Insurance Co., Inc., GR
143133, Jun. 5, 2002, 530.
Subsection 2 — VIGILANCE OVER GOODS .................................... 532
ARTICLE 1734 .................................................................................. 532
COMMENT: (1) When Common Carrier Is Not Liable, 532;
Phil. American General Insurance Co. v. PKS Shipping Com-

xl
 pany, GR 149038, Apr. 9, 2003, 532; (2) Burden of Proof, 533;
(3) Concept of ‘Public Enemy’, 534; (4) Act or Omission, 534; (5)
Order or Act of Competent Public Authority, 534.
ARTICLE 1735 .................................................................................. 534
COMMENT: (1) Presumption of Fault of Negligence, 534; Phil.
American General Insurance Co. v. PKS Shipping Company, GR
149038, Apr. 9, 2003, 535; (2) Defense Under Art. 1735, 535.
ARTICLE 1736 .................................................................................. 535
COMMENT: (1) Reason for the Extraordinary Responsibility of
the Common Carrier, 536; (2) When Liability May Be Limited,
536; (3) Misdelivery, 536; Ang v. Compania Maritima, L-30805,
Dec. 26, 1984, 536.
ARTICLE 1737 .................................................................................. 536
COMMENT: (1) Continuing Liability, 537; (2) Exception, 537.
ARTICLE 1738 .................................................................................. 537
COMMENT: Liability While in the Warehouse, 537.
ARTICLE 1739 .................................................................................. 537
COMMENT: Natural Disaster Being the Cause, 538; Phil.
American General Insurance Co., Inc. v. MGG Marine Services,
Inc. & Doroteo Gaerlan, GR 135645, Mar. 8, 2002, 538.
ARTICLE 1740 .................................................................................. 540
COMMENT: (1) Effect of Default caused by Negligence, 541;
BAR, 541.
ARTICLE 1741 .................................................................................. 541
COMMENT: Contributory Negligence of the Shipper or Owner,
541.
ARTICLE 1742 .................................................................................. 541
COMMENT: If Cause Be the Character of the Goods or Faulty
Packing, 542.
ARTICLE 1743 .................................................................................. 542
COMMENT: Seizure or Destruction by Order of Public Author-
ity, 542.
ARTICLE 1744 .................................................................................. 542
COMMENT: Diligence Less Than Extraordinary, 542.
ARTICLE 1745 .................................................................................. 543
COMMENT: Void Stipulations, 543; Pedro de Guzman v. CA
and Ernesto Cendaña, L-47822, Dec. 22, 1988, 544.

xli
 ARTICLE 1746 .................................................................................. 545
COMMENT: When Stipulation Is Vitiated by Threat or Undue
Influence, 545.
ARTICLE 1747 ................................................................................. 545
COMMENT: Effect of Default or Change of Route, 545.
ARTICLE 1748 ................................................................................. 545
COMMENT: Effect of Strikes or Riots, 545.
ARTICLE 1749 ................................................................................. 546
COMMENT: (1) Stipulation Limiting Carrier’s Liability, 546;
(2) Rule in Carriage of Goods by Sea Act, 546; (3) Cases, 546;
Belgian Overseas Chartering & Shipping N.V. v. Phil. First
Instance Co., GR 143133, Jun. 5, 2002, 546; Wallem Phils. Ship-
ping, Inc. & Seacoast Maritime Corp. v. Prudential Guarantee
& Insurance, Inc., and CA, GR 152158, Feb. 7, 2003, 547.
ARTICLE 1750 .................................................................................. 549
COMMENT: Fixing of Sum That May Be Recovered, 550.
ARTICLE 1751 .................................................................................. 550
COMMENT: Effect of Lack of Competition, 550.
ARTICLE 1752 .................................................................................. 550
COMMENT: Presumption of Negligence Even if There Is Agree-
ment on Limited Liability, 550.
ARTICLE 1753 .................................................................................. 550
COMMENT: (1) Conflicts Rule –– Law of Destination, 550; (2)
Cases, 551; Sea-Land Service, Inc. v. IAC, GR 75118, Aug. 31,
1987, 551.
ARTICLE 1754 .................................................................................. 553
COMMENT: (1) Rules as to Baggage, 553; (2) Effect of Non-
Payment of Baggage Fare, 553; (3) Freight Tickets, 553; (4)
Case, 553; Compania Maritima v. Limson, GR 27134, Feb. 28,
1986, 553.

Subsection 3 — SAFETY OF PASSENGERS ..................................... 554

ARTICLE 1755 .................................................................................. 554
COMMENT: (1) Reason for ‘Utmost Diligence’ in the Carriage
of Passengers, 554; Davila v. Philippine Air Lines, 49 SCRA
497, 555; Philippine Air Lines v. Court of Appeals, L-46558,
Jul. 31, 1981, 555; (2) Perfection of the Contract of Common
Carriage of Passengers, 555; (3) Parties to the Contract, 556;
Perez v. Gutierrez, 53 SCRA 149, 557; (4) Passengers, 557; (5)
Non-passengers, 558; (6) Burden of Proof and Proceeding, 559;

xlii
 (7) Procedural Techniques, 560; (8) Query, 560; (9) Case, 562;
LRTA & Rodolfo Roman v. Marjorie Navidad, Heirs of the late
Nicanor Navidad & Prudent Security Agency, GR 145804, Feb.
6, 2003, 562.
ARTICLE 1756 .................................................................................. 562
COMMENT: (1) Presumption of Negligence, 562; LRTA v.
Navidad, GR 145804, Feb. 6, 2003, 562; (2) How Presumption is
Rebutted, 563; (3) Liability of Carrier, 563; (4) Recklessness on
the Part of the Driver, 563; (5) Recklessness on the Part of the
Owner or Operator Himself, 564; (6) No Recklessness, 565.
ARTICLE 1757 .................................................................................. 566
COMMENT: Effect of Contrary Stipulation, 566.
ARTICLE 1758 .................................................................................. 566
COMMENT: (1) Effect of Gratuitous Carriage or Carriage at
a Reduced Rate, 566; (2) Effect of Reduction of Fare, 567; (3)
Some Rules re Non-paying Persons, 567; (4) Invited Guests or
Accommodation Passengers, 567.
ARTICLE 1759 .................................................................................. 568
COMMENT: (1) Liability of Carrier for Death of or Injuries to
Passengers Due to NEGLIGENCE or WILFULL ACTS, 568; (2)
Query, 568; Maranan v. Perez, L-22272, Jun. 26, 1967, 569.
ARTICLE 1760 .................................................................................. 569
COMMENT: Effect of Contrary Stipulation, 569.
ARTICLE 1761 .................................................................................. 570
COMMENT: Duty of Passenger to Observe Diligence, 570.
ARTICLE 1762 .................................................................................. 570
COMMENT: Contributory Negligence of Passenger, 570.
ARTICLE 1763 .................................................................................. 570
COMMENT: (1) Responsibility of Common Carriers for Willful
Acts or Negligence of Strangers or other Passengers (Passen-
gers Other Than the Victims), 571; (2) Example, 571; (3) Case,
571; Fortune Express, Inc. v. CA, et al., GR 119756, Mar. 18,
1999, 571.

Subsection 4 — COMMON PROVISIONS .......................................... 572

ARTICLE 1764 .................................................................................. 572
COMMENT: (1) Is a Common Carrier Liable for Moral Dam-
ages?, 572; (2) Rule in Case of Physical Injuries, 572; (3) Rule in
Case of Death, 573; (4) Death of a Foetus, 573; (5) Damages for
Ill-Treatment of Air Passengers, 574; Zulueta v. Pan American
World Airways, Inc., 43 SCRA 397, 574.

xliii
 ARTICLE 1765 .................................................................................. 574
COMMENT: Cancellation of the Certificate of Public Conven-
ience, 574.
ARTICLE 1766 .................................................................................. 575
COMMENT: Civil Code Prevails Over Other Laws, 575.

Title IX. PARTNERSHIP ....................................................................... 576

CHAPTER 1 — GENERAL PROVISIONS .......................................... 576

ARTICLE 1767 .................................................................................. 576
COMMENT: (1) ‘Partnership’ Defined, 576; Fernando Santos v.
Sps. Arsenio & Nieves Reyes, GR 135813, Oct. 25, 2001, 576;
(2) Characteristics of the Contract, 577; (3) Historical Notes,
578; (4) ‘Partnership’ Distinguished from a ‘Corporation’, 580;
(5) ‘Ordinary Partnership’ Distinguished from the ‘Conjugal
Partnership Gains’, 582; (6) ‘Partnership’ Distinguished from
‘Co-ownership’ (Community of Property; Tenancy in Common),
584; (7) ‘Partnership’ Distinguished from ‘Joint Stock Company’,
585; (8) ‘Partnership’ Distinguished from ‘Social Organizations’,
586; (9) ‘Partnership’ Distinguished from ‘Business Trusts’, 587;
(10) ‘Partnership’ Distinguished from ‘Tenancy’, 587; (11) ‘Part-
nership’ Distinguished from ‘Agency’, 588; (12) ‘Partnership’
Distinguished from a ‘Joint Adventure’ (or JOINT ACCOUNTS),
588; (13) ‘Partnership’ Distinguished from a ‘Syndicate’, 588;
(14) Capacity to Become Partner, 588; (15) Some Cases, 589;
Sevilla v. CA, GR 41182-3, Apr. 15, 1988, 589; Estanislao, Jr. v.
CA, GR 49982, Apr. 27, 1988, 590; Dan Fue Leung v. IAC and
Leun Yiu, GR 70926, Jan. 31, 1989, 591; Ferdinand Santos v.
Sps. Arsenio & Nieves Reyes, GR 135813, Oct. 25, 2001, 592.
ARTICLE 1768 .................................................................................. 592
COMMENT: (1) Effect on Non-Compliance With Art. 1772, 1st
Paragraph (Registration With the Securities and Exchange
Commission), 592; Lilibeth Sunga-Chan & Cecilia Sunga v.
Lamberto T. Chua, GR 143340, Aug. 15, 2001, 593; (2) Conse-
quences of the Partnership Being a Juridical Entity, 593; (3)
Limitations on Alien Partnerships, 594; Pedro R. Palting v. San
Jose Petroleum, Inc., L-14441, Dec. 17, 1966, 594; (4) Rules in
Case of Associations not Lawfully Organized as Partnerships,
595; (5) Distinctions Between Partnerships in the Philippines
and Those in America, 595; (6) Partnership From the Viewpoint
of Private International Law, 596.
ARTICLE 1769 .................................................................................. 596
COMMENT: (1) Purpose of Art. 1769 (Rules for Determining
Existence of Partnerships), 597; (2) Requisites for Existence of
Partnership, 597; (3) Sharing of Net Profits, 597; (4) Cases, 598;
Fortis v. Gutierrez Hermanos, 6 Phil. 100, 598; Bastida v. Menzi

xliv
 and Co., 58 Phil. 188, 598; Lyons v. Rosenstock, 56 Phil. 632,
599; (5) Bar, 599; (6) Proof Needed to Establish the Existence
of a Partnership, 599; (7) Partnership by Estoppel, 600.
ARTICLE 1770 .................................................................................. 600
COMMENT: (1) Lawful Object or Purpose, 601; (2) Query: Is a
Judicial Decree Needed to Dissolve an Unlawful Partnership?
601; (3) Instances When a Partnership Is Unlawful, 601; (4)
Consequences of Unlawful Partnership, 602; Arbes v. Polistico,
et al., 53 Phil. 489, 602.
ARTICLE 1771 .................................................................................. 603
COMMENT: (1) Formalities Needed, 603; (2) Problem, 604;
(3) Cases, 604; Magalona v. Pesayco, 59 Phil. 453, 604; Borja
v. Addison, et al., 44 Phil. 895, 604; Agad v. Mabato, L-24193,
Jun. 28, 1968, 605; (4) Problems, 605.
ARTICLE 1772 .................................................................................. 607
COMMENT: (1) Purpose of the Registration with the Office
of the Securities and Exchange Commission, 607; (2) Effect of
Non-Registration, 607.
ARTICLE 1773 .................................................................................. 607
COMMENT: (1) Requirements Where Immovable Property is
Contributed, 608; (2) Applicability of the Article, 608; (3) Reg-
istration in the Register of Property, 608.
ARTICLE 1774 .................................................................................. 608
COMMENT: (1) Acquisition of Property under the Partner-
ship Name, 608; (2) Alien Partners, 608; (3) Limitations on
Acquisition, 609.
ARTICLE 1775 .................................................................................. 609
COMMENT: (1) If Articles Are Kept Secret, 609; (2) Effect of
Certain Transactions, 610.
ARTICLE 1776 .................................................................................. 610
COMMENT: (1) Classification of Partnerships, 610; (2) Clas-
sification Into General and Limited, 612; (3) Example of Part-
nership De Facto, 612; (4) Example of Partnership by Estoppel,
612; (5) Formalities Needed for the Creation of a Partnership,
613.
ARTICLE 1777 .................................................................................. 613
COMMENT: Kinds of Universal Partnerships, 613.
ARTICLE 1778 .................................................................................. 614
COMMENT: Definition of Universal Partnership of All Present
Property, 614.

xlv
 ARTICLE 1779 .................................................................................. 614
COMMENT: Transfer of Ownership from the Partners to the
Universal Partnership, 614.
ARTICLE 1780 .................................................................................. 614
COMMENT: (1) Universal Partnership of Profits, 615; (2) Dis-
tinctions, 615; (3) Future Property, 616; (4) Some Hypotheti-
cal Problems on ALL PRESENT PROPERTY, 616; (5) Some
Hypothetical Problems on Profits, 617.
ARTICLE 1781 .................................................................................. 618
COMMENT: Presumption in Favor of Partnership of Profits,
618.
ARTICLE 1782 .................................................................................. 618
COMMENT: (1) Persons Who Together Cannot Form a Uni-
versal Partnership, 618; Commissioner of Internal Revenue
v. William J. Suter and the Court of Tax Appeals, L-25532,
Feb. 28, 1969, 618; (2) Reason for the Article, 619; (3) Effect
of Violation, 619.
ARTICLE 1783 .................................................................................. 619
COMMENT: (1) ‘Particular Partnership’ Defined, 619; (2) Ex-
amples, 619; (3) Doctrine, 620.
CHAPTER 2 — OBLIGATIONS OF THE PARTNERS .................... 621
Section 1 — OBLIGATIONS OF THE PARTNERS
AMONG THEMSELVES .......................................... 621
Different Relationships, 621; Some Obligations of a Partner,
621; Some Rights of a Partner, 622.
ARTICLE 1784 .................................................................................. 622
COMMENT: (1) When A Partnership Begins, 622; (2) Intent
to Create a Future Partnership, 622; (3) Rule if Contributions
Have Not Yet Been Actually Made, 623.
ARTICLE 1785 .................................................................................. 623
COMMENT: (1) Duration of a Partnership, 623; (2) Partner-
ship “At Will”, 623.
ARTICLE 1786 .................................................................................. 624
COMMENT: (1) Three Important Duties of Every Partner, 624;
(2) The Duty to Contribute, 624; Moran, Jr. v. Court of Appeals,
L-59956, Oct. 31, 1984, 625; (3) The Duty to Deliver the Fruits,
625; (4) The Duty to Warrant, 625; (5) Problem, 626.
ARTICLE 1787 .................................................................................. 626
COMMENT: (1) When Contribution Consists of Goods, 626; (2)
How Appraisal Is Made, 626; (3) Necessity of the Inventory-
Appraisal, 626; (4) Risk of Loss, 627.

xlvi
ARTICLE 1788 .................................................................................. 627
COMMENT: (1) Rules of Failure to Contribute and for Conver-
sion, 627; (2) Coverage of Liability, 627; (3) Why No Demand Is
Needed to Put Partner in Default, 627; (4) Some Cases, 628.
ARTICLE 1789 .................................................................................. 628
COMMENT: (1) Classification of Partners, 629; (2) Definitions
and Some Characteristics, 629; (3) Distinctions Between a
‘Capitalist’ and an ‘Industrial Partner’, 630.
ARTICLE 1790 .................................................................................. 631
COMMENT: (1) Amount of Contribution, 631; (2) To Whom
Applicable, 631.
ARTICLE 1791 .................................................................................. 632
COMMENT: (1) When a Capitalist Partner Is Obliged to Sell
His Interest to the Other Partners, 632; (2) Reason, 632; (3)
Rule for the Industrial Partners, 632.
ARTICLE 1792 .................................................................................. 632
COMMENT: (1) Rule if Managing Partner Collects a Credit,
633; (2) Example, 633; (3) When Article Does Not Apply, 634.
ARTICLE 1793 .................................................................................. 634
COMMENT: (1) Art. 1792 Compared With Art. 1793 (Where a
Partner Receives His Share of a Partnership Credit), 634; (2)
Example, 634; (3) Query, 635.
ARTICLE 1794 .................................................................................. 635
COMMENT: (1) Why General Damages Cannot Be Offset by
Benefits, 635; (2) Mitigation of Liability, 635; (3) Need for Liqui-
dation, 635; (4) Effect of Death of the Negligent Partner, 636.
ARTICLE 1795 .................................................................................. 636
COMMENT: Risk of Loss, 636.
ARTICLE 1796 .................................................................................. 637
COMMENT: Responsibility of Firm, 637.
ARTICLE 1797 .................................................................................. 638
COMMENT: (1) How Profits Are Distributed, 638; (2) How
Losses are Distributed, 638; (3) Industrial Partner’s Profits,
638; (4) Industrial Partner’s Losses, 638; (5) Non-Applicability
to Strangers, 639.
ARTICLE 1798 .................................................................................. 639
COMMENT: Designation by Third Person of Shares in Profits
and Losses, 639.

xlvii
ARTICLE 1799 .................................................................................. 639
COMMENT: (1) Stipulation Excluding a Partner from Profits
or Losses, 640; (2) Reason Why Industrial Partner Is Generally
Exempted from Losses, 640; (3) Problem, 640.
ARTICLE 1800 .................................................................................. 641
COMMENT: (1) Appointment of Manager, 641; (2) Appoint-
ment in Articles of Partnership, 641; (3) Appointment Other
Than in the Articles of Partnership, 642; (4) Scope of Powers
of a Manager, 642.
ARTICLE 1801 .................................................................................. 643
COMMENT: (1) Rule When There Are Two or More Manag-
ers, 643; (2) Specific Rules, 643; (3) When Opposition May Be
Made, 644.
ARTICLE 1802 .................................................................................. 644
COMMENT: (1) When Unanimity Is Required, 644; (2) Duty
of Third Persons, 645; Smith, Bell, and Co. v. Aznar, (CA) 40
O.G. 1882, 645.
ARTICLE 1803 .................................................................................. 646
COMMENT: (1) Rules to Be Observed When Manner of Man-
agement Has Not Been Agreed Upon, 646; (2) Cases, 647; Red
Men v. Veteran Army, 7 Phil. 685, 647; Criado v. Gutierrez
Hermanos, 37 Phil. 883, 647; Sy-Boco v. Yap Teng, 7 Phil. 12,
648; (3) Rule on Alterations, 648.
ARTICLE 1804 .................................................................................. 648
COMMENT: Associate of Partner, 649.
ARTICLE 1805 .................................................................................. 649
COMMENT: (1) Partnership Books, 649; (2) Value of Partner-
ship Books of Account as Evidence, 650; Garrido v. Asencio,
10 Phil. 691, 650.
ARTICLE 1806 .................................................................................. 650
COMMENT: (1) Duty of Partners to Give Information, 651; Poss
v. Gottlieb, 1922, 18 Misc. 318, 651; (2) Errors in the Book, 651;
Ternate v. Aniversario, 8 Phil. 292, 651; (3) Who Can Demand
Information, 652.
ARTICLE 1807 .................................................................................. 652
COMMENT: (1) Duty to Account, 652; (2) Some Problems, 653;
(3) Some Cases, 654; Buenaventura v. David, 37 Phil. 435, 654;
Tuason and San Pedro v. Gavino Zamora and Sons, 2 Phil.
305, 654; Pang Lim and Galvez v. Lo Seng, 42 Phil. 282, 655;
Hanlon v. Haussermann and Beam, 40 Phil. 796, 656; Teague
v. Martin, et al., 53 Phil. 504, 656.

xlviii
 ARTICLE 1808 .................................................................................. 656
COMMENT: (1) Business Prohibition on Capitalist Partners,
657; (2) Instances When There Is No Prohibition, 657; (3) Ef-
fect of Violation, 657.
ARTICLE 1809 .................................................................................. 658
COMMENT: (1) Right to Demand a Formal Account, 658; Leung
v. IAC and Yiu, GR 70926, Jan. 31, 1989, 659; (2) Estoppel, 659;
(3) Stipulation About Continuing Share, 659.

