Civil Law Outlines

-OBLIGATIONS
AND CONTRACTS

JOEMER C. PEREZ

Philippine Copyright 2010

I
'

by

Chapter

Joemer C. Perez
A l l rights reserved.

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.
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ISBN 978-971-0ll-217-3
Published by

Central Book Supply, Inc.

927 Quezon Avenue, Quezon City
Philippines 1 104

I: Introduction to Obligations

Chapter 2:

Nature and Effect of Obligations

10

Chapter 3:

Remedies

26

Chapter 4:

Kinds of Obligations

35

Chapter 5:

Extinguishment of Obligations

75

Chapter

review or in judicial or other official proceedings.

Serial No.

TABLE OF CONTENTS

6: Introduction to Contracts

131

Chapter 7:

Essential Requisites of Contract

150

Chapter 8:

Form of Contracts

1 89

Chapter 9:

Reformation of lnstruments

194

Chapter I 0:

Interpretation of Contracts

200

Chapter

1 1 : Defective Contracts

207

Chapter

12: Natural Obligations

247

Chapter 13: Estoppel

250

Chapter 14: Trusts

257

Preface
Everything should be made as simple as possible,
but not any simpler.
- Einstein
Civil law is an enonnous subject, which covers a wide range of
A student of civil law is

topics from the simple to the more complex.

prone to be overwhelmed by the largeness of the subject, particularly as

he prepares for the bar exams.

This work is an attempt to help the student navigate this vast

field. It is a basic presentation of civil law in outline fonn. It provides
a logical arrangement and synthesis of civil law rules and principles
based chiefly on coda! provisions and relevant jurisprudence.
Commentators are also cited whenever useful or appropriate. The
arrangement of topics in the Civil Code has been followed as far as
practicable.
My aim is to give students a substantial understanding of the
essential principles and rules of civil law, with as much nuance as
possible, but without overwhelming them with the more abstruse
theories and issues.

JCP
2010

\
Nani
and Alfonso.
To

To me you are perfect,

just the way you are.
.

Chapter

Introduction to Obligations
I. IN GENERAL
A.

DEFINITION:

An obligation is a juridical necessity to give, to

do or not to do.

(Art. 1156)

The definition in

Art. 1156

is incomplete as it considers

obligations only from the side of the obligor, omitting the

creditor. Obligation may be defined more comprehensively as a
juridical relation whereby a person (the creditor) may demand
from another (the debtor) the observance of a determinate
conduct and, in case of breach, may obtain satisfaction from
the assets of the debtor. 1
Note that the obligation defined under Art. 1156 refers to civil
'
obligations, i.e., obligations which are enforceable by courts
under the law.

They are different from

natural obligations,

which are not enforceable by the courts under the law, but
when performed, they are binding, under the prh1ciples of
conscience or moral justice. A common example of a natural
obligation is a prescribed debt which cannot be enforced in
courts; however, when it is paid by the debtor, the payment
becomes binding on the said debtor.

B. CONCEPTS:
2
concepts :
1.

Cre dit

The notion of a civil obligation imports three

- right of a person (creditor) to demand a

prestation or the observance of a particular conduct, which

the law will enforce;
1 JBL Reyes, "Observations on the New Civil Code," Lawyers Journal, Vol. XVI,
January 31, 1951, p. 47, citing Arias Ramos.

' Id.

pp. 47-50,

2. Debt -duty of another person (debtor) to render a

prestation or observe a particular conduct; and

A. LAW
I.

Not P resum ed . Obligations derived from law are not

presumed. Only those expressly detem1ined in the Civil

Note that in

obligations,

the credit is a personal right,

in which is enforceable against a particular or definite

person (although it is not necessary that such person be

presently identified), as opposed to a realright, which

Code or in special laws are demandable. (Art.

a.

is enforceable against the whole world (erga ornnes).'

b.

the exemptions provided by law. (Art. 2236)

C. ELEMENTS: An obligation is constituted upon the concurrence

of the following essential elements:4

cause established by the various sources of obligations

(law, contracts, quasi-contracts, delicts and quasi-delicts);

The

of the obligation, are the active (obligee) and the passive

be

regulated by the precepts of the law which establishes

1 158)

3. Examples of Obligations Created By Law:

a.

Obligation between spouses or between parents and

b.

Obligation by emplcyer to provide certain benefits to

children to provide support under the Family Code;

employees under the Labor Code;

c.

d.

SOURCES OF OBLIGATION

cam10t

them; and as to what has not been foreseen, by the

(obligor) subjects.

' See Sps. Adorable v. CA, G.R. No. 1 1 9466, November 25, 1999.
Ang Yu Asuncion v. CA, 238 SCRA 602 (1994).

obligation

2. Applicable Law. Obligations derived from law shall be

3. The subject-persons who, viewed from the demandabilify

Obligations arise from the foliowing sources: (Art

Such

presumed.6

object which is the prestation or conduct required to

be observed (to give, to do or not to do); and

II.

A father-in-law has no legal obligation to support his

provisions of Book IV of the Civil Code. (Art.

1 . The vinculum juris or juridical tie which is the efficient

2.

chargeable with a prestation or undertaking to give or

daughter-in-law.

The debtor is liable with all his property, present and

future, for the fulfillment of his obligations, subject t

A legal norm can reqiiire that a particular party be

to deliver or to do or to render some service. But it

must be shown that such legal provision in fact exists.5

3. Responsibility-right of the creditor to obtain satisfaction

from the debtor's patrimony in case of the debtor's breach.

1 1 58)

Obligation to reimburse necessary expenses under the

law on property;
Obligations of the owners of a servient estate to the

owners of the dominate estate under the law on

easements;

etc.

1 157)
5 Batchelder v. Central Bank, G.R. No. L-25071, July 29, 1972.
' Pelayo v. Lauron, 12 Phil. 453 (1909).
3

a. . Negotiorum Gestio - 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. (Art. 2144)

B. CONTRACTS
1. Obligations arising from contracts have the force of law
between the contracting parties and should be complied
with in good faith. (Art. 1159)
2. Definition. A contraci is a meeting of minds between two
persons whereby one binds himself, with respect to the
other, to give something or to render some service. (Art.
1305)

. b. Solutio Indebiti - 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. (Art.
2152)

See discussion on Contracts in Chapters 5, et seq.