Section 2 — PROPERTY RIGHTS OF A PARTNER ....................... 660

ARTICLE 1810 .................................................................................. 660
COMMENT: Property Rights of a Partner, 660.
ARTICLE 1811 .................................................................................. 660
COMMENT: (1) Co-Ownership in Specific Partnership Property,
661; (2) Rights of a Partner in Specific Partnership Property,
661; (3) Some Cases, 662; Kimbal v. Hamilton F. Ins. Co. (1861),
8 Bos. (N.Y.) 495, 662; McGrath v. Cowen, (1898), 57 Ohio St.,
385, 662; Sherwood v. Jackson, 8 P. (2d) 943, 663.
ARTICLE 1812 .................................................................................. 663
COMMENT: A Partner’s Interest in the Partnership, 663.
ARTICLE 1813 .................................................................................. 663
COMMENT: (1) Effect of Conveyance By Partners of His In-
terest in the Partnership, 664; (2) Rights of the Assignee, 665;
(3) Rule in Case of Mortgages, 665; White v. Long, 1927, 289
Pa. 526, 665.
ARTICLE 1814 .................................................................................. 666
COMMENT: (1) Charging the Interest of a Partner, 666; (2)
Preferential Rights of Partnership Creditors, 667; (3) Receiv-
ership, 667; (4) Redemption of the Interest Charged, 668; (5)
Exemption Laws, 668.

Section 3 — OBLIGATIONS OF THE PARTNERS WITH

REGARD TO THIRD PERSONS ........................... 669
ARTICLE 1815 .................................................................................. 669
COMMENT: (1) Firm Name, 669; Sharruf and Co. v. Baloise
Fire Insurance Co., 64 Phil. 258, 669; (2) Liability of Strangers
Who Include Their Names, 670.
ARTICLE 1816 .................................................................................. 670
COMMENT: (1) Liability Distinguished from Losses, 670; (2)
Example, 671; (3) Liability of a Partner Who Has Withdrawn,
671; (4) Unequal Contribution of Capitalist Partners, 671;
(5) Bar, 672; Island Sales, Inc. v. United Pioneers General

xlix
 Construction Co., et al., L-22493, Jul. 31, 1975, 672; (6) Effect
of Stipulation Exempting Liability to Third Persons, 673; (7)
Comment of the Code Commission, 673; (8) Partner Acting in
His Own Name, 673.
ARTICLE 1817 .................................................................................. 673
COMMENT: (1) Stipulation Eliminating Liability, 674; (2)
‘Liability’ and ‘Losses’ Distinguished, 674; (3) Bar, 674.
ARTICLE 1818 .................................................................................. 675
COMMENT: (1) When A Partner Can Bind or Cannot Bind
the Firm, 676; (2) Agency of a Partner, 676; (3) When Can a
Partner Bind the Partnership, 676; (4) When Will the Act of the
Partner Not Bind the Partnership, 678; (5) Reasons Why the
7 Acts of Ownership are “Unusual”, 679; De la Rosa v. Ortega
Go-Cotay, 48 Phil. 605, 680.
ARTICLE 1819 .................................................................................. 680
COMMENT: (1) Conveyance of Real Property, 681; (2) Example
of Par. No. 1, 682; (3) Example of Par. No. 2, 683; (4) Example
of Par. No. 3, 683; (5) Example of Par. No. 4, 684; (6) Example
of Par. No. 5, 684.
ARTICLE 1820 .................................................................................. 685
COMMENT: (1) Admission or Representation Made By a
Partner, 685; (2) Restrictions on the Rule, 685; Ormachea Tin
Congco v. Trillana, 13 Phil. 194, 686; (3) Previous Admission,
686.
ARTICLE 1821 .................................................................................. 686
COMMENT: (1) Effect of Notice to a Partner, 686; (2) Effect of
Knowledge Although No Notice Was Given, 687; (3) Problem,
688; (4) Service of Pleading on a Partner in a Law Firm, 688.
ARTICLE 1822 .................................................................................. 688
COMMENT: (1) Wrongful Act or Omission of a Partner, 689; (2)
Injury to an Employee, 689; (3) When the Firm and the Other
Partners are NOT Liable, 689.
ARTICLE 1823 .................................................................................. 690
COMMENT: Liability of the Partners for Misappropriation,
690.
ARTICLE 1824 .................................................................................. 690
COMMENT: (1) Solidary Liability of the Partners With the
Partnership, 690; (2) Example, 691.
ARTICLE 1825 .................................................................................. 691
COMMENT: (1) Partner and Partnership By Estoppel, 692; (2)
How the Problem May Arise, 692; (3) When Estoppel Does Not

l
 Apply, 693; (4) Examples of a “Partner by Estoppel”, 693; (5)
Burden of Proof, 694; (6) Problem, 694.
ARTICLE 1826 .................................................................................. 695
COMMENT: (1) Entry of a New Partner Into an Existing
Partnership, 695; (2) Creation of a New Partnership in View
of the Entry, 695; (3) Liability of New Partner for Previous
Obligations, 696.
ARTICLE 1827 .................................................................................. 697
COMMENT: (1) Reason for the preference of Partnership
Creditors, 697; (2) Reason Why Individual Creditors May Still
Attach the Partner’s Share, 697; (3) Sale by a Partner of His
Share to a Third Party, 697.

CHAPTER 3 — DISSOLUTION AND WINDING UP ....................... 698

ARTICLE 1828 .................................................................................. 698
COMMENT: Dissolution Defined, 698.
ARTICLE 1829 .................................................................................. 698
COMMENT: (1) ‘Dissolution’ Defined, 698; (2) ‘Winding Up’
Defined, 698; Recentes v. Court of First Instance, GR 40504,
Jul. 29, 1983, 699; (3) ‘Termination’ Defined, 699; (4) Effect on
Obligations, 699.
ARTICLE 1830 .................................................................................. 699
COMMENT: (1) Causes of Dissolution, 700; (2) No Violation
of Agreement, 700; (3) Cause No. 2 –– Violation of Agreement,
701; (4) Cause No. 3 –– Unlawfulness of the Business, 702;
(5) Cause No. 4 –– LOSS, 702; (6) Cause of No. 5 –– DEATH
of ANY Partner, 702; Goquiolay v. Sycip, L-11840, Dec. 10,
1963, 703; Bearneza v. Dequilla, 43 Phil. 237, 703; (7) Cause
No. 6 –– Insolvency of any Partner or of the Partnership, 704;
(8) Cause No. 7 –– Civil Interdiction of any Partner, 705; (9)
Cause No. 8 –– Decree of the Court under Art. 1831, 705; (10)
Decrease of Causes of Dissolution, 705; (11) Cases, 705; Eu-
genia Lichauco, et al. v. Faustino Lichauco, 33 Phil. 350, 705;
Walter Jackson v. Paul Blum, et al., 1 Phil. 4, 706; Solomon v.
Hollander, 55 Mich. 256, 706.
ARTICLE 1831 .................................................................................. 706
COMMENT: (1) Dissolution by Judicial Decree, 707; (2) Who
Can Sue for Dissolution, 707; (3) Insanity of a Partner, 708;
(4) Incapability to Perform Part, 708; (5) Prejudicial Conduct
or Persistent Breach of the Agreement, 708; Potter, et al. v.
Brown, et al., 328 Pa. 554, 118 ALR 1415, 708; (6) Appointment
of Receiver, 710; (7) Time of Dissolution, 710.
ARTICLE 1832 .................................................................................. 710

li
 COMMENT: (1) Effect of Dissolution, 711; (2) Effect on Previous
Contracts, 711; (3) Creditors Who Have Not Been Prejudiced,
711.
ARTICLE 1833 .................................................................................. 712
COMMENT: (1) Two Kinds of Causes for Dissolution, 712; (2)
Dissolution Caused by A-I-D, 712; (3) Effect of A-I-D, 713; (4)
Examples, 713.
ARTICLE 1834 .................................................................................. 715
COMMENT: (1) When Firm Is Bound or Not Bound, 716; (2)
When Partnership Is BOUND (a partnership liability is cre-
ated), 716; (3) When Is the FIRM not BOUND?, 718; (4) Some
Decided Cases, 718; JCH Service Station v. Patrikes (1944), 181
Misc. 401, 718; McNeil Co. v. Hamlet (1919), 213 Ill. Appl. 501,
719; Froess v. Froess, 289 Pa. St., 691, 137 A. 124, 719.
ARTICLE 1835 ................................................................................. 719
COMMENT: (1) Dissolution Ordinarily Does Not Discharge
Existing Liability of Partners, 720; (2) How a Partner’s Liabil-
ity is Discharged, 720; (3) Problem, 720; (4) Effect of Death on
Pending Action, 720.
ARTICLE 1836 .................................................................................. 721
COMMENT: (1) Extrajudicial and Judicial Winding-Up, 721; (2)
Rule if Survivor Is Not the Manager, 722; (3) Profits, 722.
ARTICLE 1837 .................................................................................. 722
COMMENT: (1) Two Aspects of Causes of Dissolution, 724; (2)
Better Rights for Innocent Partners, 724; (3) Right of Innocent
Partners to Continue, 724; (4) Right to Get Cash, 725; (5) No
Share in Goodwill for Guilty Partner, 725; (6) Partner Wrong-
fully Excluded, 725; (7) Division of Losses, 726.
ARTICLE 1838 .................................................................................. 726
COMMENT: (1) Rescission or Annulment of Partnership Con-
tract, 727; (2) Three Rights, 727.
ARTICLE 1839 .................................................................................. 727
COMMENT: (1) Rules for Settling Accounts, 728; (2) The As-
sets of the Partnership, 729; (3) Order of Payment of Firm’s
Liabilities, 729; (4) New Contributions, 730; (5) Problem, 730;
(6) Preference With Respect to the Assets, 731; (7) Rule if
Partner is Insolvent, 731.
ARTICLE 1840 .................................................................................. 732
COMMENT: (1) Right of Old Creditors to be Creditors of the
New Firm, 733; (2) Example, 733.
ARTICLE 1841 .................................................................................. 733

lii
 COMMENT: Retirement or Death of a Partner, 734.
ARTICLE 1842 ................................................................................. 734
COMMENT. (1) When Right to Account Accrues, 734; (2) Pos-
sible Defendants, 735.

CHAPTER 4 — LIMITED PARTNERSHIP ........................................ 736

ARTICLE 1843 .................................................................................. 736
COMMENT: Reason for and History of Limited Partnerships,
736.
ARTICLE 1844 .................................................................................. 740
COMMENT: (1) Requisites in the Formation of a Limited
Partnership, 741; (2) Non-Fulfillment of the Requisites, 741; (3)
Effect if Only Aggregate Contribution is Stated, 741; (4) Effect
of Omitting the Term “Limited” in the Firm Name, 742.
ARTICLE 1845 .................................................................................. 742
COMMENT: (1) What the Limited Partner Can Contribute,
742; (2) Industrial Partner Can Join, 742.
ARTICLE 1846 .................................................................................. 742
COMMENT: Non-Inclusion of Name of the Limited Partner,
742.
ARTICLE 1847 .................................................................................. 743
COMMENT: Liability for a False Statement, 743.
ARTICLE 1848 .................................................................................. 743
COMMENT: Effect of Taking Part in the Control of the Busi-
ness, 743.
ARTICLE 1849 .................................................................................. 744
COMMENT: (1) When Additional Limited Partners May Be
Admitted, 744; (2) Effect of Failure to Amend, 744.
ARTICLE 1850 .................................................................................. 744
COMMENT: (1) Acts of Strict Dominion, 745; (2) Conflicts Rule
Governing Capacity of the Limited Partner, 745.
ARTICLE 1851 .................................................................................. 745
COMMENT: Rights of a Limited Partner, 746.
ARTICLE 1852 .................................................................................. 746
COMMENT: (1) Contributor Who Erroneously Believes He Has
Become a Limited Partner, 746; (2) When He Becomes Liable As
a General Partner, 747; (3) Limited Partner Who Participates
in the Control Cannot Take Advantage of the Article, 747.

liii
ARTICLE 1853 .................................................................................. 747
COMMENT: (1) General — Limited Partner, 747; (2) Rights,
748.
ARTICLE 1854 .................................................................................. 748
COMMENT: Right of a Limited Partner to Lend Money and
Transact Other Business With the Firm, 748.
ARTICLE 1855 .................................................................................. 749
COMMENT: (1) Preference to Some Limited Partners, 749; (2)
Nature of the Preference, 749.
ARTICLE 1856 .................................................................................. 749
COMMENT: Profit or Compensation of Limited Partners,
749.
ARTICLE 1857 .................................................................................. 750
COMMENT: (1) When Contributions of Limited Partners Can
Be Returned, 751; (2) Liability of a Limited Partner Who Has
Withdrawn, 751.
ARTICLE 1858 .................................................................................. 752
COMMENT: (1) Liabilities of a Limited Partner, 752; (2) Prob-
lem Involving Liability to Creditors, 753.
ARTICLE 1859 .................................................................................. 754
COMMENT: (1) Assignment of a Limited Partner’s Interest,
754; (2) Some Problems, 755; (3) Substituted Limited Partner,
756; (4) Some Problems, 756.
ARTICLE 1860 .................................................................................. 756
COMMENT: Some Causes for the Dissolution of a Limited
Partnership, 756.
ARTICLE 1861 .................................................................................. 757
COMMENT: (1) Death of a Limited Partner, 757; (2) Problem,
758.
ARTICLE 1862 .................................................................................. 758
COMMENT: (1) Charging the Interest of a Limited Partner,
758; (2) Example, 758.
ARTICLE 1863 .................................................................................. 759
COMMENT: Payment of Liabilities of the Limited Partner-
ship, 759.
ARTICLE 1864 .................................................................................. 759
COMMENT: (1) When Certificate Is Cancelled or Amended,
760; (2) Cancellation, 760.

liv
 ARTICLE 1865 ................................................................................. 761
COMMENT: (1) Requisites for Amending or Cancelling the
Certificate, 762; (2) Problems, 762.
ARTICLE 1866 .................................................................................. 762
COMMENT: When Contributors (Other Than General Partners)
Should Be Made Parties to Proceedings, 762.
ARTICLE 1867 .................................................................................. 762
COMMENT: Transitional Provisions on Limited Partnerships,
763.

Title X. AGENCY ...................................................................................... 764

CHAPTER 1 –– NATURE, FORM, AND KINDS OF AGENCY ........ 764

ARTICLE 1868 .................................................................................. 764

COMMENT: (1) Defective Definition of the Contract of Agency,
764; Bert Osmeña and Associates v. Court of Appeals, GR
56545, Jan. 28, 1983, 765; Alfred Hahn v. CA & Bayerische
Motoren Werke Aktiengesellschaft (BMW), GR 113074, Jan.
22, 1997, 78 SCAD 240, 765; (2) Other Definitions, 766; (3)
Roman Law, 766; (4) Importance of Agency, 766; Smith, Bell
& Co., Inc. v. CA, GR 110668, Feb. 6, 1997, 79 SCAD 38, 767;
(5) History, 767; (6) Characteristics, 767; Philpotts v. Phil.
Mfg. Co., et al., 40 Phil. 471, 768; (7) Parties to the Contract,
768; Gelano v. Court of Appeals, L- 39050, Feb. 24, 1981, 103
Phil. 90, 769; (8) Capacity of the Principal, 769; (9) Capacity
of an Agent, 770; Mendoza v. De Guzman, 33 O.G. 1505, 770;
Gelano v. Court of Appeals, L- 39050, Feb. 24, 1981, 770; (10)
Distinctions, 771; Atcheson R. Co. v. Maber, 23 Kan. 163, 771;
Hawley v. Curry, 74 Ill. A. 309, 773; State v. Page, 40 Am. D.
608, 773; Shell Co. v. Firemen’s Ins. Co., 100 Phil. 757, 775;
Quiroga v. Parsons Hardware Co., 38 Phil. 501, 778; Gonzalo
Puyat and Sons, Inc. v. Arco Amusement Co., 72 Phil. 402, 779;
(11) ‘Agent’ and ‘Broker’ Distinguished, 780; Manuel B. Tan,
Gregg M. Tecson & Alexander Saldaña v. Eduardo R. Gullas
& Norma S. Gullas, GR 143978, Dec. 3, 2002, 780.
ARTICLE 1869 .................................................................................. 781
COMMENT: (1) Kinds of Agency According to Manner of Con-
stitution, 781; De la Peña v. Hidalgo, 16 Phil. 450, 781; Lim
v. People, L-34338, Nov. 21, 1984, 782; (2) Kinds of Agency
According to Form, 782.
ARTICLE 1870 .................................................................................. 783
COMMENT: Express and Implied Agencies, 783.
ARTICLE 1871 .................................................................................. 783
COMMENT: Another Form of Implied Agency, 783.

lv
ARTICLE 1872 ................................................................................... 783
COMMENT: Rules if the Parties Are “Absent” (Not “Present”),
784; Garvey v. Scott, 9 Ill. A. 19, 784.
ARTICLE 1873 .................................................................................. 784
COMMENT: (1) Informing Other People of the Existence of
the Agency, 785; (2) Comment of Justice J.B.L. Reyes, 785;
(3) Problem, 785; (4) Agency by Estoppel, 785; (5) Agency by
Estoppel Distinguished from Implied Agency, 786.
ARTICLE 1874 .................................................................................. 786
COMMENT: (1) Agency to Sell Land or Any Interest Therein,
786; (2) Effect if the Article is Violated, 787; Jimenez v. Rabat,
38 Phil. 318, 787; Rosario S. Juat, et al. v. Land Tenure Ad-
ministration, L -17080, Jan. 28, 1961, 787.
ARTICLE 1875 .................................................................................. 787
COMMENT: (1) Agency Is Presumed to Be Onerous, 788; (2)
Form of Compensation, 788; Fiege and Brown v. Smith, Bell
and Co. and Cowper, 43 Phil. 118, 788; (3) Brokers, 789; (4)
Compensation of Brokers, 789; Reyes, et al. v. Mosqueda and
the Court of Appeals, L-8699, May 25, 1956, 53 O.G. 2158, 790;
Perez de Tagle v. Luzon Surety Co., (C.A.) 38 O.G. 1213, 791.
ARTICLE 1876 .................................................................................. 792
COMMENT: General and Special Agencies, 792.
ARTICLE 1877 .................................................................................. 792

COMMENT: (1) Agency Couched in General Terms and in

Special Terms, 793; (2) Observation, 793; (3) Example, 793; (4)
Examples of Acts of Mere Administration, 794.