D. ACTS OR OMISSIONS PUNISHED BY LAW

C. QUASI-CONTRACTS
l..

1. Applicable Law. Civil obligations arising from criminal

offenses shall be governed by the penal laws, subject to the
following provisions of the Civil Code:

Applicable Law. Obligations derived from quasi-contracts

shall be subject to the provisions of Chapter l , Title XVII,
of Book IV of the Civil Code. (Art. 1160)

a. Article 2177;

2. Definition. Quasi-contracts are obligations ariing from

certain lawful, voluntary and unilateral acts, to the end that
no one shall be unjustly enriched or benefited at the
expense of another. (Art. 2142)

b. The pertinent provmons of Chapter 2, Preliminary

Title, on Human Relations, and

a
there is no consent in the sense of
In quasi-contracts,
.
meeting of minds between the parties; thus there is no
contract. However, in view of the peculiar
circumstances or factual environment, consent is
presumed, to tho end that a recipient of benefiis or
favors resulting from lawful, voluntary and unilateral
acts of. another may not be unjustly enriched at the
expens of another.7
3. Examples:

1 Philippine National Bank v. CA. G.R. No. 97995, January 21, 1993.
4

c. The pertinent provisions of Title XVIII of Book IV,

regulating damages. (Art. 1161)

2. Civil Lia bil ity Arising From Crime. Under Art. 100 of
the Revised Penal Code, every person criminally liable for
a felony is also civilly liable. The Civil Code also provides
that in crimes, the defendant shall be liable for all damages
which are the natural and probable consequences of the act
or omission complained of.' (Art. 2202) It is not necessary
that such damages have been foreseen or could have
reasonably been foreseen by the defendant. (Art. 2202)
Civil liability arising from crime may be proved by
preponderance of evidence. (Arts. 29, 30, 35) Thus, it
5

is possible that an accused wh6 is acquitted because of

includes homicide (whether attempted, frustrated

or consUmmated). 1 1

reasonable doubt may nonetheless be held liable civilly

based on preponderance of evidence. (Id.)
d.

3. Deemed Instituted. When a criminal action is instituted,

the civil action for the recovery of civil liability arising
from t)ie offense charged shall be deemed instituted with
the criminal action, unless the offended party -

Failure of a policeman or peace officer to render aid or

protection to any person in case of danger to life or
property. (Art. 34)
The peace officer is primarily liable for damages,
and the city or municipality is subsidiari\y liable.

a. Waives the civil action,

(Art. 34)
5. No Double Recovery. In no case (even in independent

b.

Reserves the right to institute it separately or

c.

Institutes the civil action prior to the criminal action.8

4. Independent Civil Action.

In the following cases

provided by the Civil Code, the offended party may file an

independent
civil
action,
which
shall
proceed
independently of the criminal action and shall require only
a preponderance of evidence':

civil actions) may the offended 'party recover damages

twice for the same act or omission charged in the criminal
action. 1 2

E. QUASIDELICTS

a.

Civil action based 0n an obligation not arising from the

act or omission complained of as a felony. (Art. 3 1)

2. Definition. Whoever by act or omission causes damage to

deposit, independent of a criminal action for

estafa. 1 0
Violation of civil or constitutional rights and liberties.

Negligence is defined as the. failure to exercise the

(Art. 32)
c.

shall be governed by the provisions of Chapter 2, Title

XVII of Book IV, and by special laws. (Art. 1 1 62)

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. (Art. 2176)

Example: a civil action for breach of contract of

b.

1 . Applicable Law. Obligations derived from quasi-delicts

standard of care that a reasonably prudent person

would have exercised in a similar situation.P

'

Defamation, fraud and physical injuries. (Art. 33)

"Physical irifuries" is used in the generic sense. It

is not limited to the crime of physical injuries, but
' Rules of Court, Rule 1 1 1 , Section 1(a).
' See also Rules of Court, Rule 1 1 1 , Section 3.
. 10 I Tolentino 1 27.

3. Distinguished from Other Sources of Obligation.

Negligence as a source of obligation may be classified into
three 1 4:
" Carandang vs. Santiago, 97 Phil. 94; Madeja v. Caro, G.R. NO. L-51183, December 21, 1983.
"See Rules of Court, Rule 1 1 1 , Section 3.
"Janssen Pharmaceutica v. Silayro, G.R. No.. 172528, February 26, 2008.

a.

Culpa contractual

may also be criminally prosecuted for criminal negligence .

the parties have a pre-existing

(this is. culpa

which will also give rise to civil

liability. The acquittal of the accused in the criminal case

the performance of the contractual obligation, and

does not carry with it the extinction of the civil liability

serves to

based on quasi-delict,19 because they are based on different

increase the liability arising from the

contractual obligation.15
b.

criminal),

contractual relations; the negligence is an incident of

sources of obligation.

Culpa aquiliana (or extra-contractual or quasi-delict)

-

the parties generally have no pre-existing contractual

relations; it is the negligence itself which creates the

obligation (and therefore the juridical relation between

the parties).1 6

However, it has been held that quasi-delict may

arise even if there is pre-existing contractual

relation, as the act which breks the contract

also be

c.

quasi-delict.17

niay

Culpa criminal negligence punished by law, as under

Art. 3 65 of the Revised Penal Code on criminal
-

negligence.
The foregoing liabilities (and the corresponding liabilities)
are independent of each other, provided that the offended
party cannot recover more than once.18
Thus, e.g., a taxi passenger who became a victim of a
vehicular accident may sue the taxi operator under their
contract of carriage (this is

culpa contractual), an.d also sue

the driver of the other vehicle which collided with the taxi
for quasi-delict, since they had no pre-existing contractual
obligations (this is

culpa aquiliana).

The negligent drivers

14

See First Philippine International Bank v. CA, G.R. No. 1 1 5849, January 24, 1996.
Sps. Batal v. Sps. Tomina9a, G.R. No. 164601, September 27, 2006.
" Sps. Batal v. Sps. Tominaga, G.R. No. 164601, September 27, 2006.
11 Air France v. Carrascoso, 18 SCRA 155 (1966), Singson vs. Bank of the Philippine Islands, 23
SCRA 1 1 1 7 (1968), Coca-Cola Bottlers Philippines, Inc. v. CA, G.R. No. 1 1 0295, October 18,
1993.
" See First Philippine International Bank v. CA, G.R. No. 1 15849, January 24, 1996. .
15

.
" Manliclic v. Calaunan, G.R. No. 150157, January 25, 2007. Safeguard Security Agency v.
Tangco, G.R; No. 165732, December 14, 2006.
9

ii. Thus, the vendor has the obligation to preserve the

thing from the perfection of the contract until the
thing is delivered to the vendee.2

Chapter 2

Nature and Effect of

Obligations
I.

OBLIGATION TO GIVE
A. OBLIGATION TO GIVE A DETERMINATE THING

b. To deliver the fruits of the thing from the time the

obligation to deliver the thing arises. (Art. 1164)

However, the creditor shall acquire no real right

over the thing until the same has been delivered to
him. (Art. 1164)

(1) A personal right is the power of one person to

demand of another, as a definite passive
subject, the fulfillment of a prestation to give,
to do, or not to do. On the other hand, a real
right is the power belonging to a person over a
specific thing, without a passive subject
individually determined.'1

1. A determinate thing is one that has been specified or

distinguished from others of the same kind. For example,
the car with plate number JCP-888.