ARTICLE 1878 ................................................................................. 794

COMMENT: (1) When Special Powers of Attorney Are Needed,

795; PNB v. CA, 70 SCAD 37 (1996), 796; (2) Reason for the
Rule, 796; (3) Meaning of “Special Powers of Attorney”, 796; (4)
Re Paragraph 1, 796; Dominion Insurance Corp. v. CA, Rodolfo
S. Guevarra & Fernando Austria, GR 129919, Feb. 6, 2002,
797; (5) Re Paragraph 2, 798; (6) Re Paragraph 3, 798; (7) Re
Paragraph 4, 798; (8) Re Paragraph 5, 798; B.H. Macke, et al.
v. Camps, 7 Phil. 553, 799; (9) Re Paragraph 6, 799; (10) Re
Paragraph 7, 799; Rural Bank of Caloocan v. Court of Appeals,
L-32116, Apr. 21, 1981, 800; (11) Re Paragraph 8, 800; (12) Re
Paragraph 9, 800; (13) Re Paragraph 10, 800; (14) Re Para-
graph 11, 800; Director of Public Works v. Sing Juco, et al., 53
Phil. 205, 800; Bank of the Phil. Islands v. De Coster, 47 Phil.
594, 801; (15) Re Paragraph 12, 801; (16) Cases, 801; Domingo
Lao v. Estrella Villones-Lao, GR 126777, 106 SCRA 42, Apr.
29, 1999, 801; Guillermo Adriano v. Romulo Pangilinan, GR

lvi
 137471, Jun. 16, 2002, 801; Manuel B. Tan, et al. v. Eduardo
R. Gullas & Norma S. Gullas, GR 143978, Dec. 3, 2002, 802;
Naawan Community Rural Bank, Inc. v. CA & Sps. Alfredo and
Anabelle Lumo, GR 128573, Jan. 13, 2003, 802.
ARTICLE 1879 .................................................................................. 802
COMMENT: (1) Power to SELL, 803; (2) Power to MORTGAGE,
804; (3) Jurisprudence, 804; Bicol Savings and Loan Association
v. CA, et al., GR 85302, Mar. 31, 1989, 804.
ARTICLE 1880 .................................................................................. 805
COMMENT: (1) Special Power to Compromise, 805; (2) Reason
for the Article, 806; (3) Special Power to Submit to Arbitra-
tion, 806.
ARTICLE 1881 .................................................................................. 806
COMMENT: (1) Fundamental Principles of Agency, 807; (2)
Effects, 807; (3) Illustrative Examples, 808; (4) Authority Dis-
cussed, 809; (5) Some Cases, 811; Germann and Co. v. Donald-
son Sim & Co., 1 Phil. 63, 811; Deen v. Pacific Commercial Co.,
42 Phil. 738, 812; Linan v. Puno, et al., 31 Phil. 259, 812; Villa
v. Garcia Bosque, 49 Phil. 126, 813; Katigbak v. Tai Hing Co.,
52 Phil. 622, 813; Veloso v. La Urbana, 58 Phil. 681, 814; Yu
Eng Yu v. A.C. Ransom Philippine Corp., (C.A.) 40 O.G. Supp.,
Aug. 23, 1941, p. 65, 814; Markham v. Jandon, 41 N.Y. 235,
814; Keeler Elec. Co. v. Rodriguez, 44 Phil. 1, 815; Caram, Jr.
v. Laureta, L-28740, Feb. 24, 1981, 815; (6) Doctrine of Agency
by Necessity, 816; (7) ‘Authority’ Distinguished from ‘Power’,
816; (8) ‘Authority’ Distinguished from ‘Instruction’, 817.
ARTICLE 1882 .................................................................................. 817
COMMENT: (1) When Agent’s Performance of Authority Is
Deemed Still Authorized, 818; (2) Example, 818; (3) Sale at a
Lower or Higher Price, 818; (4) Bar, 818.
ARTICLE 1883 ................................................................................. 819
COMMENT: (1) Agency With an Undisclosed Principal, 819; (2)
Example of the General Rule, 819; Phil. Bank of Commerce v.
Jose M. Aruego, L-25836-37, Jan. 31, 1981, 102 Phil. 530, 819;
(3) Example of the Exception, 820; (4) When Agent Transacts
Business in His Own Name, 820; (5) When Authorized Agent
Buys in His Own Name But Really in Behalf of His Principal,
820; (6) When Authority of Agent is Doubtful, 820; (7) Regard-
ing “Things Belonging to the Principals,” 821.

CHAPTER 2 — OBLIGATIONS OF THE AGENT ............................ 822

ARTICLE 1884 .................................................................................. 822
COMMENT: (1) Duty of Agent to Carry Out the Agency, 822;
Bank of the Phil. Islands v. Pineda, GR 62441, Dec. 14, 1987,

lvii
 822; (2) Liability of Lawyer Who Fails to Perfect an Appeal,
822; (3) Effect of Principal’s Death, 822; (4) Agent Who Sells
to Himself, 823.
ARTICLE 1885 .................................................................................. 823
COMMENT: (1) Rule if a Person Declines the Agency, 823; (2)
Duty of Owner, 823.
ARTICLE 1886 .................................................................................. 823

COMMENT: Stipulation for Agent to Advance Necessary

Funds, 824.

ARTICLE 1887 .................................................................................. 824

COMMENT: (1) Agent’s Duty to Follow Instructions, 824; (2)

Effect if Agent Follows Instructions, 824; (3) Clarity of Instruc-
tions, 825; (4) Different Interpretations Re Instructions, 825; (5)
How Instructions Are to Be Construed, 825; (6) How Execution
May Fail, 826; (7) Excessive Execution, 826.
ARTICLE 1888 .................................................................................. 826
COMMENT: (1) When Agency Should Not Be Carried Out, 826;
(2) Example, 826.
ARTICLE 1889 .................................................................................. 827
COMMENT: (1) Rule if Agent Prefers His Own Interests, 827;
(2) Example, 827.
ARTICLE 1890 .................................................................................. 827
COMMENT: (1) Authority to Borrow or Lend Money, 827; (2)
Benefit of Principal, 828; (3) Prohibition to Purchase, 828.
ARTICLE 1891 .................................................................................. 828
COMMENT: (1) Duty of Agent to Account, 828; Domingo v.
Domingo, 42 SCRA 131, 829; (2) Stipulation Exempting Agent
from Duty to Account, 829; (3) Duty to Deliver Funds, 829; (4)
No Co-Ownership Over Funds Despite Right to Commission,
830; (5) Agent Should Not Profit for His Own Account, 830;
(6) Doctrines on the Duty to Account, 830; (7) Some Cases,
831; United States v. Kiene, 7 Phil. 736, 831; United States v.
Igpuara, 27 Phil. 619, 831; Ojinaga v. Estate of Perez, 9 Phil.
185, 832; Severino v. Severino, 44 Phil. 343, 832.

ARTICLE 1892 .................................................................................. 833

COMMENT: (1) Appointment of Substitute for the Agent, 833;

(2) Soundness of the article, 834.

ARTICLE 1893 .................................................................................. 834

COMMENT: (1) When the Principal Can Sue the Substitute,
834; (2) Art. 1311 (Who Are Bound By Contracts), 835.

lviii
ARTICLE 1894 .................................................................................. 835
COMMENT: Joint Not Solidary Liability, 835.
ARTICLE 1895 .................................................................................. 835
COMMENT: When Solidarity Has Been Agreed Upon, 836.
ARTICLE 1896 .................................................................................. 836
COMMENT: Liability of the Agent for Interest, 836.
ARTICLE 1897 ................................................................................. 836
COMMENT: (1) No Personal Liability for Agent, 837; (2) Proper
Parties to the Suit, 837; Jovito R. Salonga v. Warner, Barnes
and Co., Ltd., L-2246, Jan. 31, 1951, 838; (3) Authority to Sell
All of the Principal’s Property, 839; (4) Authority to Agree on
Certain Stipulations, 839.
ARTICLE 1898 .................................................................................. 839
COMMENT: (1) Contracts Entered Into in Excess of Authority,
839; (2) Example, 840.
ARTICLE 1899 .................................................................................. 840
COMMENT: (1) Effect of Agent’s Ignorance, 840; (2) Compliance
with Authority and Instruction, 840.
ARTICLE 1900 ................................................................................ 840
COMMENT: (1) Act Performed Within Terms of Written Au-
thority, 841; (2) Example, 841.
ARTICLE 1901 .................................................................................. 841
COMMENT: Effect of Ratification, 842.
ARTICLE 1902 .................................................................................. 842
COMMENT: (1) Private or Secret Orders, 842; (2) Case, 842;
Cruz v. CA, GR 85685, Sep. 11, 1991, 842.
ARTICLE 1903 .................................................................................. 843
COMMENT: (1) ‘Commission Agent’ Defined, 843; (2) Distinc-
tion Between a Commission Agent and a Broker, 843; (3) Es-
tablished Place of Business, 844; (4) Presumption as to When
the Damage to the Goods Occurred, 844.
ARTICLE 1904 .................................................................................. 844
COMMENT: Duty of Commission Agent to Place Countermarks,
844.
ARTICLE 1905 .................................................................................. 844
COMMENT: (1) Sale by the Commission Agent on Credit (Not
Cash), 845; Green Valley Poultry v. Intermediate Appellate
Court, L-49395, Dec. 26, 1984, 845; (2) Untenable Defense of

lix
 Agent, 845; (3) Choices Given to the Principal, 845; (4) Exam-
ple, 845.
ARTICLE 1906 .................................................................................. 846
COMMENT: (1) Duty of Agent to Inform the Principal, 846; (2)
Reason for the Law, 846.
ARTICLE 1907 .................................................................................. 846
COMMENT: (1) Guarantee Commission, 846; (2) Example of the
Purpose, 847; (3) Applicability to Both Cash and Credit Sales,
847; (4) When Insolvency of Debtor Is Not a Defense, 847.
ARTICLE 1908 .................................................................................. 847
COMMENT: (1) Failure of Agent to Collect Credits, 847; (2)
When Agent is Not Liable in Case of Failure to Collect, 848;
(3) Due Diligence of Agent, 848.
ARTICLE 1909 .................................................................................. 848
COMMENT: (1) Responsibility Not Only for Fraud But Also
for Negligence, 848; (2) Duty of Agent to Insure, 849; (3) Some
Decided Cases, 849; International Films (China) v. Lyric Film
Exchange, 63 Phil. 778, 849; Tan Tiong Teck v. La Comision de
Valores Bolsas y Cua Oh and Co., 69 Phil. 425, 849; Nepomu-
ceno, et al. v. Heredia, 7 Phil. 563, 850; Gutierrez Hermanos
v. Oria Hermanos and Co., 30 Phil. 491, 850; Austria v. Court
of Appeals, 39 SCRA 527, 851; Caoile v. CA, 44 SCAD 1040
(1993), 851.

CHAPTER 3 — OBLIGATIONS OF THE PRINCIPAL .................. 852

ARTICLE 1910 .................................................................................. 852
COMMENT: (1) Principal’s Duty to Comply with Agent’s Com-
mitments, 852; (2) Ratification by Principal, 852; Case, 852;
Bedia v. White, GR 94050, Nov. 21, 1991, 852.
ARTICLE 1911 .................................................................................. 854
COMMENT: (1) Liability of Principal Because of Estoppel, 854;
(2) Solidary Liability, 855.
ARTICLE 1912 .................................................................................. 855

COMMENT: (1) Advancing of Necessary Funds, 855; (2) Bro-

ker’s Fee, 855.

ARTICLE 1913 .................................................................................. 855

COMMENT: Principal to Compensate Agent for Damages,

856.
ARTICLE 1914 .................................................................................. 856
COMMENT: Right of Agent to Retain by Way of Pledge, 856.

lx
 ARTICLE 1915 .................................................................................. 856
COMMENT: (1) Solidary Liability of Principals, 856; (2) Exam-
ples, 856; (3) Case, 857; Constante Amor de Castro v. CA, GR
115838, Jul. 18, 2002, 857.
ARTICLE 1916 .................................................................................. 857
COMMENT: QUESTION — (When Both Principal and Agent
Contract with Respect to the Same Thing), 858; Diosdado
Sta. Romana v. Carlos Imperio, et al., L-17280, Dec. 29, 1965,
858.
ARTICLE 1917 .................................................................................. 859
COMMENT: Liability of Principal if Agent Acted in Good Faith
or in Bad Faith, 859.
ARTICLE 1918 .................................................................................. 859
COMMENT: When Principal Is Not Liable for Agent’s Ex-
penses, 859.

CHAPTER 4 — MODES OF EXTINGUISHMENT

OF AGENCY ............................................................... 860
ARTICLE 1919 .................................................................................. 860
COMMENT: (1) Keyword for Extinguishment of the Agency
– EDWARD, 860; (2) Death, 861; Manuel Buason, et al. v. Mari-
ano Panuyas, 105 Phil. 795, 861; Hermosa v. Longara, L-5267,
Oct. 27, 1953, 861; Natividad Herrera, et al. v. Luy Kim Guan,
et al., L-17043, Jan. 31, 1961, 862; (3) Dissolution, 862.
ARTICLE 1920 .................................................................................. 862
COMMENT: (1) Revocation by Principal or Agency, 862; (2)
When Agency Cannot Be Revoked at the Principal’s Will, 862;
(3) Agent Cannot Generally Recover Damages, 863; (4) Kinds
of Revocation, 863.
ARTICLE 1921 .................................................................................. 864
COMMENT: Agency for Contracting with Specified Persons,
864.
ARTICLE 1922 .................................................................................. 864
COMMENT: Agency When Third Parties Are Not Specified,
864.
ARTICLE 1923 .................................................................................. 864
COMMENT: Effect of Appointment of a New Agent, 864.
ARTICLE 1924 .................................................................................. 865
COMMENT: (1) Effect if the Principal Directly Manages the
Business, 865; (2) Case, 865; CMS Logging, Inc. v. CA & D.R.
Aguinaldo Corp., GR 41420, Jul. 10, 1992, 865.

lxi
 ARTICLE 1925 .................................................................................. 866
COMMENT: Revocation by One of Two or More Principals,
866.
ARTICLE 1926 .................................................................................. 866
COMMENT: Rule When Special Power Is Granted to Another
Agent, 866.
ARTICLE 1927 .................................................................................. 867
COMMENT: (1) When an agency Cannot Be Revoked, 867;
Bisaya Land Transportation Co., Inc. v. Sanchez, GR 74623,
Aug. 31, 1987, 868; (2) Effect When “Interest” Terminates,
868.
ARTICLE 1928 .................................................................................. 868
COMMENT: (1) Withdrawal by Agent, 868; (2) Effect When
Agent Sues Principal, 869.
ARTICLE 1929 .................................................................................. 869
COMMENT: When a Withdrawn Agent Must Still Act, 869.
ARTICLE 1930 .................................................................................. 869
COMMENT: (1) When Agency Continues Even After Death
of Principal, 869; (2) Agency Coupled With an Interest, 870;
(3) Nature of the Agent’s Interest, 870; (4) Interest is Not the
Share in the Profits or the Commission, 870; (5) The Entire
Agreement to Be Construed, 871; Eulogio del Rosario, et al. v.
Abad and Abad, 104 Phil. 648, 871.
ARTICLE 1931 .................................................................................. 872
COMMENT: (1) Effect of Agent’s Act Without Knowledge of
the Termination of the Agency, 872; (2) Rule in Case Business
Was Already Begun, 873.
ARTICLE 1932 .................................................................................. 873
COMMENT: (1) Death of the Agent, 873; (2) Effect of Agent’s
Death in Case of Agency Coupled with an Interest, 873.

Title XI. LOAN ........................................................................................ 874

(1) Introductory Comment, 874; (2) Scope of Credit Transac-
tions, 874.
GENERAL PROVISIONS ....................................................................... 874
ARTICLE 1933 ................................................................................. 874
COMMENT: (1) The Two Kinds of Loans, 875; (2) Loans Under
the Old Law, 875; (3) Distinctions Between Mutuum and Com-
modatum, 876; (4) ‘Consumable’ and ‘Non- consumable’ Distin-
guished, 876; (5) ‘Fungible’ and ‘Non-Fungible’ Distinguished,

lxii
 876; (6) Meaning of ‘Bailment’, 877; (7) Parties in a Bailment,
877; (8) Consideration or Cause in a Bailment of Loan, 877; (9)
Definition of ‘Credit’ as Applied to ‘LOANS’, 877; (10) ‘Loan’
Distinguished from ‘Rent’ or ‘Lease’ (Tolentino v. Gonzales, 50
Phil. 558), 878; In Re Guardianship of Tamboco, et al., 36 Phil.
939, 878; Government v. Phil. Sugar Estate Dev. Co., 38 Phil.
15, 878; (11) ‘Loan’ Distinguished from ‘Discounting of a Paper’,
879; Herrera v. Petrophil Corp., GR 48349, Dec. 29, 1986, 879;
(12) Loan Distinguished from Deposit, 879; (13) ‘Loan’ Distin-
guished from ‘Irregular Deposit’, 880; (14) ‘Loan’ Distinguished
from ‘Sale’, 881; (15) Form of Interest, 881; Herrera v. Petrophil
Corp., GR 48349, Dec. 29, 1986, 881; (16) Escalation Clause,
881; Insular Bank of Asia and America v. Salazar, GR 82082,
Mar. 25, 1988, 881; Almeda v. CA, 70 SCAD 248, 256 SCRA
292 (1996), 882.
ARTICLE 1934 .................................................................................. 882
COMMENT: (1) Nature of the Contract of Loan, 882; (2) Need
for Delivery, 882; (3) Consent of the Parties, 882; (4) Consensual
Contract of Future Loans, 883.

CHAPTER 1 — COMMODATUM .......................................................... 884

Section 1 — NATURE OF COMMODATUM ...................................... 884

ARTICLE 1935 .................................................................................. 884
COMMENT: (1) ‘Commodatum’ Defined, 884; (2) Features or
Characteristics of Commodatum as a Contract, 884; (3) What
Bailee (Borrower) in Commodatum Acquires, 885; (4) Spanish
Terms, 885.
ARTICLE 1936 .................................................................................. 885
COMMENT: (1) Subject Matter of Commodatum, 885; (2)
Counterpart in the Contract of Lease, 885.

ARTICLE 1937 .................................................................................. 885

COMMENT: (1) Properties That May Be the Object of Com-

modatum, 886; (2) Example of Commodatum Involving Land,
886.

ARTICLE 1938 .................................................................................. 886

COMMENT: Bailor (Lender) Need Not Be the Owner, 886;

Mercado and Ebora v. Aguilar, (C.A.) 45 O.G. 5th S. 118, Jun.
30, 1947, 887.

ARTICLE 1939 .................................................................................. 887

COMMENT: (1) Personal Nature of Commodatum, 887; (2)
Example of the First Paragraph, 888; (3) Example of the Second
Paragraph, 888.

lxiii
 ARTICLE 1940 .................................................................................. 888
COMMENT: (1) Does Bailee Have Right to Use the Fruits?
888; (2) Example, 888.

Section 2 — OBLIGATIONS OF THE BAILEE ................................. 889

ARTICLE 1941 .................................................................................. 889
COMMENT: (1) Duty of Borrower to Pay Ordinary Expenses,
889; (2) Examples, 889.
ARTICLE 1942 .................................................................................. 889
COMMENT: (1) Liability for Loss Due to a Fortuitous Event,
890; (2) Reason for the Law, 890; (3) Misuse or Abuse, 891.
ARTICLE 1943 .................................................................................. 891
COMMENT: Non-liability for Deterioration Without Fault,
891.
ARTICLE 1944 .................................................................................. 891
COMMENT: (1) Generally, Borrower Cannot Retain, 891; (2)
Reason for the Law, 891.
ARTICLE 1945 .................................................................................. 891
COMMENT: Solidary Liability of Bailees, 892.
Section 3 — OBLIGATIONS OF THE BAILOR ................................ 892
ARTICLE 1946 .................................................................................. 892
COMMENT: (1) Generally, Bailor Cannot Demand Immediate
Return, 892; (2) Reason for Second Sentence, First Paragraph
(Urgent Necessity), 892; (3) Suspension of the Contract, 893.
ARTICLE 1947 .................................................................................. 893
COMMENT: Precarium, 893.
ARTICLE 1948 .................................................................................. 893
COMMENT: (1) Effect of Commission of Act of Ingratitude,
893; (2) Grounds of Ingratitude, 893.
ARTICLE 1949 .................................................................................. 894
COMMENT: (1) Extraordinary Expenses, 894; (2) Reason for
the Second Paragraph (Actual Use by Bailee), 894; (3) Exam-
ple, 895.
ARTICLE 1950 .................................................................................. 895
COMMENT: Other Expenses, 895.
ARTICLE 1951 .................................................................................. 895
COMMENT: (1) When Bailor Knows Flaws, 895; (2) Reason
for the Law, 895; (3) Right of Retention, 896; (4) Nature of the
Flaws, 896.

lxiv
 ARTICLE 1952 .................................................................................. 896
COMMENT: (1) Effect of Bailor’s Abandonment or Giving of
the Object, 896; (2) Reason for the Law, 896.

CHAPTER 2 — SIMPLE LOAN OR MUTUUM ................................. 897

ARTICLE 1953 .................................................................................. 897
COMMENT: (1) Ownership Passes in Mutuum, 897; Republic
v. Jose Grijaldo, L-20240, Dec. 31, 1965, 897; Carlos Gelano,
et al. v. Court of Appeals and Insular Sawmill, Inc., L-39060,
Feb. 24, 1981, 897; Bonnevie v. Court of Appeals, GR 49101,
Oct. 24, 1983, 898; (2) Similarity to Abnormal Usufruct, 898;
(3) Bank Accounts, 898; (4) Effect of Mutual Error, 898; Rural
Bank of Caloocan v. Court of Appeals, L- 32116, Apr. 21, 1981,
898; (5) ‘Behest’ Loans, 899; Presidential Ad-Hoc Fact-Find-
ing Committee on Behest Loans v. Hon. Aniano A. Desierto
(Recovery of Ill-Gotten Wealth), GR 130340, 114 SCRA 707,
Oct. 25, 1999, 899.
ARTICLE 1954 .................................................................................. 899

COMMENT: (1) Barter of Non-Consumable Things, 899; (2)

Example, 899.