2. When what is to be delivered is a determinate thing, the

creditor may compel the debtor to make the delivery (in
addition to damages). (Art. 1165)
a. This .means that the creditor can compel the debtor to
deliver the thing actually specified in the obligation,
and the debtor is not allowed to substitute another
thing:

(2) Delivry is required for a creditor to acquire a

real right over the thing; before such delivery,
the creditor only has a personal right to compel
the debtor to deliver the thing to him.

b. If the obliger delays, or has promised to deliver the

same thing to two or more persons who do not have the
same interest, he shall be responsible for any fortuitous
event until he has effected the delivery. (Art. 1165)

c. To deliver all of the accessions and accessories of the

thing, even though they may not have been mentioned.
(Art. 1166)

B. OBLIGATION TO GIVE AN INDETERMINATE THING

3. The obligation to give a determinate thing includes the
following accessory obligations:

1. An indeterminate thing is one that is generic or indicated

only by its kind, without being specified or distinguished
from others.ofthe same kind. For example,."a car."

a. To take care of the thing with the proper diligence of a

good father ofa family. (Art. 1163)
1.

Unless the law or the stipulation of the parties

requires another standard of care. (Art. 1163)
IO

20
21

Seven Brolhers Shipping Corp. v. CA, G.R. No. 109573, July 13, 1995.
Sps. Adorable v. CA, G.R. No. 1 1 9466, November 25, 1999.
11

2. If the thing is indeterminate or generic, he may ask that the

obligation be complied with at the expense of the debtor.
(Art.
a.

1 1 65)

The obligation is satisfied by giving to the creditor a

generic thing, at the debtor's expense. This is in
addition to damages.

b.

The_ obligation to give a generic thing does not carry

III. TRANSMISSIBILITY OF OBLIGATIONS

A. GENERAL RULE: All rights acquired in virtue of an obligation

are transmissible, subject to laws or stipulations to the contrary.

(Art.

1 178)

B. EXCEPTIONS: Rights

and

with it the accessory obligations to preserve the thing

transmissible -

because a generic thing is not individualized.

I. By nature; (Art. 1 3 1 1)

a!1d deliver its fruits, accessions and accessories,

obligations

which

are

not

2. By stipulation of the parties; (Art. 1 3 1 1 ) or

II. OBLIGATION TO DO AND NOT TO DO .

3 . By provision oflaw.23 (Art. 1 3 1 1)

A. OBLIGATION TO Do: If a person obliged to do something fails

to do it, the same shall be executed at his cost. (Art. 1 1 67)
I. This same rule shall be observed if he does it
contravention of the tenor of the obligation. (Art. 1 1 67)

300), parental
authority (Article 327), usufruct (Article 603),
contracts for a piece of work (Article 1726),
partnership (Article 1830) and agency (Article 1 919).

Examples:

2. Furthermore, it may be decreed that what has been. poorly

done be undone. (Art. 1 1 67)

legal

support

(Article

IV. PERFORMANCE OF OBLIGATIONS

the

A. IN GENERAL: The thing or service in which the obligation

B. OBLIGATION NOT TO Do: When the obligation consists in not

B. RECEIPT OF PRINCIPAL: The receipt of the principal by the

Note that the debtor cannot be compelled

to do

thing, since it would violate his personal liberty. He

can only be held liable for damages.

doing, and the obligor does what has been forbidden him, it

shall also be undone at his expense. (Art.

1 168)

consists must be

completely delivered or rendered, as the case

may be. (Art. 1233) See further discussion regarding Payment.
creditor without reservation with respect to the interest, shall
give rise to the presumption that said interest has been paid.

(Art.

1 176)

Thus, constructions which are made despite the prohibition

or restrictions in the Deed of Restrictions may be

demolished.'2
22 C.ajardo Jr. v. Freedom to

Build, Inc., G.R. No. 134692, August 1 , 2000.

12

" Estate of Hemady v. Luzon Surety Co., 100 Phil. 388 (1956).
13

If the debt produces interest, payment of the principal shall

not be deemed to have been made until the interests have

A. DELAYORMORA

been covered. (Art. 1253)

1 . Requisites.
c.

RECEIPT OF LATER INSTALLMENT:

installment

of

debt

without

The receipt of a later

reservation

as

to

They are governed by special

905 of the Central Bank, adopted on

22, l 982, has expressly removed the interest

ceilings prescribed by the Usury Law.

(mora

That

the

obligation

be

demandable

and

already

liquidated;

Circular No.
December

a.

(Art. 1 176)

D. USURIOUS TRANSACTIONS:
laws. (Art. 1 175)

In order for the debtor to be in default

'9
the following requisites must be present :

prior

installments, shall likewise raise the presumption that such

installments have been paid.

solvendi),

Thus, the Usury

24
Law is now "legally inexistent" or "inffective."

b.

That the debtor delays performance; and

c.

That the creditor requires the performance judicially or

extrajudicially (demand).
It is important to determine when the debtor is in
default because the debtor becomes liable from that
30
time for damages (usually in the form of interest).

However, courts may modify interest rates when found

(Art. 2209) The debtor also assumes

to

(even for a fortuitous event) from the time of default.

be

iniquitous

or

unconscionable

under the
2'
circumstances (such as 66% per annum , 72% per
26
27
annum, or 1 08-120% per annum ).

the risk for a thing

(Art. 1 1 65)
2 . General rule o n demand requirement.

Those obliged to

deliver or to do something incur in delay from the time the

V. NON-PERFORMANCE OF OBLIGATION
(BREACH OR DEFAULT)
Those who in the performance of their obligations are guilty of

fraud, uegligence, or delay, and those who in any manner

contravene the tenor thereof, are liable for damages. (Art. 1 170)

obligee judicially or extrajudicially demands from them the .

fulfillment of their obligation.

Filing of case in court is a judicial demand.

3. Exceptions to demand requirement.

creditor shall not

In general, every debtor who fails in the performance of his

(Art. 1 1 69)
31

The demand by the

be necessary in order that delay may exist

in any of the following instances:

(Art. 1 1 69)

obligations is bound to indemnify for the losses and damages

28
caused thereby.

" Medel v. CA, G.R. No. 131622, November 27, 1996.

2s Medel v.
CA, G.R. No. 131622, NoVember27, 1998.
26 Carpo v. Chua, G.R. Nos. 150773 & 153599, September 30, 2005.
" Dino v. Jardines, G.R. No. 145671, January 31, 2006.
" Arrieta vs. National Rice & Corn Corp., 10 SCRA 79 (1964), citing De la Cruz v. Seminary of
Manila, 18 Phil. 330; Municipality of Moncada v. Cajulgan, 21 Phil. 184; De la Cavada v. Diaz, 37

Phil. 962; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v.
Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657.
" Social Security System v. Moonwalk Developmenl and Housing Corp., G.R. No. 73345, April
7, 1993; Santos Ventura Hocorma Foundation, Inc. v. Santos, G.R. No. 153004, November 4,
2004.
" Malayan Insurance Co., Inc. v. CA, G.R. No. L59919, November26, 1 966.
" United Coconut Planters Bank v. Sps. Beluso, G.R. No. 159912, August 17, 2007.

14

15

a.

By express provrswn or stipulation. When the

the performance without valid reason. A creditor in default

obligation or the law expressly so declare; or

bears the risk of accidental loss due to fortuitous events.34

The fact that the contract fixes the schedule of

Such creditor's default is not negated by the debtor's

failure io consign the thing to be delivered.35

payment does not dispense with the demand

requirement32 ; the contract must specifically state
that demand is not necessary or that the debtor is

5. In reciprocal obligations, neither party incurs in delay if

waiving the requirement of demand.

the other does not comply or is not ready to comply in a

proper manner with what is incumbent upon him. (Art.

b. Time is of the essence. When from the nature and the

1169)

circumstances of the obligation it appears t_hat the

designation of the. time when the thing is to be

From the moment one of the paf\ies fulfills his

delivered or the service is to be rendered was a

controlling

contract; .?r

motive for the

obligation, delay by the other begins. (Art. 1169)

establishment of the

In reciprocal obligations, the performance of one is

i.

For example, delivery of wedding cake at a

ii.

When a common carrier undertakes to convey

conditioned on the
other obligation.36

specified date of the wedding.

B. FRAUD

goods, they should be delivered at destination

1. Definition, "Fraud" under Art. 1170 refers to bad faith or

. malice in the performance of an obligation which is already

agreement as to the time of delivery.33

existing. It is a conscious and intentional design to evade

the normal fulfillment of existing obligations.37 The

Demand is useless. When demand would be useless, as

consequence of this "fraud" is liability for damages and

'

when the obliger has rendered it beyond his power to

rescission of the obligation.

perform.

For example,

when the

It should be differentiated from "fraud" under Art.

obliger had already

1338 (contracts) and Art. 839(5) (wills), which refers

disposed of the thing to be delivered.

4. Creditor's Default. The creditor may also incur default

.

(mora creditoris or accipiendi) when h

fulfillment of the

within a reasonable time, in the absence of any

c.

simultaneous

to

deceit (dolo) as a vice of consent in the execution of

contract or wills. The consequence of this "fraud" is

refuses to accept

See Social Security System v. Moonwalk Development and Housing Corp., G.R. No. 73345,
April 7, .1993.
"Maersk Line v. CA, G.R. No. 94761, May 17, 1993.

"'Vda. De Villaruel v. Manila Motor Co., Inc., 104 Phil. 926 (1958).
" Vda. De Villaruel v. Manila Motor Co., Inc., 104 Phil. 926 (1958).
" Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 (1957). Boysaw v. lnterphil Promotions,
Inc., 148 SCRA 643 (1987).
"Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L25885, January 31, 1972, 43 SCRA 93

16

17

32

b.

the voidability of the contract and invalidity of the

demandable in all obligations. (Art.

extra-contractual or quasi-delict)

obligation (and therefore the juridical relation between

the parties).41

117 1)

i.

Any waiver of an action for future fraud is void. (Art.

However, it has been held that quasi-delict may

arise even if there is pre-existing contractual

1 17 1)
b.

(or

relations; it is the negligence itself which creates the

2. Always Dem a ndable. Responsibility arising from fraud is

a.

Culpa aquiliana

- the parties generally have no pre-existing contractual

will.38

relations, as the act which breaks the contract may

Thus, it

was held

that

also be a quasi-delict.42

a stipulation completely

exempting a party from any liability in case of loss '

notwithstanding its bad faith, fault or negligence is

ii. Note that in

culpa aquiliana,

the employer may

avoid liability for the negligence of his employee

void.39

by invoking the defense of due diligence of a good

father of

In culpa
the family. (Art. 2180)
contractual, this defense is not available.43

C. NEGLIGENCE
I. Liability for Negligence. Responsibility ansmg from
negligence in the performance of every kind of obligation

c.

is also demandable, but such liability may be regulated by

the courts, according to the circumstances. (Art.

obligation

and

corresponds

with

1 173)

As previously discussed, negligence or

may be of three kinds:

the

attributable to the non-performance), shall apply.

a.

culpa

Wanton negligence in effecting the plans, designs,

specifications,

Culpa contractual.

negligence punished by law, as under

circumstances of the persons, of the time and of the place.

(Art.

of the Revised Penal Code on criminal

3. Negligence with Bad Faith. When negligence shows bad

faith, the provisions of Articles 1 171 (on fraud) and 2201,
paragraph 2 (liability for all damages reasonably

in the omission of that diligence which is required by the

of the

365

negligence.

1 172)

2. Definition. The fault or negligence of the obliger consists

nature

Culpa criminal

Art.

and construction of

building

is

equivalent to bad faith. 44

the parties have a pre-existing

contractual relations; the negligence is an incident of

the perfonnance of the contractual obligation, and

serves to

increase the liability arising from . the

contractual obiigation.40

41

Sps. Batai v. Sps. Torninaga, G.R. No. 164601, September 27, 2006.
Carrascoso, 18 SCRA 155 (1966), Singson vs. Bank of !he Philippine Islands, 23
SCRA 1 1 17 (1968),
Coca-Coia Bottlers Philippines, Inc. v. CA, G.R. No.110295, October 18,
.
1993.
43 el Pardo v. Manila Eler.lrtc Co., 52 Phil. 900, 904 (1929); De Gula v. Manila Electric Railroad
and Light Co., 40 Phil. 706, 710 (1920); Manila Railroad Co. v. Compania Transatlanlica, 38 Phil.
875, 889-890 (1918); Herbosa v. CA, G.R. No. 1 190867, January 25, 2002.
44 Nakpil & Sons v. CA, G.R. No. L-47851, Oclober3, 1986.
"Air France v.

38 See J.B.L. Reyes, Lawyers' Journal, Jan. 31,

1951, p. 47.
Philippine Commercial international Bank v. CA, G.R. No. 97785, March 29, 1996.
)' Sps. Batai v. Sps. Tominaga, G.R. No. 164601, September 27, 2006.
39

18

19

5. Extraordinary

4. Or dinary Diligence. If the law or contract does not state

Diligence.

Certain

businesses

or

the diligence which is to be observed in the performance,

professions required the "highest degree of care" because

that which is expected of a goodfather of a family shall be

of their nature. Examples:

required.
a.

(Art 1173)

a.

This connotes reasonable care which an ordinarily '

prudent person would have observed when confronted

b.

with a similar situation.45

b.

Examples:
i.

Placing

Common Carriers

for the protection of life and

property. 50
because of the fiduciary nature of their
relationship with their depositors.5 1

Banks

c. Pharmacies

because of their potential harm to human

life.52

a cellphone in a bag and holding on to that

bag is ordinarily sufficient care of a cellphone

D. OTHER VIOLATIONS OF THE OBLIGATION

while travelling on board the LRT.46

ii.

A shipping company exercised due diligence hen

I.

its vessel sailed only after the main engine,

and every kind of defective performance.53 Examples:

and found to be in good running condition; when

vessel

was

manned

by

competent

and

a.

experienced officers; and when the master ordered

Supplier failed to deliver the cinema films subject of a

booking contract.5"

an inspection upon the occurrence ofvibrations.47

b.

iii. A store supervisor who did nothing even if it had

Shipping company failed to deliver the cargo within a

reasonable time (delay of two months from the

been informed that a counter was unstable and

estimated date of arrival).55

posed a danger to C)lStomers, is negligent.48

iv.

contravene the tenor" of the

obligation includes any illicit act or omission which

impairs the strict and faithful fulfillment of the obligation

machineries, and other auxiliaries were checked

the

The phrase "in any manner

c.