ARTICLE 1955 .................................................................................. 900

COMMENT: (1) Liability of Borrower of Money, 900; (2)

Example of Second Paragraph (Loan of Things Other Than
Money), 900.

ARTICLE 1956 .................................................................................. 901

COMMENT: (1) Formality for Interest (for Use of the Money),

901; (2) Example, 901; (3) Kinds of Interest, 901; (4) How In-
terest Arises, 901; (5) When Interest Earns Interest, 901; (6)
Interest by Way of Damages, 902; (7) Consolidation, 903; (8)
Municipal Corporations Are Liable for Interest, 903; (9) Inter-
est During the Moratorium Laws, 903; (10) Computations for
Compensatory Damages, 904; (11) Some Cases, 906; Nakpil
and Sons, et al. v. CA, GR 47861, Resolution on Motion for
Reconsideration, 906; Monzon, et al. v. IAC and Theo H. Davies
& Co., Far East Ltd., GR 72828, Jan. 31, 1989, 907; Anotnio
Tan v. CA & Cultural Center of the Phils., GR 116285, Oct.
19, 2001, 907.

ARTICLE 1957 .................................................................................. 907

COMMENT: (1) Usury Law Should Not Be Circumvented, 907;

(2) What Constitutes Usury, 908; Herrera v. Petrophil Corp.,
GR 48349, Dec. 29, 1986, 908; (3) Repeal of Usury Law, 908;
Liam Law v. Olympic Sawmill Co. and. Elino Lee Chi, L-30771,
May 28, 1984, 908.

lxv
 ARTICLE 1958 .................................................................................. 908
COMMENT: Determination of Interest if in Kind, 909.
ARTICLE 1959 .................................................................................. 909
COMMENT: (1) When Accrued Interest Earns Interest, 909;
(2) Compound Interest, 909; (3) Usury Law Not Violated, 909;
(4) When Compound Interest Cannot Be Demanded, 910; (5)
Reason Why Compound Interests Are Not Allowed Except in
the Cases Provided for by Law, 910; (6) Cases, 911; Antonio
Tan v. CA & Cultural Center of the Phils., GR 116285, Oct.
19, 2001, 911.
ARTICLE 1960 .................................................................................. 911
COMMENT. Payment of Interest Where There Is No Stipula-
tion, 911.
ARTICLE 1961 .................................................................................. 912
COMMENT: (1) Usury Law, 912; (2) Rules on Construction,
912; (3) Criminal Liability, 912; (4) When Usury Law Does Not
Apply, 913; (5) Compound Interest, 913; (6) Advance Interest,
913; (7) How Much Interest Can Debtor Recover, 913; Sanchez
v. Buenviaje, GR 57314, Nov. 29, 1983, 914; (8) Lawful Interest
Rates, 915; (9) Central Bank Circular 416, 915; Pilipinas Bank
v. CA, 43 SCAD 990 (1993), 915; (10) Case, 915; Almeda v. CA,
70 SCAD 248 (1996), 915; Sps. Puerto v. Court of Appeals, GR
138210, Jun. 13, 2002, 916.

Title XII. DEPOSIT ................................................................................. 917

CHAPTER 1 — DEPOSIT IN GENERAL AND

ITS DIFFERENT KINDS ......................................... 917

ARTICLE 1962 .................................................................................. 917

COMMENT: (1) Provisions in the Code of Commerce, 917; (2)
When Contract of Deposit is Perfected, 917; (3) Purposes of the
Contract, 917; (4) Kinds of Deposits, 918; (5) Characteristics
of the Contract of Deposit, 918; (6) ‘Deposit’ Distinguished
from ‘Sale’ and ‘Barter’, 919; (7) ‘Deposit’ and ‘Commodatum’
Distinguished, 919; (8) ‘Deposit’ Distinguished from ‘Agency’,
919; (9) Balance of a Commission Account, 920; (10) Advance
Partial Payment in Sales, 920.
ARTICLE 1963 .................................................................................. 920
COMMENT: (1) Consensual Contract to Constitute a Deposit,
920; (2) Necessity of an Agreement, 921.
ARTICLE 1964 .................................................................................. 921
COMMENT: Distinctions Between ‘Judicial’ and ‘Extrajudicial’
Deposits, 921.

lxvi
 ARTICLE 1965 .................................................................................. 922
COMMENT: (1) Compensation in a Deposit, 922; (2) Problem,
922; (3) When Contract Is Really One of Loan, 922.
ARTICLE 1966 .................................................................................. 922
COMMENT: (1) Why Only Movable Things May Be the Object
of a Deposit, 923; (2) Services of a Watchman, 923; (3) Seques-
tration or Attachment of Real Properties, 923.
ARTICLE 1967 .................................................................................. 923
COMMENT: Kinds of Extrajudicial Deposit, 923.

CHAPTER 2 — VOLUNTARY DEPOSIT ............................................ 924

Section 1 — GENERAL PROVISIONS ................................................ 924
ARTICLE 1968 .................................................................................. 924
COMMENT: (1) ‘Voluntary Deposit’ Defined, 924; (2) Reasons
for the First Sentence, 924; (3) Depositor Need Not Be the
Owner, 924; (4) ‘Interpleader’ Defined, 925; (5) Example of
Interpleader, 925.
ARTICLE 1969 .................................................................................. 925
COMMENT. Form of the Contract of Deposit, 925.
ARTICLE 1970 .................................................................................. 925
COMMENT. (1) Rule When Depositor Is Incapacitated, 925;
(2) Capacity of Depositary, 926; (3) Validity of the Contract
Entered Into, 926.
ARTICLE 1971 .................................................................................. 926
COMMENT: (1) Rule if Depositary Is Incapacitated, 926; (2)
Remedy of Depositor, 927; (3) Validity of the Contract Entered
Into, 927.
Section 2 — OBLIGATIONS OF THE DEPOSITARY ...................... 927
ARTICLE 1972 .................................................................................. 927
COMMENT: (1) Principal Obligations of the Depositary, 927; (2)
Duty of Safekeeping, 927; (3) Effect if Deposit Is Gratuitous or
Onerous, 928; (4) Owner Bears Loss, 928; (5) Duty of Owner of
Rice Mill, 928; (6) Guardian as Such, Is Not Depositary, 928.
ARTICLE 1973 .................................................................................. 929
COMMENT: (1) Deposit With a Third Person, 929; (2) Reason
of the First Sentence of the Article, 929.
ARTICLE 1974 .................................................................................. 929
COMMENT: (1) When Depositary May Change the Way of the
Deposit, 930; (2) Reason for the Law, 930.

lxvii
ARTICLE 1975 .................................................................................. 930
COMMENT: (1) Duty of Depositary to Collect Interest on In-
tangible Properties, 930; (2) Duty to Collect the Capital Also,
931; (3) Reason for the Second Paragraph, 931.

ARTICLE 1976 .................................................................................. 931

COMMENT: (1) Right of Depositary to Commingle, 931; (2)

Reason for the Proportional Co-ownership, 931.

ARTICLE 1977 .................................................................................. 932

COMMENT: Generally, Depositary Cannot Use, 932.

ARTICLE 1978 .................................................................................. 932

COMMENT (1) When Depositary Has Permission to Use,
932; (2) Irregular Deposit, 933; (3) Presumption, 933; Baron
v. David, 51 Phil. 1, 933; (4) Deposit of Palay, 934; Delgado v.
Bonnevie and Arandez, 23 Phil. 308, 934; (5) When Deposit of
Money Is Really a Loan, 934; (6) No Prescription of Demand
for Return, 934.
ARTICLE 1979 .................................................................................. 935
COMMENT: Liability for Fortuitous Event, 935.
ARTICLE 1980 .................................................................................. 935
COMMENT: (1) Bank Deposits, 935; PDIC v. CA, Abad, et al.,
GR 126911, Apr. 20, 2003, 936; Rural Bank of Caloocan v. Court
of Appeals, L-32116, Apr. 21, 1981, 937; Ong Sip v. Prudential
Bank and Trust Co., GR 27328, May 30, 1983, 937; Gonzales
v. Philippine National Bank, GR 33320, May 30, 1983, 938; (2)
Distressed Banks, 938; Serrano v. Central Bank, L-30511, Feb.
14, 1980, 938; (3) Exemption from Payment of Interest, 938; The
Overseas Bank of Manila v. Court of Appeals, L-49353, Jun. 11,
1981, 938; (4) The Bouncing Checks Law, 939; Batas Pambansa
Blg. 22, 939; A.M. 00-11-01-SC, 941; Elvira Yu Oh v. CA and
People of the Phils., GR 125197, Jun. 6, 2003, 942.
ARTICLE 1981 .................................................................................. 942
COMMENT: The Depositary Must Keep the Secret of the
Deposit, 942.
ARTICLE 1982 .................................................................................. 943
COMMENT: Necessity of Opening Locked Box, 944.
ARTICLE 1983 .................................................................................. 944
COMMENT: Return of the Thing Deposited, 944.
ARTICLE 1984 .................................................................................. 944
COMMENT: Depositary Cannot Demand Proof of Ownership,
945.

lxviii
 ARTICLE 1985 .................................................................................. 945
COMMENT: Two or More Depositors, 945.
ARTICLE 1986 .................................................................................. 945
COMMENT: Rule if Depositor Becomes Insane, 946.
ARTICLE 1987 .................................................................................. 946
COMMENT: (1) Example of Paragraph 1, 946; (2) Example of
Paragraph 2, 946.
ARTICLE 1988 .................................................................................. 946
COMMENT: (1) When Deposit Must Be Returned, 947; (2)
Exceptions to the General Rule, 947; (3) Liability for Dam-
ages, 947.
ARTICLE 1989 .................................................................................. 948
COMMENT: (1) Justifiable Reason for Returning, 948; (2)
Problem, 948.
ARTICLE 1990 .................................................................................. 949
COMMENT: Loss Thru Force Majeure or Government Order,
949.
ARTICLE 1991 .................................................................................. 949
COMMENT: Sale by Heir, 949.
Section 3 — OBLIGATIONS OF THE DEPOSITOR ........................ 950
ARTICLE 1992 .................................................................................. 950
COMMENT: Duty of Depositor to Reimburse, 950.
ARTICLE 1993 .................................................................................. 950
COMMENT: (1) Reimbursement Because of Loss, 951; (2)
Exceptions, 951.
ARTICLE 1994 .................................................................................. 951
COMMENT: (1) Right of Retention by Depositary, 952; (2)
Pledge by Operation of Law, 952; (3) Query, 952.
ARTICLE 1995 .................................................................................. 952
COMMENT: (1) Extinguishment of Deposit, 953; (2) Effect of
Death, 953; (3) Query, 953; (4) Other Grounds, 953.
CHAPTER 3 — NECESSARY DEPOSIT ............................................. 954
ARTICLE 1996 .................................................................................. 954
COMMENT: (1) Example of Necessary Deposit Made in Compli-
ance With a Legal Obligation, 954; (2) Example of a Necessary
Deposit Made on the Occasion of a Calamity, 954; (3) Two Other
Kinds of Necessary Deposits, 955.

lxix
 ARTICLE 1997 .................................................................................. 955
COMMENT: (1) Governing Rules for Deposits Made in Compli-
ance with a Legal Obligation, 955; (2) Rules Governing Deposits
Made Because of a Calamity, 955; (3) Art. 2168, 955.
ARTICLE 1998 .................................................................................. 956
COMMENT: (1) Example of Liability of Hotel or Inn-keepers,
956; (2) ‘Innkeeper’ Defined, 956; (3) ‘Occasional Entertainment’
Defined, 956; (4) ‘Travellers’ Defined, 956; (5) Reasons for the
Liability of the Hotels or Inns, 957; (6) When Liability Begins,
957; (7) Meaning of Effects, 957; (8) Nature of Precautions to
Be Given to the Guests, 957.
ARTICLE 1999 .................................................................................. 958
COMMENT: Liability Extends to Objects in Annexes, 958.
ARTICLE 2000 .................................................................................. 958
COMMENT: (1) Rules for Liability, 958; (2) Non-Liability for
Force Majeure, 958; (3) Problem, 958.
ARTICLE 2001 .................................................................................. 959
COMMENT: (1) Robbery Through Force Upon Things, 959; (2)
Query, 959; (3) Reason for Art. 2001, 959.
ARTICLE 2002 .................................................................................. 960
COMMENT: (1) Instances When Hotel Keeper Is Not Liable,
960; (2) Examples, 960.
ARTICLE 2003 .................................................................................. 960
COMMENT: Effect of Notices Negating Liability, 960.
ARTICLE 2004 .................................................................................. 961
COMMENT: (1) Right of Retention Given to Hotel-Keeper, 961;
(2) Right to Sell, 961; (3) Why the Right to Retain Is Given, 961;
(4) When Lien or Retention Does Not Exist, 961.

CHAPTER 4 — SEQUESTRATION OR JUDICIAL

DEPOSIT ..................................................................... 962
ARTICLE 2005 .................................................................................. 962
COMMENT: Nature of Garnishment or Judicial Deposit, 962.

ARTICLE 2006 .................................................................................. 962

COMMENT: Object of Judicial Sequestration, 962.

ARTICLE 2007 .................................................................................. 963

COMMENT: (1) When Depositary Can Be Relieved of Liability,

963; (2) When Properties Cease to Be in Custodia Legis, 963.

lxx
 ARTICLE 2008 .................................................................................. 963
COMMENT: To Exercise Diligence of a Good Father, 963.
ARTICLE 2009 .................................................................................. 963
COMMENT: Suppletory Rules in Rules of Court, 963.

TITLE XIII .................................................................................................. 964

ALEATORY CONTRACTS ..................................................................... 964
GENERAL PROVISIONS, 964.
ARTICLE 2010 .................................................................................. 964
COMMENT: (1) Element of Risk, 964; (2) Kinds of Aleatory
Contracts, 964; Malayan Insurance Co., Inc. v. Arnaldo, GR
67835, Oct. 12, 1987, 964; (3) Distinction Between an Aleatory
Contract and a Contract with a Suspensive Condition, 965.
CHAPTER 1 — INSURANCE ................................................................ 966
ARTICLE 2011 ................................................................................. 966
COMMENT: (1) Principal Law on Insurance, 966; Acme Shoe
Rubber and Plastic Corporation v. Court of Appeals, L 56718,
Jan. 17, 1985, 966; Mayer Steel Pipe Corp. & Hong Kong Gov-
ernment Supplies Dept. v. CA, South Sea Surety & Insurance
Co., Inc. & Charter Insurance Corp., GR 124050, Jun. 19, 1997,
83 SCAD 881, 966; (2) Deficiency in the Insurance Law, 967;
Association of Baptist for World Evangelism, Inc. v. Fieldman’s
Insurance, GR 28772, Sep. 21, 1983, 967; (3) Beneficiary Is
Not the Donee in a Donation, 967; (4) Rule if Beneficiary Is a
Compulsory Heir, 967; (5) Who Collects the Insurance Indem-
nity?, 968; (6) Problem, 968; (7) Effect of Predecease of the
Beneficiary, 968; (8) Accident Insurance, 969; (9) Measure of
the Vested Interest of Insurance Beneficiary, 969; (10) Act of
Surrendering an Insurance Policy is an Act of Disposition or
alienation, 969.
ARTICLE 2012 .................................................................................. 970
COMMENT: (1) Disqualified Donees Cannot Be Beneficiaries,
970; (2) No Retroactive Effect of the Article, 970.
CHAPTER 2 — GAMBLING .................................................................. 971
ARTICLE 2013 .................................................................................. 971
COMMENT: (1) Game of Chance Defined, 971; (2) Rule in Case
of Doubt, 971; (3) Examples of Games of Chance, 971; (4) Some
Forms of Legal Gambling, 971.
ARTICLE 2014 .................................................................................. 972
COMMENT: (1) No Court Action by Winner, 972; (2) Promis-
sory Note Issued Because of Gambling, 972; (3) Money Lent to

lxxi
 a Gambler, 972; (4) Instance Where Article is Not Applicable,
972; Ban v. IAC, GR 66272, Oct. 17, 1986, 972.
ARTICLE 2015 .................................................................................. 973
COMMENT: Effect of Cheating, 973.
ARTICLE 2016 .................................................................................. 973
COMMENT: Rule if Loser Does Not Bring the Action to Re-
cover, 973.
ARTICLE 2017 .................................................................................. 974
COMENT: Bets Made by Game Watchers, 974.
ARTICLE 2018 .................................................................................. 974
COMMENT: Where the Transactions Partake of Gambling and
Thus Void, 974.
ARTICLE 2019 .................................................................................. 975
COMMENT: (1) Prohibition on Betting, 975; (2) Beauty Contest,
Oratorical Contest, 975; (3) Revised Penal Code, 975.
ARTICLE 2020 .................................................................................. 975
COMMENT: Chess is definitely not a game of chance, 975.

CHAPTER 3 — LIFE ANNUITY ........................................................... 976

ARTICLE 2021 .................................................................................. 976
COMMENT: (1) Example of Life Annuity, 976; (2) Life Annuity
Distinguished from Life Insurance, 976.
ARTICLE 2022 .................................................................................. 976
COMMENT: (1) Upon Whose Life the Annuity May Be Consti-
tuted, 977; (2) Who May Be the Beneficiary, 977.
ARTICLE 2023 .................................................................................. 977
COMMENT: When the Contract of Life Annuity Is Void, 977.
ARTICLE 2024 .................................................................................. 977
COMMENT: Effect if the Income Due Is Not Paid, 977.
ARTICLE 2025 .................................................................................. 978
COMMENT: Effect if Beneficiary Dies, 978.
ARTICLE 2026 .................................................................................. 978
COMMENT: Attachment of the Annuity, 978.
ARTICLE 2027 .................................................................................. 978
COMMENT: Proof of Existence of Person Upon Whose Life the
Annuity Has Been Constituted, 978.

lxxii
Title XIV. COMPROMISES OR ARBITRATIONS ............................ 979

CHAPTER 1 — COMPROMISES .......................................................... 979

ARTICLE 2028 .................................................................................. 979
COMMENT: (1) Essence of Compromise, 979; (2) Definition
of Compromise, 979; (3) Characteristics, 979; Kaisahan v.
Sarmiento, L-47853, Nov. 16, 1984, 980; (4) Kinds, 980; (5)
When Agreement Is Not Really a Compromise, 980; Merced v.
Roman Catholic Archbishop, L-24614, Aug. 17, 1967, 980; (6)
Cases, 981; Landoil Resources Corp., et al. v. Hon. Tensuan,
et al., GR 77733, Dec. 20, 1988, 981; Reformist Union of R.B.
Liner, Inc. v. NLRC, GR 120482, Jan. 27, 1997, 78 SCAD 377,
981.
ARTICLE 2029 .................................................................................. 982
COMMENT: (1) Duty of the Court to Persuade Litigants to
Compromise, 982; (2) Right of Attorney to Compromise for
His Client, 982; (3) The Case of Richard Gordon, 982; Richard
Gordon v. CA, GR 134900, Sep. 1, 1998, 982.
ARTICLE 2030 .................................................................................. 982
COMMENT: (1) Suspension of Civil Action or Proceeding, 983;
(2) Motion to Dismiss, 983; (3) Postponements, 983; (4) Offers
to Arbitrate Not Included, 983.
ARTICLE 2031 .................................................................................. 984
COMMENT: Mitigation of Damages, 984.
ARTICLE 2032 .................................................................................. 984
COMMENT: (1) When Court Approval is Essential, 984; (2)
Other Rules, 984.
ARTICLE 2033 .................................................................................. 985
COMMENT: Rules for Compromise Entered Into by Juridical
Persons, 985.
ARTICLE 2034 .................................................................................. 985
COMMENT: (1) Generally, No Compromise on Criminal As-
pect, 985; (2) When Compromise Is Allowed, 985; Republic v.
Marcela B. Garay, L-21416, Dec. 31, 1965, 986; Dasalla, Sr. v.
CFI, GR 51461, Apr. 26, 1991, 986; (3) Compromise in Criminal
Tax Cases, 988.
ARTICLE 2035 .................................................................................. 988
COMMENT: (1) Questions on Which There Can Be No Valid
Compromise, 988; (2) Status, 988; Tan, et al. v. Republic, L-
27713, Feb. 10, 1981, 988; (3) Recognition of Illegitimate Child,
989; (4) Support, 989; (5) Jurisdiction of Courts, 989; One Heart
Sporting Club, Inc. v. The Court of Appeals, GR 53790, Oct. 23,

lxxiii
 1981, 989; Solidum v. Sta. Maria, Administrative Case 1858,
Dec. 26, 1984, 989.
ARTICLE 2036 ................................................................................. 990
COMMENT: (1) What a Compromise Can Deal With, 990;
(2) Effect of General Renunciation of Rights, 990; (3) Strict
Construction of a Compromise Agreement, 990; International
Hotel Corp., et al. v. Hon. Elias Asuncion, L-39669, Mar. 10,
1975, 990.
ARTICLE 2037 .................................................................................. 991
COMMENT: (1) Res Judicata Effect of a Compromise, 991;
Cruz, et al. v. IAC, et al., GR 72806, Jan. 9, 1989, 991; (2) Ju-
dicial Compromise, 991; Republic v. Court of Appeals, L-47381
and L-47420, Jan. 31, 1985, 992; Federis v. Sunga, L-34893,
Jan. 17, 1985, 992; (3) Judgment Generally Not Appealable,
992; (4) Judgment by Wage Administration Service, 993; (5)
When Judgment on Compromise Is Void, 993; (6) Effect of a
Judicial Compromise on Persons Not Original Parties, 994;
Rodriguez v. Alikpala, L-38314, Jun. 25, 1974, 994; Bobis v.
Provincial Sheriff of Camarines Norte, GR 29838, Mar. 18,
1983, 994.
ARTICLE 2038 .................................................................................. 994
COMMENT: (1) Effect of Compromise Where There is Vitiated
Consent, 995; (2) Modification of a Judgment on Compromise,
995.
ARTICLE 2039 .................................................................................. 995
COMMENT: Effect of Discovery of Documents Referring to
Matters Compromised Upon, 996.