A towing service which failed to ensure that its

Bank failed to keep a safety deposit box from being

flooded and failed to inform the depositor of the flood,

tugboat was free of mechanical problems is

negligent, particularly considering that the barge to
be towed was wholly dependent on the tugboat for
propulsion.49

50

45

Crisostomo v. CA, G.R. No. 138334, August 25, 2003.

"Cruz v. Gangan, G.R. No. 143403, January 22, 2003.
47 Wildvailey Shipping Co. v. CA, G.R. No. 1 19602, October 6, 2000.
"Jarco Marketing Corp. V. CA, G.R. No. 129792, December 21, 1 999.
" Cargolitt Shipping, Inc. vs. L. Acuario Marketing Corp., G.R. No. 146426, June 27, 2006.
.

20

Tiu v. Arriesgado, G.R. No. 138060, September 1, 2004; Calaias v. Court of Appeals, 332
SCRA 356 (2000); Kapalaran Bus Line v. Coronado, 176 SCRA 792 (1 989);
51 Bank of the Philippine islands v. CA, G.R. No. 102383, November 26, 1992, 216 SCRA 51;
Far East Bank and Trust Company v. Quirimil, G.R. No. 148582, January 16, 2002.
5 2 Mercury Drug Corp. v. De Leon, G.R. No. 165622, October 17, 2008.
53 Arrieta vs. National Rice & Corn Corp., 10 SCRA 79 (1964); Magat vs. Medialdea, 121 SCRA
418 (1983).
54 Acme Films, Inc. vs. Theaters Supply Corporation, 63 Phn. 657 (1936)
55 Maersk Line v. CA, G.R. No. 94761, May 17, 1 993.
21

which led to the destruction of the stamp collection

stored therein.56
d.

Supplier

FORTUITOUS EVENT

stopped

terminating

an

deliveries,

existing

thereby

unilaterally

distributorship agreement

without legal justification.''

e.

A. DEFINITION: A fortuitous event (also known as force majeure)

is one which could not be foreseen, or which, though foreseen,
was inevitable. (Art.

Repairman failed to repair a typewriter and even

returned it "in shambles.'"'

f.

VI. EXCUSE FOR NON-PERFORMANCE:

Constructio\l company deviated from the plans and

specification, and architect provided defective plans

1. "Act of God" if caused by nature, such as earthquakes, epidemics or pestilence,62 floods or storms,63 fire, etc., or

2. "Act of man"

When an obligation, regardless of its source (i.e.,, law,

contracts,

breached,

quasi-contracts,

damages.60
a.

the

contravenor

If the obligor acted in

delicts or quasi-delicts),
can

be

held

liable

goodfaith, he shall be

is

for

liable for

B. GENERAL RULE

No LIABILITY: No person shall be

responsible for fortuitous events.

(Art. 1174)

To exempt the

obligor from liability for a breach of an obligation due to a

fortuitous event, the following requisites must concur:65

1. The cause of the breach of the obligation must be'

independent of the will of the debtor;

those damages that are the natural and probable

consequences of the breach of the obligation and which

2.

foreseen at the time the obligation was constituted.

3. The event must be such as to render it impossible for the

the parties have foreseen or could have reasonably

(Art. 2200)
b.

if caused by humans (other than the

obligor), such as war,64 robbery, rebellion, etc.

and specifications."

2.

1174). It may either be -

In case

debtor to fulfill his obligation in a normal mauner; and

of.fraud, badfaith, malice, or wanton attitude,

the guilty party is liable for all damages which may be

reasonably attributed to the non-performance of the
obligation.61

The event must be either unforseeable o r unavoidable;

(Art. 2201)

4. The debtor must be free from any participation

aggravation of the injury to the creditor.

C. EXCEPTIONS:

111,

or

The obligor is liable for breach even due to

fortuitous events in the following cases:

so

Sia v. CA, G.R. No. 102970, May 13, 1993.

" Pacmac, Inc. v. CA, G.R. No. 72405, May 29, 1987.
" Chaves v. Gonzales, G.R. No. L-27454, April 30, 1 970.
" Nakpil & Sons v. CA, G.R. No. L-47851, October 3, 1986.
"Eastern Shipping Lines v. CA, G.R. No. 97412, July 12, 1994.
" Magat vs, Medialdea, 121 SCRA 418 ( 1983).
22

" Crame Sy Panco v. Gonzaga, 10 Phil. 646 (1908).

"Government v. Bingham, 13 Phil. 558 (1909).
"Castro v. Longa, 89 Phil. 581 (1951).
" Nakpil & Sons v. CA, G.R, No. L-47851, October 3, 1986, citing Vasquez v. Court of Appeals,
138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austna v. Court of Appeals, 39 SCRA
527: Republic of the Phil. v. Luzon Stevedonng Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil.
657.
23

1. In cases expressly specified by the law. (Art. 1174)

iii. The collapse of a building due to an earthquake

would not absolve the architect and the constructor
upon showing that there were defects in the design

2. When it is declared by stipulation. (Art. 1174)

and construction of the said building. 70

3.

When the nature o f the obligation requires the assumption

of risk.

iv. Malfunction or loss of brake is not a fortuitous

(Art. l 174)

event, because the owner/driver of a vehicle is

supposed to know about the conditions of his

4. If the obligor delays, or has promised to deliver the same

vehicle and keep it off the street if mechanically

thing to two or more persons who do not have the same

interest. (Art.

defective. 71

l 165)
v.

5. When. the obligor is guilty of contributory fault or

n egligence.66

Tire blow-out is also not a fortuitous event if

caused by factors which could have been easily

(Art. 1 170)

discovered with a thorough check-up of the

2
vehicle.7

If upon the happening of a fortuitous event, \here

concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor

vi.

A fire which occurred in a vessel is not a fortuitous

of the obligation, which results in loss or damage, the

event where it was shown to have originated from

obligor caimot escape liability.67

a crack in the fuel oil tank which should have been

discovered upon inspection of the vessel.73

i.

Street robbery resulting in the loss of jewelry

entrusted to the victim may be considered a

vii.

fortuitous event, but the victim must be free of

ii.

common carrier which proceeds with the sailing

of its vessel despite knowledge of an incoming

contributory fault or negligence (she must have

typhoon is guilty of ne ligence and cannot invoke

taken the necessary precautions).68

fortuitous event.74

Carnapping per se is not a fortuitous event. Thus, a

mere police report of the carnapping is not

. sufficient to exonerate the obligor who lost a car

due to the camapping: It must be established that
the event was an act of God or was done solely by
third parties, and that the obligor had no fault or
participation therein.69
10

Nakpil & Sons v. CA, G.R. No. L47851, October 3, 1986.

Thermochem, Inc. v. Naval, G.R. No. 131541, October 20, 2000.
12 La Mallorca v. De Jesus, G.R. No. L-21486, May 14, 19136.
" Edgar Cokaliong Shipping Lines, Inc. V. UCPB General Insurance Company, Inc., G.R. No.
146018, June 25, 2003.
"Asia Lighterage and Shipping, Inc. v. CA, G.R. No. 147246, August 19, 2003.
11

"Austria v. CA, G.R. No. L-29640, June 10, 1971.

"Nakpil & Sons v. CA, G.R. No. L-47851 , October 3, 1986.
"Ausfna v. CA. G.R. No. L-29640, June 10, 1971.
69 Jimmy Co v. CA, G.R. No. 124922, June 22, 1998.
24

25

may ask that it be undone at the expense of the debtor.

(Art. 1168)

Chapter 3

If the obligation is reciprocal, breach by one party

will entitle the other party to demand rescission (as an
alternative to performance). (Art. 1191) See further
discussion below.

Remedies

Note:

I. IN GENERAL

2. Damages. The creditor may also ask for damages in case

ofbreach or non-performance by the debtor. (Art. 1170)

Civil obligations necessarily entail the availability of remedies by

which they can be enforced by the creditor.
A. PRINCIPAL REMEDIES: In general, to enforce an obligation,
the creditor may demand performance and/or indemnity for
da ma ges.

I. Performance.
a. In obligation to give a determinate thing, the creditor
may demand specific performance, or to compel
delivery of the thing due. (Art. 1165)
b. In obligation to give a generic thing, the creditor may
demand substituted peiformance, i.e., that the
obligation be complied with at the expense of the
debtor.
c. In obligation to do, the creditor may demand
substituted performance, i.e., that the obligation be
executed at the cost of the cost of the debtor. The
creditor may also demand that what has been poorly
done be undone. (Art. 1167)
d. In obligation not to do, the creditor may demand
desistance (or "negative performance," as it were) by
the debtor from doing the forbidden thing. The creditor
may ask for an injunction for this purpose. If the
forbidden thing has already been done, the creditor

B.

SATISFACTION OF CLAIMS: When a creditor avails himself of

the remedies allowed by law (supra), and he succeeds in
obtaining a favorable judgment, he will naturally be interested
in getting satisfaction of the award in his favor. He may do so
by taking the following successive measures against his
debtor:75 (see Art. 1177)
I.

Exhaust the properties of the debtor through levying by

attachment and execution upon all the property of the
debtor, except such as are exempt by law from execution;

2. Exercise all the rights and actions of the debtor, save those
personal to him (accion subrogatoria); and

3. Seek rescission o f the contracts executed b y the debtor in

fraud of their rights (accion pau/iana).
a. The foregoing remedies are successive. Thus, a
creditor can resort to accion subrogatoria only after he
has exhausted the properties of the debtor. And he can
only resort to accion pau/iana after he has resorted the
first two remedies. 76

"Adorable v. CA, G.R. No. 1 1 9466, November 25, 1999.

Novembe r 25, 1999.

76 Adorable v. CA, G.R. No. 1 1 9466,

26

27

b.

Thus,

accion subrogatoria

and

accion pauliana

are

obligation of the other.79 Example: In a contract of sale, the buyer's

considered "subsidiary remedies m

obligation to pay the purchase price and the seller's obligation to

c.

deliver the thing sold are reciprocal.so

Another measure which the creditor may take is to file

an action to declare the nullity of absolutely simulated
transfers by the debtor. This is often confused with

In case of breach of obligation, the injured party may choose

beiween the fulfillment of the obligation (specific performance)

rescission, but the two remedies are different'8 i.

and the rescission ofthe obligation, with the payment of

In rescission, the transfer by the debtor is real or

A. RESCISSION (OR RESOLUTION)

merely apparent.

I.

In rescission, there must be intent to defraud

(actual or prest1mptive); in simulation, no such

what is incumbent upon him. (Art.

a.

iii. In rescission, the creditor must have first exhausted

unjust that a party be held bound to fulfill his promises

when the other violates hi.s.82

1v. In rescission, the transfer is set aside insofar only

. as necessary to satisfy the creditor's claim; in

Examples: (1)

simulation, the entire transfer is set aside.

boat fails to arrive in time for loading83;

years; in

obligations are defined as those that arise from the

same cause, and in which each party is a debtor and a creditor of

the other, such that the obligation of one is dependent upon the

JBL Reyes & Ricardo Puna, Outlineof Philippine Civil Law, Vol. IV (1958 ed.) (hereafter "IV
Reyes .& Puna"), pp. 34-35.
78 IV Reyes & Puna 38 (citing Puig Pena and Manresa).
28

(2)

lessor may cancel the lease contract if the lessee

fajls to pay rent84;

(3)

a seller may rescind if the

buyer fails to pay the purchase price. 85

b. Rescission or resolution

n. REMEDIES IN BREACH OF
RECIPROCAL OBLIGATIONS

11

a party may cancel its charter

contract with a shipping company if the latter's

simulati.on, the action to set aside the transfer does

not prescribe.

Reciprocal

This is predicated on the breach of faith by the

the parties. 81 It is retaliatory in character, it being

required.

1191)

defendant which is violative of the reciprocity between

the assets of the debtor; in simulation, this is not

In rescission, the action prescribes in

The power to rescind obligations is implied in reciprocal

ones, in case one of the obligors should not comply with

intent is required.

v.

damages

in either case. (Art. 1191)

actual; in simulation, the transfer is fictitious and

n.

under Art. 1191

is for breach

of stipulations, and should not be confused with

"Presbitero, Jr. v. CA, G.R. No. 102432, January 21, 1993.

Leonardo v. Maravilla, G.R. No. 143369, November 27, 2002.
" Pryce Corporation v. Philippine Amusement and Gaming Corporation, G.R. No. 157480, 6
May 2005; Spouses Francisco v. DEAC Construction, Inc., G.R. No. 171312, February 4, 2008.
" Universal Food Corporation v. CA, G.R. No. L-29155, May 13, 1970, 33 SCRA 1 (JBL Reyes,
concurring).
"ADR Shipping Services, Inc. v. Gallardo, G.R. No. 134873, September 17, 2002.
84 Cruz v. IAC, G.R. No. 72313, December 29, 1989.
" Almira v. CA, G.R. No. 1 15966, March 20, 2003.
so

29

rescission under Art. 1381, et seq., which is the setting

aside of contracts due to

suffered by the

lesion

plaintift'6 (e.g., a creditor seeks the

rescission of a fraudulent disposition of property made

by his insolvent debtor in favor of third persons).
Rescission under

Art. 1 191. is a principal action,

Art. 1381, et seq. is

while rescission under

c.

an extended period because Art.

court such discretion. 89

oi economic damage

4. Generally, the power to rescind must be invoked judicially;

it cannot be exercised solely on a party's own judgment

that the other has committed a breach of the obligation.'

a.

as rescinded and act accordingly, even without prior.

that he has no other recourse to repair the damage

court action or before any judicial. pronouncement of

he suffered).

breach. But his unilateral determination is provisional,

since the other party may challenge it by suing him in

Rescission presupposes that the obligation or contract

court. It is then the court which will finally determine

exists.

if the rescission should be set aside or affirmed.9t

Thus, one cannot ask for the declaration of

b.

prestation.