ARTICLE 2040 .................................................................................. 996

COMMENT: (1) Compromise Entered Into in Ignorance of a

Final Judgment, 996; (2) Reason for Allowing a Rescission, 996;
(3) Effect of Appeal, 996.

ARTICLE 2041 .................................................................................. 996

COMMENT: (1) Effect if Compromise Agreement Is Not Ful-

filled, 997; City of Zamboanga v. Mandi, GR 86760, Apr. 30,
1991, 997; Barreras, et al. v. Hon. Garcia, et al., L-44715 16,
Jan. 26, 1989, 1000; (2) No Necessity for Judicial Rescission,
1000; (3) No Rescission After Benefits are Enjoyed, 1000; Re-
public v. Sandiganbayan, 49 SCAD 45 (1993), 1000.

CHAPTER 2 — ARBITRATIONS ......................................................... 1001

ARTICLE 2042 .................................................................................. 1001
COMMENT: (1) ‘Arbitration’ Defined, 1001; Mindanao Portland
Cement Corp. v. McDonough, L-23390, Apr. 24, 1967, 1001;

lxxiv
 Bengson v. Chan, L-27283, Jul. 29, 1977, 1001; Allied Bank-
ing Corp. v. CA & BPI, GR 123871, Aug. 31, 1998, 1002; LM
Power Engineering Corp. v. Capitol Industrial Const. Groups,
Inc., GR L-141833, Mar. 26, 2003, 1002; (2) Distinguished from
‘Compromise’, 1003; (3) Special Law on Arbitration, 1004.
ARTICLE 2043 .................................................................................. 1004
COMMENT: Applicability of Provisions on Compromise,
1004.
ARTICLE 2044 .................................................................................. 1004
COMMENT: (1) Finality of Arbitral Award, 1004; (2) Stipula-
tion on Arbitration Before Judicial Suit, 1004; (3) Cases, 1005;
National Union Five Insurance Co. of Pittsburg v. Stolt-Nielsen
Phils., Inc., 184 SCRA 682 (1990), 1005; Santos v. Northwest
Orient Airlines, 210 SCRA 256 (1992), 1005; (4) Some Observa-
tions, 1005; Question of Fact and of Law Re Arbitral Awards
Asset Privatization Trust v. Court of Appeals, 300 SCRA 579
(1998), 1006; (5) The Matter of ‘Filing Fee’, 1007; Sun Insurance
Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274 (1989), 1007; (6)
Court to Decide All Motions, Petitions, or Applications within 10
Day After Hearing, 1007; Puromines, Inc. v. CA, 220 SCRA 281
(1993), 1007; (7) Inclusion of Third Parties as Additional Parties
to Defeat an Arbitration Clause, 1008; Toyota Motor Phils. Corp.
v. CA, 216 SCRA 236 (1992), 1008; (8) The Del Monte Case, 1009;
Del Monte Corp.-USA v. CA, 351 SCRA 373 (2001), 1009.
ARTICLE 2045 .................................................................................. 1013
COMMENT: Equal Number of Arbitrators, 1013.
ARTICLE 2046 .................................................................................. 1013
COMMENT: Authority of the Supreme Court to Promulgate
Rules on Arbitration, 1013.

Title XV. GUARANTY ............................................................................. 1014

CHAPTER 1 — NATURE AND EXTENT OF GUARANTY ............. 1014

INTRODUCTORY COMMENT: (1) Guaranty in the Broad
Sense, 1014; (2) Personal Guaranty, 1014; (3) Real Guaranty,
1014; San Miguel Corporation v. National Labor Relations
Commission, GR 58630, Nov. 25, 1983, 1015.

ARTICLE 2047 .................................................................................. 1015

COMMENT: (1) Guaranty in the Strict Sense, 1015; (2) Char-

acteristics of the Contract of Guaranty, 1015; Vizconde v. IAC,
GR 74231, Apr. 10, 1987, 1015; (3) Guarantor Distinguished
from Surety, 1017; (4) Surety Distinguished from a Solidary
Debtor, 1017; (5) Procedure for Enforcement of Surety’s Li-
ability, 1017; (6) ‘Guarantor’ Distinguished from the ‘Debtor’,
1018; (7) Instance When a Suretyship is Deemed a Continuing

lxxv
 One, 1018; Ongkiko v. BPI Express Card Corp., 486 SCRA 206
(2006), 1018.
ARTICLE 2048 .................................................................................. 1018
COMMENT: (1) Gratuitous Character, 1018; (2) Relation
Between an ‘Accommodation Party’ and the ‘Accommodated
Party,’ 1019; Tomas Ang v. Associated Bank and Antonio Ang
Eng Liong, GR 146511, Sep. 5, 2007, 1019.
ARTICLE 2049 .................................................................................. 1019
COMMENT: Married Woman as Guarantor, 1019.
ARTICLE 2050 .................................................................................. 1019
COMMENT: (1) Guaranty Entered Into Without Debtor’s
Knowledge, Consent, or Against the Latter’s Will, 1019; (2)
Cross References, 1019.
ARTICLE 2051 .................................................................................. 1020
COMMENT: (1) Guaranty Classified According to Manner of
Creation, 1020; (2) Sub-Guaranty, 1020.
ARTICLE 2052 .................................................................................. 1020
COMMENT: (1) Can a Guaranty Exist Even Without a Valid
Principal Obligation, 1021; (2) Consideration, 1021; Willex Plas-
tic Ind. Corp. vs. CA & ICB, GR 103066, Apr. 25, 2006, 1021.
ARTICLE 2053 .................................................................................. 1022
COMMENT: (1) Guaranty for Present and Future Debts, 1022;
(2) Liquidated Debt, 1022; (3) Continuing Surety Agreements
are Quite Commonplace in Present Day Commercial Practice,
1022; South City Homes, Inc., Fortune Motors (Phils.), Palawan
Lumber Manufacturing Corp. v. BA Finance Corp., GR 135462,
Dec. 7, 2001, 1023.
ARTICLE 2054 .................................................................................. 1023
COMMENT: (1) Obligation of Guarantor May Be Less, But Not
More Than Obligation of Principal Debtor, 1024; Pacific Bank-
ing Corp. v. IAC, GR 72275, Nov. 13, 1991, 1024; (2) Problems,
1026; (3) Rule if a Person Has Two Debts, 1027; Commonwealth
of the Phil. v. Far Eastern Surety and Insurance Co., 83 Phil.
305, 1027; (4) Rule if Debt is Increased, 1027; (5) Liability of
Guarantor for Interest, 1028; (6) Effect of a Penalty Clause,
1028.
ARTICLE 2055 .................................................................................. 1028
COMMENT: (1) Form of the Contract, 1028; PNB v. CA, Luzon
Surety Co., et al., GR 33174, Jul. 4, 1991, 1029; (2) Kinds of
Guaranty According to Period or Condition, 1030; National
Marketing Corporation v. Gabino Marquez, et al., L-25553,
Jan. 31, 1969, 1030; (3) Strictly Construed, 1031.

lxxvi
 ARTICLE 2056 .................................................................................. 1032
COMMENT: (1) Qualification of Guarantor, 1033; (2) Proper
Court, 1033.
ARTICLE 2057 .................................................................................. 1033
COMMENT: (1) Effect of Conviction of a Crime Involving Dis-
honesty, 1033; (2) Subsequent Loss of Integrity or Insolvency,
1033; (3) Liability of Heirs if the Guarantor Dies, 1034.

CHAPTER 2 — EFFECTS OF GUARANTY ....................................... 1035

Section 1 — EFFECTS OF GUARANTY BETWEEN THE

GUARANTOR AND THE CREDITOR .................. 1035

INTRODUCTORY COMMENT .............................................................. 1035

ARTICLE 2058 .................................................................................. 1035
COMMENT: (1) Benefit of Excussion, 1035; (2) Bar Question,
1036; (3) Duty of Creditor, 1036; (4) Query, 1037.
ARTICLE 2059 ................................................................................. 1037
COMMENT: (1) When Guarantor Is Not Entitled to Benefit of
Excussion, 1037; (2) Additional Instances When Guarantor Is
NOT Entitled to the Benefit of Excussion, 1038; (3) Re Para-
graph 4 of the Article (Absconding Debtor), 1038.
ARTICLE 2060 .................................................................................. 1038
COMMENT: Requisites Before Guarantor Can Make Use of
Excussion, 1038.
ARTICLE 2061 .................................................................................. 1039
COMMENT: Effect of Creditor’s Negligence, 1039.
ARTICLE 2062 .................................................................................. 1039
COMMENT: (1) Generally Suit Must Be Against Principal
Debtor Alone, 1039; (2) Suit by the Creditor to Recover the
Debt, 1040; (3) Reason for Notifying Guarantor, 1040; (4) Ob-
ligatory Nature of the Notification, 1040.
ARTICLE 2063 .................................................................................. 1040
COMMENT: (1) Effect of Compromise Between Creditor and
Principal Debtor, 1040; (2) Effect of Compromise Between the
Guarantor and the Creditor, 1040.
ARTICLE 2064 .................................................................................. 1041
COMMENT: Sub-Guarantor Enjoys Excussion, 1041.
ARTICLE 2065 .................................................................................. 1041
COMMENT: (1) Benefit of Division, 1041; (2) When the Benefit
of Division Ceases, 1041.

lxxvii
Section 2 — EFFECTS OF GUARANTY BETWEEN THE
DEBTOR AND THE GUARANTOR ...................... 1041
ARTICLE 2066 .................................................................................. 1041
COMMENT: (1) Indemnity to Be Paid By the Debtor for Whom
the Guarantor Has Paid, 1042; (2) Guaranty as a Strict In-
demnity, 1042.

ARTICLE 2067 .................................................................................. 1042

COMMENT: (1) Right of Guarantor to Subrogation, 1043; Ur-

rutia and Co. v. Moreno and Reyes, 28 Phil. 260, 1043.

ARTICLE 2068 .................................................................................. 1043

COMMENT: (1) Effect if Guarantor Pays Without Notifying

Debtor, 1044; (2) Reason for the Article, 1044.

ARTICLE 2069 .................................................................................. 1044

COMMENT: (1) Payment By Guarantor Before Debt Becomes
Due, 1044; (2) Reason for the Article, 1044; (3) Ratification By
the Debtor, 1044.
ARTICLE 2070 .................................................................................. 1044

COMMENT: (1) Payment By Both the Guarantor and the

Debtor, 1045; (2) Gratuitous Guaranty, 1045; (3) Comment
of Manresa, 1045; (4) Applicable Only When Debtor Had Not
Previously Authorized the Guarantor to Pay, 1046.

ARTICLE 2071 .................................................................................. 1046

COMMENT: (1) Rights of Guarantor Before Payment, 1047; (2)

Problems, 1047; (3) How Guarantor or Surety Can Enforce the
Rights Under the Article, 1048; (4) Problem, 1048; Mercantile
Insurance Co., Inc. v. Felipe Ysmael, Jr., and Co., Inc., L-43862,
Jan. 13, 1989, 1049; (5) The Nature of the Remedies, 1049; (6)
Applicability of the Article to Sureties, 1049; (7) When Surety’s
Action Is Not Premature, 1050; The Cosmopolitan Insurance
Co., Inc. v. Angel B. Reyes, L-20199, Nov. 23, 1965, 1050.

ARTICLE 2072 .................................................................................. 1051

COMMENT: Guarantor Who Becomes One At the Request of

an Absent Debtor, 1051.

Section 3 — EFFECTS OF GUARANTY AS BETWEEN

CO-GUARANTORS .................................................... 1051
ARTICLE 2073 .................................................................................. 1051
COMMENT: (1) Right of Guarantor Who Pays, 1052; (2) Ex-
ample of Par. 1, 1052; (3) Example of Par. 2, 1052; (4) Distin-
guished from Benefit of Division, 1052.

lxxviii
 ARTICLE 2074 .................................................................................. 1053
COMMENT: Right of Co-Guarantors Against the Guarantors
Who Paid, 1053.
ARTICLE 2075 ................................................................................. 1053
COMMENT: Liability of Sub-Guarantors to Co-Guarantors,
1053.
CHAPTER 3 — EXTINGUISHMENT OF GUARANTY .................... 1054
ARTICLE 2076 .................................................................................. 1054
COMMENT: (1) Two Causes for Extinguishment of the Guar-
anty, 1054; (2) Effect of Novation, 1054; Capitol Insurance v.
Ronquillo Trading, GR 36488, Jul. 26, 1983, 1055.
ARTICLE 2077 .................................................................................. 1055
COMMENT: Effect of Dacion En Pago, 1055.
ARTICLE 2078 .................................................................................. 1055
COMMENT: Release by Creditor in Favor of One of the Guar-
antors, 1055.
ARTICLE 2079 .................................................................................. 1056
COMMENT: (1) Effect of Extension Granted By the Creditor,
1056; (2) Comment of Manresa, 1056; Philippine General Ins.
Co. v. Mutuc, L-19632, Nov. 13, 1974, 1056; (3) Failure of
Creditor to Demand Payment, 1057; General Insurance and
Surety Corp. v. Republic, L-13873, Jan. 31, 1963, 1057; The
Commissioner of Immigration v. Asian Surety and Insurance
Co., Inc., L-22552, Jan. 30, 1969, 1058; (4) Problems, 1060; (5)
Neglect of Creditor to Collect, 1061.
ARTICLE 2080 .................................................................................. 1061
COMMENT: (1) When Guarantors Are Released Because of
an Act of the Creditor That Prevents Subrogation, 1061; (2)
Reason for the Article, 1061; (3) Meaning of “Act”, 1061; (4)
When Guarantor is at Fault, 1062; (5) When Guarantor Can
Make Use of the Article, 1062; (6) Art. 2080 does not Apply in
a Contract of Suretyship, 1062; Ang v. Associated Bank, GR
146511, Sep. 5, 2007, 1062.
ARTICLE 2081 .................................................................................. 1062
COMMENT: Defenses Available to the Guarantor, 1062.

CHAPTER 4 — LEGAL AND JUDICIAL BONDS ............................ 1064

ARTICLE 2082 .................................................................................. 1064
COMMENT: (1) Qualification of a Bondsman, 1064; (2) The
Bond, 1064; Singson v. Babida, L-30096, Sep. 27, 1977, 1064;
(3) Right to Be Heard, 1065.

lxxix
 ARTICLE 2083 .................................................................................. 1065
COMMENT: Rule if the Bond Is Not Given, 1065.
ARTICLE 2084 .................................................................................. 1065
COMMENT: (1) No Right to Excussion, 1065; (2) Liability of
Surety if Creditor Was Negligent in Collecting, 1066; (3) Effect
of Violation By Creditor of Terms of the Surety Agreement,
1066; (4) Bond Filed for Aliens Stay, 1066; (5) Rule When Per-
formance is Rendered Impossible, 1066; (6) Obligation of Surety
to Keep the Accused Under His Surveillance, 1067; People v.
Ignacio Sanchez, et al., L- 34222, Jan. 24, 1974, 1067; House
v. De La Costa, 68 Phil. 742, 1067; (7) Special Act on Perform-
ance Bonds, 1068.

Title XVI. PLEDGE, MORTGAGE AND ANTICHRESIS ............... 1069

CHAPTER 1 — PROVISIONS COMMON TO PLEDGE

AND MORTGAGE .................................................... 1069
ARTICLE 2085 .................................................................................. 1069
COMMENT: (1) Consideration of Pledge or Mortgage, 1069; (2)
Ownership, 1070; (3) Nullity of Pledge or Mortgage, 1070; (4)
Liability of Mortgagor for Another’s Debt, 1070; (5) Essential
Requisites for Pledge and Mortgage, 1071; (6) Case, 1071; Guill-
ermo Adriano v. Romulo Pangilinan, GR 137471, Jan. 16, 2002,
1071; (7) A DST is not an Imposition in the Document Itself but
on the Privilege to Enter into a Taxable Transaction of Pledge,
1074; Michel J. Lhuiller Pawnshop, Inc. v. Commissioner of
Internal Revenue (CIR), 501 SCRA 450 (2006), 1074.
ARTICLE 2086 ................................................................................. 1075
COMMENT: Applicability of Art. 2052 (Guaranty of Voidable,
etc., Obligations), 1075.
ARTICLE 2087 .................................................................................. 1076
COMMENT: (1) Right to Have the Property Alienated So That
the Debt May Be Paid, 1076; (2) Violations of Conditions May
Authorize Immediate Foreclosure, 1076; (3) Price, 1077; El
Hogar Filipino v. Phil. Nat’l. Bank, 64 Phil. 582, 1077; Solomon
and Lachica v. Dantes, 63 Phil. 522, 1078; Lopez v. Director of
Lands, 47 Phil. 23, 1078.
ARTICLE 2088 .................................................................................. 1079
COMMENT: (1) Pactum Commissorium, 1079; (2) Cases, 1080;
Warner, Barnes and Co. v. Buenaflor and Macoy, (CA) 36 O.G.
3290, 1080; Ranjo v. Salmon, 15 Phil. 436, 1081; Dalay v. Aquia-
tin and Maximo, 47 Phil. 951, 1081; A. Francisco Realty & Dev.
Corp. v. CA & Sps. Romulo S.A. Javillonar and Erlinda P. Javil-
lonar, GR 125055, Oct. 30, 1998, 1083; (3) Mortgagee Cannot
Sell During Existence of Principal Obligation, 1083; (4) Case,
1084; Hechanova v. Adil, GR 49940, Sep. 25, 1986, 1084.

lxxx
 ARTICLE 2089 .................................................................................. 1084
COMMENT: (1) Indivisibility of a Pledge or Mortgage, 1084;
(2) Example of the Exception, 1085; (3) Mortgage on Both a
House and Its Lot, 1085; (4) Non Applicability to Third Per-
sons, 1085.
ARTICLE 2090 .................................................................................. 1085
COMMENT: (1) Indivisibility Applies Even if Debtors Are Not
Solidary, 1085; (2) Case, 1086; Ong v. IAC, GR 74073, Sep. 13,
1991, 1086.
ARTICLE 2091 .................................................................................. 1087
COMMENT: The Kinds of Obligations Which a Pledge or a
Mortgage May Secure, 1087.
ARTICLE 2092 .................................................................................. 1087
COMMENT: (1) A Promise to Constitute a Pledge or Mortgage,
1087; (2) Judicial Declaration of Lien Is Sufficient, 1088; (3)
Double Remedies, 1088; (4) Estafa, 1088; (5) Another Instance
of Estafa, 1089; (6) Ownership Not a Necessary Element of
Estafa, 1089.