1 191)

perform his

own

simply withhold

if the injured party has already performed, such as a

would have to seek judicial rescission so the court can

compel the infractor to make him whole (e.g., for the

buyer to recover the price he has already paid).92

for a slight or casual breach, but only for such breaches

within the stipulated period, the court cannot grant him

to

a buyer can

buyer who has already paid the purchase price, he

The right to rescind is not absolute. It is not permitted

In lease, however, if the lessee fails to pay the rent '

Thus,

payment if the seller is not ready to deliver. However,

3. The court shall decree the rescission claimed, unless there

be just cause authorizing the fixing of a period. (Art. 1 191)

as are so substantial and fundamental as to defeat the

object of the parties in entering into the agreement. 88

extrajudicial rescission is feasible

rescind and simply refuse

has chosen specific performance, if the latter should

become impossible. (Art.

Practically speaking,

if the injured party has -not yet performed; he can

2. The injured party may also seek rescission, even after he

b.

However, the injured party my consider the contract

subsidiary (in the latter, the plaintiff must show

nullity of a contract, and at the same seek its rescission

:
under Art. 1 1 9 1 . 87

a.

1659 does not give the

c.

Also, in the sale of immovables,

a demand for

rescission must be made either judicially or by notarial

act,

even if it is stipulated that rescission shall take

place upon failure to pay on time. (Art.

1 592)

"Universal Food Corporation v. CA, G.R. No. L29155, May 13, 1970, 33 SCRA 1 (JBL Reyes,
concurring); Ong v. CA, G.R. No. 97347, July 6, 1999.
" Pan Pacific Industrial Sales Co., Inc. v. CA, G.R. No. 125283, February 10, 2006.
"Universal Food Corporation v. Court of Appeals, 33 SCRA 1, May 13, 1 970; Roque v. Lapuz,
96 SCRA 741, March 31, 1 980; Multinational Village Homeowners Association, Inc. vs. ARA
Security & Surveillance Agency, Inc., G.R. No. 154852, October 21, 2004.

" IV Tolentino 180, citing Mina v. Rodriguez, (CA) O.G. Supp., August 30, 1941, p. 65.
' Tan v. CA, G.R. No. 80479, 28 July 1989, 175 SCRA 656, 661-662. Ong v. Bognalbal, G.R.
No. 149140, September 12, 2006.
" UP v. Delos Angeles, 35 SCRA 102 (1970); Cruz v. IAC, G.R. No. 72313, December 29, 1989.
" IV Tolentino 177-178.

30

31

5. Rescission may be availed of by the injuredparty. A party

may not seek rescission if he was the one who prevented
the .other party from fulfillment of the obligation.93

cannot demand specific performance (or even rescission

under Art.
a.

in a

contract to sell

a parcel of land, the

payment of the contract price. Until then, ownership

remains in the seller. If the price is not paid, the

rescission may be ordered as to the portion which remains

obligation to convey title does not arise, and the buyer

unfinished. 94

cannot compel performance.99

7. The right to rescind may be waived, expressly or impliedly.

unqualified acceptance of late payments is an

implied waiver of the right to rescind on the basis of such

late payments. 95

8. In case of rescission, mutual restituiion is required., This

'
means bringing the parties back to their original status
prior to the inception of the contract.96 They must return to
each other. what they respectively reserved (less damages,
if proper).

b.

Also, in a contract to sell scrap iron upon the buyer's

opening of a letter of credit, the seller cannot be
compelled to sell if the buyer failed to open a letter of
credit.100

3. Where the plaintiff is t11e party who did not perform his
undertaking under the contract, he is not entitled to insist
upon the performance of the contract by the defendant, or
recover damages by reason of his own breach.101

4. The right to demand specific performance is without

B. SPECIFIC PERFORMANCE

prejudice to the rights of third persons who have acquired

1 . Specific performance is a remedy which is alternative to

rescission. The injured party caunot have both. Thus, e.g., ,
the lessor cannot rescind the contract and recover
possession of the leased property, and at the same time
demand future rents. 97

2.

e.g.,

obligation to covey title is conditioned upon full

6. In exceptional cases, partial rescission may be ordered.

Example: when a construction is already 75% complete,

Example:

Thus,

191 1).98

the thing, in accordance with Articles

the Mortgage Law. (Art.

1385 and 1388 and

1 191)

Thus, the obligee may no longer demand specific

performance if the thing to be given has already
been sold by the obligor to a ihird party in good

The breach contemplated in Art.

1 9 1 1 is the obligor's

faith.

failure to comply with an obligation already extant. If the

obligation is subject to a suspensive condition which has
not been fulfilled, the obligation did not even arise or exist,
and could not have been breached. Thus, the other party

" Penalosa v. Santos, G.R. No. 133749, August 23, 2001.

" Spouses Francisco v. DEAC Construction, Inc., G.R. No. 171312, February 4, 2008.
95 Development Bank of the Phlllppines v. CA, G.R. No. 137557, October 30, 2000.
96 Laperal v. Solid Homes, Inc., G.R. No. 130913, June 21, 2005, 460 SCRA 375; Unlad
Resources Dev't Corp. v. Dragon, G.R. No. 149338, July 28, 2008.
" Rios v. Jacinto, 49 Phil. 7 (1926).'

" Ong v. CA, 310 SCRA 1 (1999).

99 Ong v. CA, 310 SCRA 1 (1999).
100 Visayan Sawmill, Inc. v. CA, G.R. No. 83851, March 3, 1993.
101
Seva vs. Alfredo Beiwin, 48 Phil. 581; Boysaw v. lnterphil Promotions, Inc., G.R. No. L22590, March 20, 1987.

32

33

C. DAMAGES
I.

Damages shall be awarded

in

either

Chapter 4

case of specific

Kinds of Obligations

performance or rescission of the obligation.

In case of rescission, the damages must be those

consistent with the abrogation of the contract, and not

.those

which

performance.

effectively

amount

to

specific

Thus, in case a lease is rescinded, the

lessor may demand rental arrears and damages done to

0
the leased property, but not future rents. 1 2

2.

Interest may, in the discretion of the court, be allowed upon

damages awarded for breach of contract. (Art.

221 0)

3. In case both parties have committed a breach 1of the

obligation -

a.

J.

PURE AND CONDITIONAL OBLIGATIONS

A. DISTINCTION BETWEEN PURE AND CONDITIONAL
1. Pure
a

a.

This is subject to the discretion of the court on

what is equitable under the circumstances. 104

b.

The

necessity

considered

time.
b.

nothing

not

can

payable upon demand.

2 . Cond itio nal - In conditional obligations, the acquisition of

rights, as well as the extinguishment or loss of those
already acquired, depends upon the happening of a

A condition is a future and uncertain event, or a past

event unknown'to the parties. (Art.

i.

"Future and uncertain event"

102

34

because

is

a loan which provides no condition or

period for repayment, 1 06 a "demand note" which is

a.

Rios v. Jacinto, 49 Phil. 7 (1926).

'" Ong v. Bognalbal, G.R. No. 149140, September 12, 2006.
"' Ong v. Bognalbal, G.R. No. 149140, September 12, 2006. See also art. 2215.

demand

Examples:

extinguished, and each shall bear his own damages.