CHAPTER 2 — PLEDGE ........................................................................ 1090

ARTICLE 2093 .................................................................................. 1090
COMMENT: (1) Thing Pledged Must Be in Possession of the
Creditor or a Third Person By Common Agreement, 1090; (2)
Effectivity Against Third Persons, 1090; (3) Symbolic Deliv-
ery, 1091; (4) Example, 1091; Betita v. Guanzon, 49 Phil. 87,
1091.
ARTICLE 2094 .................................................................................. 1091
COMMENT: What May Be Pledged, 1091; Pac. Com. Co. v. Phil.
Nat’l. Bank, 49 Phil. 236, 1092; The Manila Banking Corp. v.
Teodoro, et al., GR 53955, Jan. 13, 1989, 1092.
ARTICLE 2095 .................................................................................. 1092
COMMENT: (1) Pledge of Incorporeal Rights, 1093; (2) Pledge
Certificate, 1093.
ARTICLE 2096 .................................................................................. 1093
COMMENT: (1) Effectivity of Pledge Against Third Persons,
1093; (2) Reason for the Law, 1093; (3) Mere Delivery Not
Sufficient, 1093; (4) Assignee Under the Insolvency Law, 1094;
(5) Problem, 1094; (6) Effect if No Public Instrument Is Made,
1094.
ARTICLE 2097 .................................................................................. 1094

COMMENT: Pledgor May Alienate Thing Pledged, 1095.

lxxxi
ARTICLE 2098 .................................................................................. 1095
COMMENT: (1) Creditor’s Right to Retain, 1095; (2) Rule Under
the Old Law, 1095; (3) No Double Pledge, 1096.
ARTICLE 2099 .................................................................................. 1096
COMMENT: Duty of Pledgee to Take Care of Thing Pledged,
1096; Cruz and Serrano v. Chua A.H. Lee, 54 Phil. 10, 1097.
ARTICLE 2100 .................................................................................. 1098
COMMENT: (1) Pledgee Cannot Deposit the Thing Pledged,
1098; (2) Responsibility of Pledgee for Subordinates’ Acts,
1098.
ARTICLE 2101 .................................................................................. 1098
COMMENT: Same Responsibility as a Bailor in Commodatum,
1098.
ARTICLE 2102 .................................................................................. 1098
COMMENT: Rules if Pledge Produces Fruits or Interests,
1099.
ARTICLE 2103 .................................................................................. 1099
COMMENT: (1) Ownership Retained By Pledgor, 1099; (2)
Exercise By Pledgee of Rights of Owner, 1099.

ARTICLE 2104 .................................................................................. 1099

COMMENT: Use By Creditor of Thing Deposited, 1099.

ARTICLE 2105 .................................................................................. 1100

COMMENT: When Debtor Can Demand the Return of Thing

Pledged, 1100.

ARTICLE 2106 .................................................................................. 1100

COMMENT: When Pledgor May Require That the Object Be

Deposited With a Third Person, 1100.

ARTICLE 2107 .................................................................................. 1100

COMMENT: When Destruction or Impairment Is Feared,

Without the Fault of the Pledgee, 1101.

ARTICLE 2108 .................................................................................. 1101

COMMENT: Destruction, Impairment, or Diminution in Value

of the Thing Pledged, 1101.

ARTICLE 2109 .................................................................................. 1102

COMMENT: Rule if Creditor Is Deceived on the Substance or

Quality of the Thing Pledged, 1102.

lxxxii
ARTICLE 2110 .................................................................................. 1102
COMMENT: (1) Return of Thing Pledged, 1102; (2) When
Thing Pledged Is Found in the Possession of the Pledgor or
Owner, 1103.
ARTICLE 2111 .................................................................................. 1103
COMMENT: (1) When Pledgee Renounces or Abandons the
Pledge, 1103; (2) Form Needed — Statement in Writing,
1103.
ARTICLE 2112 .................................................................................. 1104
COMMENT: (1) Right of Creditor to Sell if Credit Is Not Satis-
fied, 1104; (2) Formalities Required, 1104; (3) Questions, 1104;
(4) Rule Under the Old Law, 1105; (5) Rule When Pledgee Is
Expressly Authorized to Sell Upon Default, 1106.
ARTICLE 2113 .................................................................................. 1106
COMMENT: Right of Pledgor and Pledgee to Bid at the Public
Auction, 1106.
ARTICLE 2114 .................................................................................. 1106
COMMENT: Nature of the Bids at the Public Auction, 1107.
ARTICLE 2115 .................................................................................. 1107
COMMENT: Rules if the Price At the Sale Is More or Less than
the Debt, 1107; Manila Surety and Fidelity Co., Inc. v. Velayo,
L-21069, Oct. 26, 1967, 1107.
ARTICLE 2116 .................................................................................. 1108
COMMENT: Duty of Pledgee to Advice Pledgor or Owner of the
Result of the Public Auction, 1108.
ARTICLE 2117 .................................................................................. 1108
COMMENT: Right of a Third Person to Pay the Debt, 1108.
ARTICLE 2118 .................................................................................. 1108
COMMENT: Pledge of a Credit That Later on Becomes Due,
1108.
ARTICLE 2119 .................................................................................. 1109
COMMENT: Rule if Two or More Things Are Pledged, 1109.
ARTICLE 2120 .................................................................................. 1109
COMMENT: Rule if a Third Person Pledges His Own Property
to Secure the Debt of Another, 1109.
ARTICLE 2121 .................................................................................. 1109
COMMENT: (1) Pledges Created by Operation of Law, 1110;
(2) Samples, 1110; (3) Query, 1110.

lxxxiii
 ARTICLE 2122 .................................................................................. 1110
COMMENT: If Sale of Thing Pledged By Operation of Law,
1110.
ARTICLE 2123 .................................................................................. 1111
COMMENT: Special Laws on Pawnshops, Etc., 1111.

CHAPTER 3 — MORTGAGE ................................................................. 1112

ARTICLE 2124 .................................................................................. 1112
COMMENT: (1) ‘Real Mortgage’ Defined, 1112; (2) Etymological
Definition, 1112; (3) Characteristics of a Real Mortgage, 1112;
(4) Real Right, 1113; (5) Accessory, 1113; (6) Indivisible, 1113;
(7) Inseparable, 1113; (8) Real Property, 1113; (9) Limitation
on Ownership, 1114; (10) Kinds of Real Mortgages, 1114; (11)
‘Real Mortgage’ Distinguished from ‘Pledge’, 1114; (12) ‘Real
Mortgage’ Distinguished from ‘Sale A Retro’, 1114; (13) ‘Real
Mortgage’ Distinguished from ‘Chattel Mortgage’, 1115; (14)
Non-Possession By Mortgagee of the Property Mortgaged, 1115;
(15) Mortgages Given to Secure Future Advancements, 1115;
Mojica v. CA, GR 94247, Sep. 11, 1991, 1115; (16) Some Cases,
1116; Prudencio v. CA, GR 34539, Jul. 14, 1986, 1116; Pruden-
tial Bank v. Panis, GR 50008, Aug. 31, 1987, 1116; Serfino v.
CA, GR 40868, Sep. 15, 1987, 1118; Danao v. CA, GR 48276,
Sep. 30, 1987, 1119; (17) A Mortgage is an Accessory Contract,
1120; PNB v. CA, Sps. Antonio So Hu & Soledad del Rosario
and Sps. Mateo Cruz & Carlita Ronquillo, GR 126908, Jan. 16,
2003, 1120; (18) Ship Mortgage, 1120; Nordic Asia, Ltd. (now
known as DNC Limited) & Bankers Trust Co. v. CA, et al., GR
111159, Jun. 30, 2003, 1120.
ARTICLE 2125 .................................................................................. 1122
COMMENT: (1) Questions Re An Unrecorded Mortgage,
1122; Reyes v. De Leon, GR 22331, Jun. 6, 1967, 1123; Tan
v. Valdehueza, L-38745, Aug. 5, 1975, 1123; (2) Comment of
the Code Commission, 1123; (3) Effect of a Signed Mortgage,
1124; (4) Rule in Case of Legal Mortgages, 1124; (5) Effect of
Registration, 1124.
ARTICLE 2126 .................................................................................. 1125
COMMENT: (1) Meaning of Property Being Subjected to
the Mortgage, 1125; (2) Non-Responsibility of Buyer for the
Deficiency, 1125; (3) Applicability of the Article Even if the
Mortgagor Is Not the Principal Debtor, 1125; (4) Transfer of
Property to Another, 1125.
ARTICLE 2127 .................................................................................. 1126
COMMENT: Ganzon v. Judge Sancho, GR 56450, Jul. 25, 1983,
1126; (1) Objects to Which a Mortgage Extends, 1126; (2) Some
Doctrines, 1126; (3) Fruits of the Land Mortgaged, 1127.

lxxxiv
 ARTICLE 2128 .................................................................................. 1127
COMMENT: (1) Alienation of the Mortgage Credit, 1127; (2)
Effect if Alienation of the Mortgage Credit Is Not Registered,
1127.
ARTICLE 2129 .................................................................................. 1128
COMMENT: (1) Right of Creditor to Go Against Possessor of
Property Mortgaged, 1128; (2) Example, 1128; Fernandez v.
Aninias, 57 Phil. 737, 1128.
ARTICLE 2130 ................................................................................. 1129
COMMENT: (1) Stipulation Forbidding Owner to Alienate,
1129; (2) Reason for the Law, 1129; (3) Bar Question, 1129;
(4) Stipulation Requiring Prior Consent of Mortgagee, 1129;
Bonnevie v. Court of Appeals, GR 49101, Oct. 24, 1983, 1129;
(5) Second Mortgage, 1130.
ARTICLE 2131 .................................................................................. 1130
COMMENT: (1) What Special Laws Govern, 1130; (2) Upset
Price, 1130; (3) Insurance, 1130; (4) ‘Equity of Redemption’
Distinguished from ‘Right of Redemption’, 1131; Rosales v.
Yboa, GR 42282, Feb. 28, 1983, 1131; IFC Service Leasing
and Acceptance Corporation v. Venancio Nera, L-21720, Jan.
30, 1967, 1131; Lonzame v. Amores, L-53620, Jan. 31, 1985,
1132; Concha, et al. v. Hon. Divinagracia, L-27042, Sep. 30,
1981, 1133; Pedro Dimasacat and Ernesto Robles v. The Court
of Appeals, et al., L-26575, Feb. 27, 1969, 1133; Gorospe v.
Santos, L-30079, Jan. 30, 1976, 1134; Development Bank of
the Philippines v. Mirang, L-29130, Aug. 8, 1975, 1134; In Re
Petition for the Cancellation of Encumbrances Appearing in
Transfer Certificates of Titles, Nicanor T. Santos, petitioner,
L-27358, Feb. 20, 1981, 1135; Bonnevie v. Court of Appeals,
GR 49101, Oct. 24, 1983, 1135; Gravina v. CA, 220 SCRA 178
(1993), 1136; Hi-Yield Realty, Inc. v. CA, etc., GR 138978, Sep.
12, 2002, 1136; (5) Redemption Price when DBP is Mortgagee,
1137; DBP v. West Negros College, Inc., GR 152359, Oct. 28,
2002, 1137.

CHAPTER 4 — ANTICHRESIS ............................................................ 1139

ARTICLE 2132 .................................................................................. 1139
COMMENT: (1) ‘Antichresis’ Defined, 1139; (2) Characteristics,
1139; (3) Distinguished from ‘Pledge’ and ‘Mortgage’, 1139; (4)
Problem, 1140; (5) Jurisprudence, 1140; Samonte v. CA, GR
44841, Jan. 27, 1986, 1140; Ramirez v. CA, GR 38185, Sep.
24, 1986, 1140.
ARTICLE 2133 .................................................................................. 1141
COMMENT: (1) Use of “Actual Market Value”, 1141; (2) Inter-
est Must Not Be Usurious, 1141.

lxxxv
 ARTICLE 2134 .................................................................................. 1141
COMMENT: (1) Form, 1141; (2) Principal Obligation, 1141.

ARTICLE 2135 .................................................................................. 1141

COMMENT: (1) Obligations of the Creditor, 1142; (2) Effects if

Creditor Does not Pay the Proper Taxes, 1142; (3) Rule if the
Fruits Are Insufficient, 1142.

ARTICLE 2136 .................................................................................. 1142

COMMENT: (1) When Debtor Can Reacquire the Enjoyment

of the Immovable, 1142; (2) What Creditor Can Do to Exempt
Himself from the Payment of Taxes and Necessary Repairs,
1143; (3) Reimbursement in Favor of Creditor, 1143.

ARTICLE 2137 .................................................................................. 1143

COMMENT: Prohibition Against Pactum Commissorium Ap-

plicable, 1143.

ARTICLE 2138 .................................................................................. 1143

COMMENT: Usurious Rates Prohibited, 1144.

ARTICLE 2139 .................................................................................. 1144

COMMENT: Applicability of Other Articles, 1144.

CHAPTER 5 — CHATTEL MORTGAGE ............................................ 1146

ARTICLE 2140 .................................................................................. 1146

COMMENT: (1) Requisites for the Form of a Chattel Mortgage,

1146; (2) Definition, 1147; (3) When Mortgage Must Be Regis-
tered in Two Registries, 1147; (4) House as the Subject Matter
of a Chattel Mortgage, 1147; Navarro v. Pineda, L-18456, Nov.
30, 1963, 1148; (5) If Executed by a Wife, 1149; (6) Cases, 1149;
Servicewide Specialists, Inc. v. CA, 70 SCAD 529, 256 SCRA
649 (1996), 1149; DBP v. CA & Emerald Resort Hotel Corp.,
GR 125838, Jun. 10, 2003, 1149.

ARTICLE 2141 .................................................................................. 1150

COMMENT: (1) Applicability of the Provisions on Pledge, 1150;

(2) Deficiency Judgments, 1150; (3) No Registry of Buildings,
1151; (4) No Necessity of Very Detailed Description of the Chat-
tel Mortgage, 1151; (5) Ownership of Rentals Accrued During
Period of Redemption, 1151; Tumalad v. Vicencio, 41 SCRA 143,
1151; (6) Chattel Mortgagee Preferred Over Judgment Creditor
of Mortgagor, 1152; Northern Motors, Inc. v. Hon. Jorge Coquia,
L-40018, Aug. 29, 1975, 1152; (7) When a Third Person Becomes
Solidarily Bound With Debtor, 1152.

lxxxvi
Title XVII. EXTRA-CONTRACTUAL OBLIGATIONS ..................... 1153

CHAPTER 1 — QUASI-CONTRACTS .................................................. 1153

ARTICLE 2142 .................................................................................. 1153
COMMENT: (1) Definition of ‘Quasi Contracts’, 1153; Union
Insurance Society of Canton v. CA, 73 SCAD 163 (1996),
1153; MC Engineering v. CA, GR 104047, Apr. 3, 2002, 1154;
(2) Bases for Quasi-Contracts, 1154; (3) Examples of Quasi-
Contracts, 1154; (4) Example of a Situation When There Is No
Quasi-Contract, 1154; (5) Case Where There Was No Unjust
Enrichment, 1155; Permanent Concrete Products v. Donato
Teodoro, et al., L-29766, Nov. 29, 1968, 1155.
ARTICLE 2143 .................................................................................. 1155
COMMENT: Enumeration in the Civil Code Not Exclusive,
1155.

Section 1 — NEGOTIORUM GESTIO ................................................. 1156

ARTICLE 2144 .................................................................................. 1156
COMMENT: (1) Essential Requisites for “Negotiorum Gestio”,
1156; (2) Examples, 1157.
ARTICLE 2145 .................................................................................. 1157
COMMENT: Diligence Required of the Officious Manager,
1157.
ARTICLE 2146 .................................................................................. 1157
COMMENT: (1) Delegation of Duties of Officious Manager,
1157; (2) Solidary Liability of the Gestors, 1158.
ARTICLE 2147 .................................................................................. 1158
COMMENT: Liability for Fortuitous Events, 1158.
ARTICLE 2148 .................................................................................. 1158
COMMENT: Other Instances of Liability for Fortuitous Events,
1158.
ARTICLE 2149 .................................................................................. 1158
COMMENT: Effect of Ratification By the Owner of the Busi-
ness, 1159.
ARTICLE 2150 .................................................................................. 1159
COMMENT: (1) Specific Liabilities of the Owner Even if There
Is No Ratification, 1159; (2) Rule if the Owner Is a Minor,
1159.
ARTICLE 2151 .................................................................................. 1159
COMMENT: Liability Even if No Benefit or Danger 1160.

lxxxvii
 ARTICLE 2152 .................................................................................. 1160
COMMENT: Personal Liability of the Officious Manager To-
wards Third Persons, 1160.
ARTICLE 2153 .................................................................................. 1160
COMMENT: Causes for the Extinguishment of the Officious
Management, 1160.

Section 2 — SOLUTIO INDEBITI ........................................................ 1161

ARTICLE 2154 .................................................................................. 1161
COMMENT: (1) ‘Solutio Indebiti’ Defined, 1161; (2) Requisites
for Solutio Indebiti, 1161; (3) Examples of Solutio Indebiti, 1161;
Puyat and Sons v. Sarmiento, L-17447, Apr. 30, 1963, 1162.

ARTICLE 2155 .................................................................................. 1162

COMMENT: Payment Because of Doubtful or Difficult Question

of Law, 1162; Globe Mackay Cable and Radio Corp., et al. v.
NLRC, et al., GR 74156, Jun. 29, 1988, 1163.

ARTICLE 2156 .................................................................................. 1164

COMMENT: Payment Made Because of Doubt, 1164.

ARTICLE 2157 .................................................................................. 1164

COMMENT: Solidary Liability of the Payees, 1165.

ARTICLE 2158 .................................................................................. 1165

COMMENT: Rule When Property Belongs to a Third Person,

1165.

ARTICLE 2159 .................................................................................. 1165

COMMENT: Rule if Payee Is in Bad Faith, 1165.

ARTICLE 2160 .................................................................................. 1166

COMMENT: Liability of a Payee in Good Faith, 1166.

ARTICLE 2161 .................................................................................. 1166

COMMENT: Reimbursement for Improvement and Expenses,

1166.
ARTICLE 2162 .................................................................................. 1166
COMMENT: Right of a Payee Who Destroys the Evidences or
Proofs of His Right, 1167.
ARTICLE 2163 .................................................................................. 1167
COMMENT: When Mistake Is Presumed, 1167.

lxxxviii
Section 3 — OTHER QUASI-CONTRACTS ........................................ 1167
(New, except Articles 2164 and 2165.)

ARTICLE 2164 .................................................................................. 1167

COMMENT: Support Given by a Stranger, 1168.
ARTICLE 2165 .................................................................................. 1168
COMMENT: Funeral Expenses Borne By a Third Person,
1168
ARTICLE 2166 .................................................................................. 1168
COMMENT: Rule if Support Is Unjustly Refused, 1168.
ARTICLE 2167 .................................................................................. 1169
COMMENT: Services Rendered By a Physician or Other Per-
sons, 1169.

ARTICLE 2168 .................................................................................. 1169

COMMENT: Rule When Property Is Saved During a Calam-

ity, 1169.

ARTICLE 2169 .................................................................................. 1169

COMMENT: Rule When Government Undertakes Necessary

Work, 1169.

ARTICLE 2170 .................................................................................. 1170

COMMENT: Rule When Movables are Commingled or Con-

fused, 1170.

ARTICLE 2171 .................................................................................. 1170

COMMENT: When Lost Personal Property is Found, 1170.

ARTICLE 2172 .................................................................................. 1171

COMMENT: Reimbursement for Necessary and Useful Ex-

penses, 1171.

ARTICLE 2173 .................................................................................. 1171

COMMENT: Payment Made By a Third Person, 1171.

ARTICLE 2174 .................................................................................. 1171

COMMENT: Measure for Protection Decided Upon By a Com-

munity, 1172.
ARTICLE 2175 .................................................................................. 1172
COMMENT: When Someone Is Constrained to Pay Another’s
Taxes, 1172.

lxxxix
CHAPTER 2 — QUASI DELICTS ......................................................... 1173
ARTICLE 2176 ................................................................................. 1173
COMMENT: (1) Requisites for a Quasi-Delict (Culpa Aquil-
iana), 1173; LRT v. Navidad, GR 145804, Feb. 6, 2003, 1173;
Phoenix Construction, Inc. v. IAC, GR 65295, Mar. 10, 1987,
1174; Teague v. Fernandez, 51 SCRA 181, 1175; People’s Bank
and Trust Co. v. Dahican Lumber Co., L-17500, May 16, 1967,
1175; Penullar v. Philippine National Bank, GR 32762, Jan.
27, 1983, 1176; Prima Malipol v. Lily Lim Tan, et al., L-27730,
Jan. 21, 1974, 1176; People v. Capillas, L-38756, Nov. 13, 1984,
1176; Phoenix Construction, Inc. v. IAC, GR 65295, Mar. 10,
1987, 1176; Valenzuela v. CA, 68 SCAD 113 (1996), 1176; (2)
‘Culpa Aquiliana’ Distinguished from ‘Culpa Contractual’ and
‘Culpa Criminal’, 1177; Syquia, et al. v. CA & Manila Memo-
rial Park Cemetery, Inc., GR 98695, Jan. 27, 1993, 1179; (3)
Necessity of Proving Negligence, 1179; Bernabe Africa, et al. v.
Caltex, et al., L-12986, Mar. 31, 1966, 1179; Republic v. Luzon
Stevedoring Corporation, L-21749, Sep. 29, 1967, 1180; NIA, et
al. v. IAC, et al., GR 73919, Sep. 18, 1992, 1180; Leah Alesna
Reyes, et al. v. Sisters of Mercy Hospital, et al., GR 130547,
Oct. 3, 2000, 1181; (4) Damnum Absque Injuria, 1182; Farolan
v. Solmac Marketing Corp., GR 83589, Mar. 13, 1991, 1182; (5)
Last Clear Chance, 1184; Ong v. Metropolitan Water District,
104 Phil. 398, 1185; Picart v. Smith, 37 Phil. 809, 1185; Phoenix
Construction, Inc. v. IAC, GR 65295, Mar. 10, 1987, 1186; (6)
Tort Liability May Still Exist Despite Presence of Contractual
Relations, 1187; Air France v. Carrascoso, L-21438, Sep. 28,
1966, 1187; Julian C. Singson and Ramona del Castillo v. Bank
of the Philippine Islands and Santiago Freixas, L-24837, Jun.
27, 1968, 1187; (7) Non-liability, 1188; Ng v. Republic, L-31935,
Jan. 24, 1980, 1188; (8) An Unregistered Deed of Sale, 1188;
Equitable Leasing Corp. v. Lucita Suyom, et al., GR 143360,
Sep. 5, 2002, 1188.

ARTICLE 2177 .................................................................................. 1189

COMMENT: (1) Culpa Aquiliana Distinguish From Civil Li-

ability Arising From a Crime, 1189; (2) Effect of Acquittal in
a Criminal Case, 1189; Marcia v. Court of Appeals, GR 34529,
Jan. 27, 1983, 1189; (3) Query, 1190; Batangas, Laguna, Taya-
bas, Bus Co., Inc. v. Court of Appeals, et al., L-33138-39, Jun.
27, 1975, 1190; (4) Rule under the 1985 Rules of Court, As
Amended in 1988, 1191; Garcia v. Florido, L-35095, Aug. 31,
1973, 1191; Crispin Abellana and Francisco Abellana v. Hon.
Geronimo R. Maraue and Geronimo Companer, et al., L-27760,
May 29, 1974, 1192; Escueta v. Fandialan, L-39675, Nov. 29,
1974, 1193; (5) No Double Recovery, 1193; Padua, et al. v.
Robles, et al., L-40486, Aug. 29, 1975, 1193; (6) Dec. 1, 2000
Amended Rules, 1194; Avelino Casupanan & Roberto Capitulo
v. Maria Llavore Laroya, GR 145391, Aug. 26, 2002, 1194.

xc
ARTICLE 2178 .................................................................................. 1196
COMMENT: (1) Applicability of Some Provisions on Negligence,
1196; (2) Cases, 1197; Ronquillo, et al. v. Singson, (C.A.) L-
22612 R, Apr. 22, 1959, 1197; Vda. de Imperial, et al. v. Herald
Lumber Co., L-14088-89, L-14112, Sep. 30, 1961, 1198.
ARTICLE 2179 ................................................................................. 1198
COMMENT: (1) Effect of Sole Cause of Injury is a Person’s
own Negligence, 1198; (2) Effect of Contributory Negligence of
Plaintiff, 1198; (3) Proximate Cause, 1199; Saturnino Bayasen
v. Court of Appeals, L-25785, Feb. 28, 1981, 1199; Phoenix Con-
struction, Inc. v. IAC, GR 65295, Mar. 10, 1987, 1199; Phoenix
Construction, Inc. v. IAC, GR 65295, Mar. 10, 1987, 1200; (4)
Examples of Proximate Cause, 1202; (5) Case, 1203; MMTC &
Apolinario Ajoc v. CA, etc., GR 141089, Aug. 1, 2002, 1203.
ARTICLE 2180 .................................................................................. 1204
COMMENT: (1) Liability for the Acts and Omissions of Another,
1205; (2) Reason for the Liability, 1205; (3) Solidary Liability,
1205; Maria Teresa Cuadra v. Alfonso Monfort, L- 24101, Sep.
30, 1970, 1206; Libi, et al. v. IAC, et al., GR 70890, Sep. 18,
1992, 1206; (4) Owners and Managers, 1207; Phil. Rabbit Bus
Lines Inc., et al. v. Phil. Am. Forwarders, Inc., et al., L-25142,
Mar. 25, 1975, 1207; (5) Employers, 1208; Vinluan v. Court of
Appeals, L-21477-81, Apr. 29, 1966, 1209; Ramos v. Pepsi-Cola,
L-22533, Feb. 9, 1967, 1209; Bernardo Jocson and Maria D.
Jocson v. Redencion Glorioso, L-22686, Jan. 30, 1968, 1210;
Malipol v. Tan, L-27730, Jan. 21, 1974, 54 SCRA 202 (1974),
1211; St. Francis High School v. CA, GR 82465, Feb. 25, 1991,
1211; Figuracion Vda. de Maglana, et al. v. Judge Francisco
Z. Consolacion & Afisco Insurance Corp., GR 60506, Aug. 6,
1992, 1214; Go v. IAC, GR 68138, May 13, 1991, 1214; George
Mckee & Ararelo Koh Mckee v. IAC, Jaime Tayag & Rosalinda
Manalo, GR 68102, Jul. 16, 1992, 1217; San Miguel Corp. v.
Heirs of Sabiano Inguito & Julius Ouano, GR 141716, Jul. 4,
2002, 1218; George Mckee, et al. v. IAC, et al., GR 68102, Jul.
16, 1992, 1222; Napocor v. CA, GR 119121, Aug. 14, 1998,
1222; FGU Insurance Corp. v. CA, Filcar Transport, Inc. &
Fortune Insurance Corp., GR 118889, Mar. 23, 1998, 1224;
(6) Liability of Teachers and Heads of Establishments (of Arts
and Trades), 1224; Palisoc v. Brillantes, 41 SCRA 548, 1224;
Magtibay v. Garcia, GR 28971, Jan. 28, 1983, 1225; Pasco v.
CFI, GR 54357, Apr. 25, 1987, 1225; (7) Liability of the State,
1226; MMTC & Apolinario Ajoc v. CA, Etc., GR 141089, Aug.
1, 2002, 1226; Victor Orquiola & Honorata Orquiola v. CA,
Etc., GR 141463, Aug. 6, 2002, 1227; (8) Special Agent, 1227;
Republic v. Palacio, L-20322, May 29, 1968, 1228; (9) Defense,
1229; (10) Penal Provisions in Case of Crimes, 1230; (11) Fail-
ure of Doctor to Follow Medical Procedure is a clear Indicia
of Negligence, 1230; Erlina Ramos v. Court of Appeals, GR
124354, Apr. 11, 2002, 1230.

xci
ARTICLE 2181 .................................................................................. 1235
COMMENT: Right of Person (Who Pays) to Get Reimburse-
ment, 1235; Sarkies Tours Phil. v. Intermediate Appellate
Court, GR 63723, Sep. 2, 1983, 1235.
ARTICLE 2182 .................................................................................. 1236
COMMENT: When a Minor or an Insane Person Is Answerable
With His Own Property, 1236.
ARTICLE 2183 .................................................................................. 1236
COMMENT: Damages Caused By Animals, 1236.
ARTICLE 2184 .................................................................................. 1236
COMMENT: (1) Liability of Owner of a Motor Vehicle, 1237;
(2) Case, 1237; Marcial T. Caedo, et al. v. Yu Khe Thai, et al.,
L-20392, Dec. 18, 1968, 1237.
ARTICLE 2185 .................................................................................. 1238
COMMENT: Presumption of Driver’s Negligence, 1238; Mikee
v. IAC, GR 68102, Jul. 16, 1992, 1238.
ARTICLE 2186 .................................................................................. 1238
COMMENT: Duty of Owner of Motor Vehicle to File a Bond,
1238.
ARTICLE 2187 .................................................................................. 1239
COMMENT: Liability of Manufacturers, 1239.
ARTICLE 2188 .................................................................................. 1239
COMMENT: Presumption of Negligence Because of the Posses-
sion of Dangerous Weapons or Substances, 1239.
ARTICLE 2189 .................................................................................. 1239
COMMENT: Liability of Municipal Subdivisions Because of De-
fective Roads, Bridges, Etc., 1240; Guilatco v. City of Dagupan
and CA, GR 61516, Mar. 21, 1989, 1240.
ARTICLE 2190 .................................................................................. 1240
COMMENT: Liability of Proprietor if a Building or Structure
Collapses, 1240.
ARTICLE 2191 .................................................................................. 1241
COMMENT: Other Liabilities of Proprietors of Buildings or
Structures, 1241; Austin Hardware Co., Inc. and All Steel
Products, Inc. v. The Court of Appeals, et al., L-41754, Feb.
27, 1976, 1241.
ARTICLE 2192 .................................................................................. 1242
COMMENT: Rule if the Cause Is a Construction Defect,
1242.

xcii
 ARTICLE 2193 .................................................................................. 1242
COMMENT: Responsibility for Thrown or Fallen Things,
1242.
ARTICLE 2194 .................................................................................. 1242
COMMENT: (1) Solidary Liability of Tort-Feasors, 1242; (2)
Cases, 1243; Metro Manila Transit Corp. v. CA, 42 SCAD 538
(1993), 1243; LRTA & Rodolfo Roman v. Marjorie Navidad,
Heirs of the Late Nicanor Navidad & Prudent Security Agency,
GR 145804, Feb. 6, 2003, 1243.

Title XVIII. DAMAGES ........................................................................... 1244

INTRODUCTORY COMMENT: Zulueta v. Pan American World
Airways, Inc., 43 SCRA 397, 1244; Air France v. CA and Mo-
rales, GR 76093, Mar. 21, 1989, 1245; Tiu v. CA, 46 SCAD 408,
228 SCRA 51 (1993), 1245.
CHAPTER 1 — GENERAL PROVISIONS ......................................... 1246
ARTICLE 2195 ................................................................................. 1246
COMMENT: Applicability to All Kinds of Legal Obligations,
1246.
ARTICLE 2196 .................................................................................. 1246
COMMENT: (1) Special Provisions and Laws, 1246; (2) In-
demnity in Workmen’s Compensation Cases, 1247; Milagros
F. Vda. de Forteza v. Workmen’s Compensation Commission
and the Philippine Charity Sweepstakes Office, L-21718, Jun.
29, 1968, 1247; Ysmael Maritime Corp. v. Avelino, GR 43674,
Jun. 30, 1987, 1247; (3) Dismissal of Action, 1249; Enrique A.
Defante v. Hon. Antonio E. Rodriguez, et al., L-28380, Feb.
27, 1976, 1249.
ARTICLE 2197 .................................................................................. 1249
COMMENT: (1) Damages Distinguished from Injury, 1249;
(2) Damage Without Injury, 1250; (3) Some Rules on Waiver,
1250; (4) Liability of Fiscal (now Prosecutor), 1250; Lim v. De
Leon, L-22554, Aug. 29, 1975, 1250; (5) Damages in Voidable
Contracts, 1251; Development Bank of the Phil. v. Court of
Appeals, L-28774, Feb. 28, 1980, 96 SCRA 342, 1251.
ARTICLE 2198 .................................................................................. 1251
COMMENT: Adoption of the Principles of the General Law on
Damages, 1251.

CHAPTER 2 — ACTUAL OR COMPENSATORY DAMAGES ........ 1252

ARTICLE 2199 .................................................................................. 1252
COMMENT: (1) ‘Actual or Compensatory Damages’ Defined,
1252; Bert Osmeña and Associates v. Court of Appeals, GR

xciii
 56545, Jan. 28, 1983, 1253; Radio Communications of the
Philippines v. Court of Appeals, L-55194, Feb. 26, 1981, 1253;
Ramos v. CA, GR 124354, Apr. 11, 2002, 1253; (2) Necessity of
Pleading, 1254; (3) Necessity of Proof, 1254; Inhelder Corpora-
tion v. Court of Appeals, GR 52358, May 30, 1983, 1254; Radio
Communications of the Philippines, Inc. (RCPI) v. Lantin, L-
59311, Jan. 31, 1985, 1257.
ARTICLE 2200 ................................................................................. 1257
COMMENT: (1) Two Kinds of Actual Damages, 1257; St.
Louis Realty Corporation v. Court of Appeals, L-46061, Nov.
14, 1984, 1257; BA Finance Corp. v. CA, GR 61464, May 28,
1988, 1258; Batong Buhay Gold Mines, Inc. v. CA, GR 45048,
Jan. 7, 1987, 1258; Aguilar v. Chan, GR 28688, Oct. 9, 1986,
1258; (2) Examples of Daño Emergente, 1258; (3) Examples of
Lucro Cesante, 1259.
ARTICLE 2201 .................................................................................. 1259
COMMENT: (1) Liability of Debtor in Contracts and Quasi-
Contracts, 1260; (2) Examples of Reasonably Foreseen or
Foreseeable Damages in Contracts, 1260.
ARTICLE 2202 .................................................................................. 1262
COMMENT: (1) Damages in Crimes and Quasi-Delicts, 1262;
Maranan v. Perez, L-22272, Jun. 26, 1967, 1262; People v.
Salig, L-53568, Oct. 31, 1984, 1263; (2) What Victim Must Prove
in a Tort or Quasi-Delict Suit, 1263; (3) Unfair Competition,
1263; (4) Concealment of an Existing Marriage, 1263; Budiong
v. Judge Apalisok, GR 60151, Jun. 24, 1983, 1264; Brinas v.
People, GR 50309, Nov. 25, 1983, 1264; People v. Castaneda,
GR 49781, Jun. 24, 1983, 1264.

ARTICLE 2203 .................................................................................. 1264

COMMENT: (1) Victim Must Minimize the Damage, 1265; (2)

Burden of Proof, 1265; (3) Plastic Surgery which Could Have
Been Performed in the Philippines, 1265; (4) Case, 1265; Abe-
lardo Lim & Esmadito Gumalan v. CA & Donato H. Gonzales,
GR 125817, Jan. 16, 2002, 1265.

ARTICLE 2204 .................................................................................. 1266

COMMENT: Effect of Aggravating or Mitigating Circumstances,

1266.

ARTICLE 2205 .................................................................................. 1266

COMMENT: Damages to Earning Capacity and to Business,

1266; Consolidated Plywood Industries, Inc. & Henry Lee v.
CA, Willie Kho, & Alfred C.H. Kho, GR 101706, Sep. 23, 1992,
1266; Francisco, et al. v. Ferrer, Jr., et al., GR 142029, Feb.
28, 2001, 1267.

xciv
ARTICLE 2206 .................................................................................. 1268
COMMENT: (1) Damages for Death — Reason for Awarding
Damages, 1268; Mckee, et al. v. IAC, et al., GR 68102, Jul. 16,
1992, 1269; (2) Factors Which May Be Considered in Determin-
ing the Amount, 1270; Monzon, et al. v. IAC and Theo H. Davies
and Co., Far East Ltd., GR 72828, Jan. 31, 1989, 1270; Smith
Bell Dodwell Shipping Agency Corp. v. Catalino Borja and
International Towage & Transport Corp., GR 143008, Jun. 10,
2002, 1270; Villa-Rey Transit v. Bello, L-18957, Apr. 23, 1963,
1272; Davila v. Phil. Air Lines, 49 SCRA 497, 1272; Budiong
v. Judge Apalisok, GR 60161, Jun. 24, 1983, 1273; Dangwa
Transportation v. CA, GR 95582, Oct. 7, 1991, 1273; MMTC,
et al. v. CA & Sps. Rodolfo V. Rosales and Lily R. Rosales, GR
116617, Nov. 16, 1998, 1274; (3) Moral Damages, 1275; (4)
Right of Recovery Not Affected By Testimony, 1276; People v.
Santiago Manos, L-27791, Dec. 24, 1970, 1276; (5) Liability for
Reckless Imprudence, 1277; People v. Eutiquia Carmen, et al.,
GR 137268, Mar. 26, 2001, 1277.
ARTICLE 2207 .................................................................................. 1277
COMMENT: (1) Effect if Property Was Insured, 1278; (2)
Meaning of “Authorized Driver” in Car Insurance, 1278; CCC
Insurance Corp. v. Court of Appeals and Carlos F. Robes, L-
25920, Jan. 30, 1970, 1278; (3) Subrogation of Insurer, 1279;
Fireman’s Fund Insurance Co., et al. v. Jamila and Co., Inc.,
L-27427, Apr. 7, 1976, 1279.
ARTICLE 2208 .................................................................................. 1279
COMMENT: (1) Concept of Attorney’s Fees As Damages, 1280;
Luz G. Cristobal v. Employees’ Compensation Commission, L-
49280, Feb. 26, 1981, 1281; Borcena, et al. v. IAC, GR 70099,
Jan. 7, 1987, 1281; Sun Insurance Office, Ltd. v. CA & Nerissa
Lim, GR 92383, Jul. 17, 1992, 1281; (2) Generally Not Part of
Damages, 1282; Salao v. Salao, L-26699, Mar. 16, 1976, 1283;
Public Estates Authority v. Elpidio S. Uy, GR 147933-34, Dec.
12, 2001, 1283; (3) Given to Party, Not to Counsel, 1284; Tiu
Po v. Bautista, L-55514, Mar. 17, 1981, 1284; Quirante and
Cruz v. IAC, et al., GR 73886, Jan. 31, 1989, 1284; (4) Express
Stipulation, 1284; Kapol v. Masa, L-50473, Jan. 21, 1985, 1285;
(5) Paragraph 2 (Defendant’s Act or Omission), 1286; Bert
Osmeña and Associates v. Court of Appeals, GR 56545, Jan.
28, 1983, 1286; Sarming v. Dy, GR 133643, Jun. 6, 2002, 1286;
(6) Paragraph 3 (Malicious Prosecution), 1286; (7) Paragraph 4
(Unfounded Civil Action), 1287; Hermosa, Jr. v. Zobel y Roxas,
L-11836, Oct. 1958, 1287; Roque Enervida v. Lauro de la Torre
and Rosa de la Torre, L-38037, Jan. 28, 1974, 1287; Metropoli-
tan Bank v. Tan Chuan Leong, et al., GR 46539, Jun. 25, 1986,
1288; Phoenix Publishing House v. Ramos, GR 32339, Mar. 29,
1988, 1289; (8) Paragraph 5 (Bad Faith of Defendant), 1290;
(9) Paragraph 8 (Workmen’s Compensation and Employer’s
Liability), 1291; (10) Paragraph 9 (Civil Liability Arising from

xcv
 a Crime), 1291; Ebajan v. CA, GR 77930-31, Feb. 9, 1989,
1291; (11) Paragraph 11 (Any Other Case), 1292; (12) Instance
When the Insurance Code Grants Damages, 1293; Prudential
Guarantee and Assurance, Inc. v. Trans-Asia Shipping, Lines,
Inc., 491 SCRA 411 (2006), 1293.
ARTICLE 2209 .................................................................................. 1293
COMMENT: (1) Monetary Obligations, 1293; (2) Rules, 1293;
State Investment House, Inc. v. CA, GR 90676, Jun. 19, 1991,
1294; Tio Khe Chio v. CA, GR 76101-02, Sep. 30, 1991, 1295;
(3) Absence of Stipulation, 1297; (4) From What Moment Inter-
est Runs, 1297; Consuelo Piczon, et al. v. Esteban Piczon, et
al., L-29139, Nov. 15, 1974, 1297; Arwood Industries, Inc. v.
D.M. Consunji, Inc., GR 142277, Dec. 11, 2002, 1298; (5) Query,
1300; (6) Recovery of Interest in Case of Usury, 1300; Angel
Jose Warehousing Co., Inc. v. Chelda Enterprises and David
Syjuico, L-25704, Apr. 24, 1968, 1300; GSIS v. CA, et al., GR
52478, Oct. 30, 1986, 1302; Florendo v. Hon. Ruiz, et al., GR
64571, Feb. 21, 1989, 1303.
ARTICLE 2210 .................................................................................. 1303
COMMENT: Interest on Damages for Breach of Contract, 1303;
Pleno v. Court of Appeals and Manila Gas Corp., GR 56919,
Oct. 23, 1981, 1303.
ARTICLE 2211 .................................................................................. 1304
COMMENT: Interest on Damages Because of Crimes and
Quasi-Delicts, 1304.
ARTICLE 2212 .................................................................................. 1304
COMMENT: Interest on Interest Due, 1304.
ARTICLE 2213 .................................................................................. 1305
COMMENT: (1) Interest on Unliquidated Claims or Damages,
1305; Bareng v. Court of Appeals, et al., L-12973, Apr. 25,
1960, 1305; (2) No Liquidated Obligation, 1306; Abelardo Lim
& Esmadito Gumabon v. CA & Ronato H. Gonzales, GR 125817,
Jan. 16, 2002, 1306.
ARTICLE 2214 .................................................................................. 1307
COMMENT: Contributory Negligence of Plaintiff in Quasi-
Delicts, 1307.
ARTICLE 2215 .................................................................................. 1307
COMMENT: Mitigation of Damages in Contracts, Quasi-Con-
tracts, and Quasi-Delicts, 1307.

CHAPTER 3 — OTHER KINDS OF DAMAGES ................................ 1308

ARTICLE 2216 .................................................................................. 1308
COMMENT: (1) When No Proof of Pecuniary Loss Is Necessary,
1308; (2) Necessity of Proving the Factual Basis, 1308; (3) In

xcvi
 Civil Case to Recover or for Restitution, Reparation of Dam-
ages or Indemnification for Consequential and Other Damages
or Any Other Civil Actions Under the New Civil Code or Other
Existing Laws Filed with Sandiganbayan Against Ferdinand
E. Marcos, et al., the Sandiganbayan is not to Look for Proof
Beyond Reasonable Doubt, but to Determine, based on the
Evidence Presented, in Light of Common Human Experience,
which of the Theories Proferred by the Parties is mere Worthy
of Credence, 1309; Yuchengco v. Sandiganbayan, 479 SCRA 1
(2006), 1309.

Section 1 — MORAL DAMAGES .......................................................... 1309

ARTICLE 2217 .................................................................................. 1309
COMMENT: (1) Requisites for the Recovery of Moral Damages,
1310; St. Mary’s Academy v. William Carpitanos & Lucia S.
Carpitanos, Guada Daniel, James Daniel II, James Daniel, Sr.
& Vivencio Villanueva, GR 143363, Feb. 6, 2002, 1311; People
v. Manero, 218 SCRA 85 (1993), 1312; Carlota P. Valenzuela,
et al. v. CA, et al., GR 56168, Dec. 22, 1988, 1312; Danao v.
CA, GR 48276, Sep. 30, 1987, 1313; Boysaw, et al. v. Interphil
Promotions, Inc., GR 22590, Mar. 20, 1987, 1313; (2) Social and
Financial Standing, 1313; (3) Need for Certain Steps, 1313;
(4) Necessity of Personal Injury, 1314; (5) Rule Under the
Old Law, 1314; (6) Mental Anguish, 1315; Ramos v. Ramos,
L-19872, Dec. 3, 1974, 1315; American Express International,
Inc. v. IAC and Jose M. Alejandrino, Nov. 9, 1988, 1315; Pan
American World Airways, Inc. v. IAC, GR 44442, Aug. 31, 1987,
1316; Danao v. CA, GR 48276, Sep. 30, 1987, 1316; (7) Courts
Given Discretion to Award Moral Damages, 1317; Prudenciado
v. Alliance Transport System, Inc., GR 33836, Mar. 16, 1987,
1317; Isabelita Vital-Gozon v. CA & Alejandro dela Fuente, GR
129132, Jul. 8, 1998, 1317; DBP v. CA & Emerald Resort Hotel
Corp., GR 125838, Jun. 10, 2003, 1318.
ARTICLE 2218 .................................................................................. 1319
COMMENT: Sentimental Value, 1319.
ARTICLE 2219 .................................................................................. 1319
COMMENT: (1) Instances (Not Exclusive) When Moral Dam-
ages May Be Recovered, 1320; Mayo y Agpaoa v. People, GR
91201, Dec. 5, 1991, 1320; Equitable Leasing Corp. v. Lucita
Suyom, Marissa Enano, Myrna Tamayo & Felix Oledan, GR
143360, Sep. 5, 2002, 1320; Garciano v. CA, et al., GR 96126,
Aug. 10, 1992, 1321; Bert Osmeña and Associates v. Court of
Appeals, GR 56545, Jan. 28, 1983, 1322; Darang v. Ty Belizar,
L-19487, Jan. 31, 1967, 1322; Imperial v. Ziga, L-19726, Apr.
13, 1967, 1322; Gatchalian v. Delim, GR 56487, Oct. 21, 1991,
1323; Mayo y Agpaoa v. People, GR 91201, Dec. 5, 1991, 1323;
Sps. Quisumbing v. Manila Electric Co., GR 142943, Apr. 3,
2002, 1325; (2) Rule With Respect to Contracts, 1326; Filinvest

xcvii
 Credit Corp. v. Mendez, GR 66419, Jul. 31, 1987, 1326; (3) Re
Par. 1 (Physical Injuries Because of a Crime), 1327; (4) Re Par.
3 (Seduction, etc.), 1328; People of the Philippines v. Mariano
Fontanilla, L-25354, Jun. 28, 1968, 1328; People v. Manalo,
GR 49810, Oct. 13, 1986, 1329; People v. Bondoy, 41 SCAD 432
(1993), 1329; People v. Eric Baid y Ominta, GR 129667, Jul. 31,
2000, 1329; (5) Re Par. 7 (Libel, Slander, Defamation), 1330; (6)
Re Par. 8 (Malicious Prosecution), 1330; Alejo Madera, et al. v.
Heirs of Salvador Lopez, L-37105, Feb. 10, 1981, 1331; PCIB
v. IAC, GR 73610, Apr. 19, 1991, 1331; Albenson Enterprises
Corp., et al. v. CA & Eugenio S. Baltao, GR 88694, Jan. 11,
1993, 1331; (7) Re Par. 10 (Articles on Human Relations), 1332;
Arturo de Guzman v. NLRC, et al., GR 90856, Jul. 23, 1992,
1333; (8) Moral and Exemplary Damages Were NOT Given in
the Following Cases, 1334; Philippine National Railways v. CA,
GR 55347, Oct. 4, 1985, 1336; (9) Liability of the State Govern-
mental & Proprietary Functions, 1336; Fontanilla v. Maliaman,
GR 55913, Feb. 27, 1991, 1336; (10) Closure of Bank Account
Due to “Kiting,” 1337; Reyes v. Court of Appeals, GR 95535,
Jan. 21, 1991, 1337; (11) No Hard and Fast Rule, 1338; Ayala
Integrated Steel Manufacturing Co., Inc. v. CA, GR 94359,
Aug. 2, 1991, 1338.
ARTICLE 2220 .................................................................................. 1338
COMMENT: (1) Willful Injury to Property and Breaches of
Contracts, 1338; (2) Case, 1339; Vicente & Michael Lim v. CA,
GR 118347, Oct. 24, 1996, 75 SCAD 574, 1339.
Section 2 — NOMINAL DAMAGES ..................................................... 1339
ARTICLE 2221 .................................................................................. 1339
COMMENT: (1) The Grant of Nominal Damages — Reason
Therefor, 1339; LRT v. Navidad, GR 145804, Feb. 6. 2003,
1340; (2) Effect of Granting Compensatory and Exemplary
Damages, 1340; Sumalpong v CA, GR 123404, Feb. 26, 1997,
79 SCAD 969, 1340; PT & T & Louie Cabalit v. CA & Lolita
Sipe Escoro, GR 139268, Sep. 3, 2002, 1341; (3) Liability of a
Negligent Lawyer, 1341.
ARTICLE 2222 .................................................................................. 1342
COMMENT: When Nominal Damages May Be Awarded, 1342;
Dee Hua Liong Electrical Equipment Corp. v. Reyes, GR 72182,
Nov. 25, 1986, 1342.
ARTICLE 2223 .................................................................................. 1342
COMMENT: Effect of Granting Nominal Damages, 1342.
Section 3 — TEMPERATE OR MODERATE DAMAGES ................ 1342
ARTICLE 2224 .................................................................................. 1342
COMMENT: (1) Reason for Allowing Temperate or Moderate
Damages, 1343; (2) Suffering of Some Pecuniary Loss, 1343;

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 (3) Cases, 1343; Consolidated Plywood Industries, Inc., et al. v.
CA, et al., GR 101706, Sep. 23, 1992, 1343; Ramos v. CA, GR
124354, Apr. 11, 2002, 1344.
ARTICLE 2225 .................................................................................. 1344
COMMENT: Reasonable Temperate Damages, 1344.
Section 4 — LIQUIDATED DAMAGES ............................................... 1344
ARTICLE 2226 .................................................................................. 1344
COMMENT: Nature of Liquidated Damages, 1345.
ARTICLE 2227 .................................................................................. 1345
COMMENT: (1) Equitable Reduction of Liquidated Damages,
1345; (2) Effect of Partial or Irregular Performance, 1345.
ARTICLE 2228 .................................................................................. 1345
COMMENT: Rule if Breach Was Not Contemplated in the
Agreement on Liquidated Damages, 1346.

Section 5 — EXEMPLARY OR CORRECTIVE DAMAGES ............ 1346

ARTICLE 2229 .................................................................................. 1346
COMMENT: (1) Reason for Imposing Exemplary or Correc-
tive Damages, 1346; Guilatco v. City of Dagupan and CA, GR
61516, Mar. 21, 1989, 1346; Prudenciado v. Alliance Transport
System, Inc., GR 33836, Mar. 16, 1987, 1347; (2) Examples of
Exemplary Damages, 1347; People v. Erlindo Talo, GR 125542,
Oct. 25, 2000, 1348; Phoenix Construction, Inc. v. IAC, GR
65295, Mar. 10, 1987, 1349; (3) Proper Court, 1350; (4) Effect
of Granting Exemplary Damages on a Claim for Nominal Dam-
ages, 1350; (5) Cases, 1350; Pan American World Airways, Inc.
v. IAC, et al., L-74442, Aug. 31, 1987, 1350; Arturo de Guzman
v. NLRC, GR 90856, Jul. 23, 1992, 1351; Sociedad Europea de
Financiacion, S.A., et al. v. Court of Appeals, GR 75787, Jan.
21, 1991, 1351; Northwest Airlines v. Dr. Jaime F. Laya, GR
145956, May 29, 2002, 1353.
ARTICLE 2230 .................................................................................. 1356
COMMENT: Exemplary Damages in Criminal Offenses,
1356.
ARTICLE 2231 .................................................................................. 1356
COMMENT: Exemplary Damages in Quasi-Delicts, 1356.
ARTICLE 2232 .................................................................................. 1356
COMMENT: (1) Exemplary Damages in Contracts and Quasi-
Contracts, 1357; (2) When Employer Is Also Liable for Exem-
plary Damages, 1357; Lourdes Munsayac v. Benedicta de Lara,
L-21151, Jun. 26, 1968, 1357; Silverio Marchan and Philippine

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 Rabbit Bus Co., Inc. v. Arsenio Mendoza, et al., L-24471, Jan.
31, 1969, 1357; Noda v. Cruz-Arnaldo, GR 67322, Jun. 22,
1987, 1358.
ARTICLE 2233 .................................................................................. 1358
COMMENT: Exemplary Damages Not a Matter of Right, 1358;
Isabelita Vital-Gozon v. CA, & Alejandro dela Fuente, GR
129132, Jul. 8, 1998, 1358.
ARTICLE 2234 .................................................................................. 1358
COMMENT: (1) Amount of Exemplary Damages Need Not
Be Proved, 1359; (2) Culpa Contractual, 1359; (3) Case, 1359;
PNB v. CA, Sps. Antonio So Hu & Soledad del Rosario and
Sps. Mateo Cruz & Carlita Ronquillo, GR 126908, Jan. 16,
2003, 1359.
ARTICLE 2235 .................................................................................. 1360
COMMENT: The Renouncing in Advance of Exemplary Dam-
ages, 1360.

Title XIX. CONCURRENCE AND PREFERENCE

OF CREDITS ..................................................................................... 1361
CHAPTER 1 — GENERAL PROVISIONS .......................................... 1361
INTRODUCTORY COMMENT (Features of the Title) ................... 1361
ARTICLE 2236 .................................................................................. 1361
COMMENT: (1) What Creditor Can Do If Debtor Has NO
Money, 1361; (2) Examples of Properties Exempt from Attach-
ment, 1362; (3) Case, 1362; DBP v. Minister of Labor, GR 75801,
Mar. 20, 1991, 1362.
ARTICLE 2237 .................................................................................. 1363
COMMENT: Civil Code Superior To Special Laws on Insol-
vency, 1364.
ARTICLE 2238 .................................................................................. 1364
COMMENT: Exemption of Properties of the Conjugal Partner-
ship or of the Absolute Community, 1364.
ARTICLE 2239 .................................................................................. 1364
COMMENT: Rule in Case of Co-Ownership, 1365.
ARTICLE 2240 .................................................................................. 1365
COMMENT: Property Held Because of an Express or Implied
Trust, 1365.

CHAPTER 2 — CLASSIFICATION OF CREDITS ............................ 1366

ARTICLE 2241 .................................................................................. 1366

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 COMMENT: (1) Credits Over Specific Personal Properties,
1367; (2) Example, 1368; (3) Nature of the Claims or Credits,
1368; (4) Par. 1 — Taxes, etc., 1369; (5) Par. 3 — Unpaid
Price of Movables SOLD, 1369; (6) Par. 4 –– Pledge or Chattel
Mortgage, 1369; (7) Par. 6 — Laborers’ Wages, 1369; (8) Last
Paragraph — Wrongful Taking, 1370; (9) Case, 1370; Ouano
v. CA, et al., GR 95900, Jul. 23, 1992, 1370.
ARTICLE 2242 .................................................................................. 1370
COMMENT: (1) Credits Over Specific Real Properties, 1371,
(2) Concurrence, Not Preference, 1372; (3) Case, 1372, Carried
Lumber Co. v. ACCFA, L-21836, Apr. 22, 1975, 1372; (4) Refec-
tionary Credit, 1372; (5) Case, 1372; Atlantic Erectors, Inc. v.
Herbal Cove Realty Corp., GR 146568, Mar. 20, 2003, 1372.
ARTICLE 2243 .................................................................................. 1374
COMMENT: (1) Nature of the Claims or Credits, 1374; (2)
Comment of the Code Commission, 1374.
ARTICLE 2244 ................................................................................. 1375
COMMENT: (1) Order of Preference in Connection With
OTHER Properties, 1376; (2) Example, 1376; (3) Taxes, 1377;
(4) Re Par. 14 (Ordinary Credits and Final Judgments), 1377;
(5) Some Decided Cases, 1377; Jesus Gigante v. Republic Sav-
ings Bank and Rolando Mallari, L-29696, Nov. 29, 1968, 1377;
Reyes v. De Leon, L-22331, Jun. 6, 1967, 1378; Manabat v.
Laguna Federation of Facomas, L-23888, Mar. 18, 1967, 1379;
DBP v. Hon. Labor Arbiter Ariel C. Santos, et al., GR 78261-
62, Mar. 8, 1989, 1379.
ARTICLE 2245 .................................................................................. 1380
COMMENT: All Other Kinds of Credits, 1380.
CHAPTER 3 — ORDER OF PREFERENCE OF CREDITS ............ 1381
ARTICLE 2246 .................................................................................. 1381
COMMENT: Preference of the Credits Over Specific Movables,
1381.
ARTICLE 2247 .................................................................................. 1381
COMMENT: Pro Rata Sharing, 1381.
ARTICLE 2248 .................................................................................. 1381
COMMENT: Preference of the Credits Over Specific Immova-
bles, 1381.
ARTICIE 2249 ................................................................................... 1382
COMMENT: Pro Rata Sharing, 1382.
ARTICLE 2250 .................................................................................. 1382
COMMENT: What Should Be Done With the Excess, 1382.

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 ARTICLE 2251 .................................................................................. 1382
COMMENT: Order of Preference, 1382.

TRANSITIONAL PROVISIONS ............................................................ 1383

ARTICLE 2252 .................................................................................. 1383
COMMENT: (1) Comment of the Code Commission (Re Non
Impairment of Vested Rights), 1383; (2) When Retroactivity is
Allowed, 1384; (3) ‘Vested Right’ Defined, 1384; (4) Example of
the Non-Impairment of a Vested Right, 1384.
ARTICLE 2253 .................................................................................. 1385
COMMENT: (1) Comment of the Code Commission (When the
Old and the New Codes Apply), 1385; (2) Recovery of Damages,
1385; (3) Successional Rights, 1385.
ARTICLE 2254 .................................................................................. 1386
COMMENT: (1) Comment of the Code Commission (Acts Con-
trary to Law), 1386; (2) Against Whom Prohibition Is Directed,
1386.
ARTICLE 2255 .................................................................................. 1386
COMMENT: Acts and Contracts With a Condition or Period,
1386; Flores and Gallano v. So, L-28527, Jun. 16, 1988, 1387.
ARTICLE 2256 .................................................................................. 1387
COMMENT: Revocation and Modification of Acts and Con-
tracts, 1387.
ARTICLE 2257 .................................................................................. 1387
COMMENT: (1) Comment of the Code Commission (Re: Civil
Sanctions and Penalties), 1388; (2) Application of the Less
Severe Sanction, 1388; Receiver for North Negros Sugar Co.,
Inc. v. Ybañez, L-22183, Aug. 30, 1968, 1388; (3) Moral and
Exemplary Damages, 1389.
ARTICLE 2258 .................................................................................. 1389
COMMENT: Actions and Rights Under the Old Law, Whether
Exercised or Not, 1390.
ARTICLE 2259 .................................................................................. 1390
COMMENT: Capacity of a Married Woman, 1390.
ARTICLE 2260 .................................................................................. 1390
COMMENT: Voluntary Recognition of a Natural Child, 1390.
ARTICLE 2261 .................................................................................. 1390
COMMENT: Exemption for Support, Pension, or Gratuity,
1391.

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 ARTICLE 2262 .................................................................................. 1391
COMMENT: Guardians of the Property of Minors, 1391.
ARTICLE 2263 .................................................................................. 1391
COMMENT: (1) Successional Rights, 1391; (2) Proofs of Fili-
ation, 1392.
ARTICLE 2264 .................................................................................. 1392
COMMENT: See the Family Code, 1392.
ARTICLE 2265 .................................................................................. 1392
COMMENT: Right of Retention of Real or Personal Property,
1392.
ARTICLE 2266 .................................................................................. 1392
COMMENT: Provisions Which Have Both Prospective and
Retroactive Effect, 1393.
ARTICLE 2267 .................................................................................. 1393
COMMENT: Provisions Appertaining to Procedure, 1393.
ARTICLE 2268 .................................................................................. 1393
COMMENT: See the Family Code, 1394.
ARTICLE 2269 .................................................................................. 1393
COMMENT: (1) Application by Analogy of the Transitional
Principles, 1394; (2) Rule in Case of Conflict, 1394.
REPEALING CLAUSE ............................................................................ 1395
ARTICLE 2270 ............................................................................ 1395
COMMENT: (1) When Spanish Civil Code Was Repealed,
1395; (2) What the New Civil Code Does Not Repeal, 1395;
(3) Complete Repeal of the Civil Code of 1889, 1396; (4) The
Family Code, 1396.

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