1 192)

condition,

actual

!OS

condition. (Art. 1 1 81)

(Art.

of an

1 1 79)

prevent a creditor from making a demand any

If it cannot be determined which of the parties first

violated the contract, the same shall be deemed

1 1 79, 1 1 81, 1 193)

A pure obligation is demandable at once. (Art.

The second infractor is not liable for damages at

liable are compensated by the mitigation of the
103
first infractor' s liability.

(i.e., a future and uncertain event, or a past

which must necessarily come). (Arts.

1 1 92)

all; the damages for which he would have been

obligation whose performance does not depend on

event unknown to the parties) or a period (i.e., a :future day

The liability of the first infractor shall be equitably

tempered by the courts. (Art.

condition

105 IV Tolentino 143.

'' Floriano v. Delgado, 1 1 Phil. 154 (1908).

35

1 1 79)

Despite the language of Art.

to "future

or

uncertain event," a condition

must be both future

and

uncertain.

1 . Suspensive and Resolutory

If the

element of uncertainty is lacking, it becomes a

period,

B. KINDS OF CONDITIONS

1 179 which refers

which is a "day certain" or that which

a.

must necessarily come, although it may not be

known when. (Art.

Suspensive condition (also known as condition

precedent) - if the acquisition of rights is dependent on
the condition.

1 193)

Thus, a

condition is uncertain to hapjJen, while

a period is certain to come. Passing the bar is

b.

Resolutory
subsequent)

condition
-

(also

known

as

condition

if the extinguishment of rights already

'

acquired is dependent on the condition.

a condition; while death of a particular person

is period.
ii.

2. Potestative, Casual or Mixed

a.

"Past event unknown to the parties"

Potestative

Condition - if the fulfillment of the

condition depends on the will of one of the parties.

past . . event, having happened already, is

always

certain.

It

knowledge

of that

uncertain.

Example:

is

only

the

parties'

event which may

be

after bar exam results

were released but before they were published,

i.

The conditional obligation (not just the condition)

is

void

when the fulfillment of the condition

depends upon the

sole will of the debtor. (Art.

1 1 82)

a father says to his son, "I will give you a car if

you passed the bar exams."
b.

If the condition is

suspensive,

(1)

E.g., when the obligor says "I will pay you

when I like it (or when I consider it properJi'

In this case, the obligation is illusory or not

the obligation is not

meant to be fulfilled.1'

demandable until the performance of the condition.

When the consent of a party to a contract is given

An offer to pay the value of the stock

subject to .the fulfillment of a suspensive condition,

subscription after the offerer had harvested

the contract is not perfected unless that condition is

fish is a condition dependent upon her sole

first complied with.107

will and, therefore, potestative in nature

and renders the obligation void.109

c.

If the

condition is

resolutory,

the obligation

is

demandable at once, but without prejudice to the

effects of the happening of the event. (Art.

1 179)

(2)

However, when the debtor binds himself to

pay when his means permit him to do so, the
obligation shall be deemed to be one

'' Ruperto v. Kosea, 26 Phil 227, December 4, 1913; Gonzales v. Heirs of Cruz, G.R. No,
131784, September 16, 1999.
36

'' Vda. De Mistica v. Spouses Nagial, G.R. No. 137909, December 1 1 , 2003.
''Trillana v. Quezon College, Inc., 93 Phil. 383 (1953).
37

with a

period. (Art. 1 1 80)

provision of

.l

It is subject to the

Art. 1 1 97,

11.

i.e., the creditor's

i.e., the debtor had already decided to sell h!s

property, which sale is dependent on external

remedy is to file an action to fix a period.

factors like the availability of a buyer.112

(3) This rule applies only when the condition is

suspensive. 110

When the potestative condition

resolutory, the obligation is valid.111 ,

Example: "I will allow you to use my house
until I want to get it back."
is

ii.

if

the

fulfillment of the condition depends on the

sole

The

conditional

obligation

is

valid

"I will give you this ring ifyou marry my son."

3. Impossible and Unlawful Conditions

a. .

ii.

Conditions which

impossible,

impossible

are

unlawful

give birth;
or

juridically

because contrary to good customs or

public policy or prohibited by law. (Art.

b. Casual Condition - if the fulfillment of the conditin

depends upon chane or the will of third persons (not

the will of any of the contracting parties).

1 1 83)

Example: payment of money conditioned upon

killing someone or seducing a third person's

i.

The conditional obligation is valid. (Art.

ii.

Example: "I will give you my umbrella if it rains

after our dinner," or "I will give you my car ifyour
son learns how to drive."

wife.

1 1 82)
b.

The impossible or unlawful conditions shall annul the

obligation which

depends upon them. (Art.

1 183)

Note that this rule applies only to contracts or

Mixed Condition - if the fulfillment of the condition

onerous obligations.

and other circumstances, including the will of third

provisions) with impossible or unlawful condition,

i.

only the
(Arts.

The conditional obligation is valid. (Art.

Vda. De Mistica v. Spouses Nagiat, G.R. No. 137909, December 1 1 , 2003.

Taylor vs. Uy Tieng Piao, 43 Phil. 873 (1922).
38

In gratuitous obligations

(simple/remuneratory donations and testamentary

depends upon the will of one of the contracting parties

persons.

111

Conditions which are physically

Example: condition that a man

Example: "I will give you P500 ifyou wart it"

or "I will give you my house if you enter the
priesthood."

110

These conditions refer to:

i.

will of the creditor.

c.

Examples: "I will pay you as soon as I receive the

proceeds from the sale of my property in Spain",

condition

is void or deemed not imposed.

727, 873) This is because in the latter, the

true consideration is the liberality of the donor or

1 1 82)

testator.

11'

Hermosa v. Longora, 93 Phil. 977 (1953).

39

2. The condition that some event will not happen at a

determinate time shall render the obligation effective from
the moment the time indicated has elapsed, or if it has
become evident that the event cannot occur. (Art. 1 1 85)

c. If the obligation is divisible, that part thereof which is

not affected by the impossible or unlawful condition
shall be valid. (Art. 1183)

Example: "I will pay you Pl,000 ifyou give me

your book, and an additional P500 ifyou can make
it dance. " The first obligation is valid, but the

Example: payment of money to X and Y on the

condition that they will not marry each other. until they
are both 25 years old - the obligation becomes
effective if they both reach their 25th birthday without
marrying each other, or if Y dies before her 25th
birthday.

second is not.
d. The condition not to do an impossible thing shall be
considered as not having been agreed upon. (Art. 1 183)
The obligation remains valid and becomes a pure one.

If no time has been fixed, the condition shall be

deemed fulfilled at such time as may have probably
been contemplated, bearing in mind the nature of the
obligation. (Art. 1 1 85) .

Example: "I will pay you Pl, 000 if you do not

make this car swim."
e. Art. 1 1 83 refers to the impossibility of condition
existing at the time of the creation of the obligation; in
such a case, the obligation is rendered void ab initio. It
should not be confused with exfinguishment of the
obligation due to impossibility of performance (Art.
1266), or because it has become certain that the
condition will not be fulfilled (Art. 1 1 84). 113

3 . The condition shall be deemed fulfilled when the obliger

voluntarily prevents its fulfillment. (Art. 1 1 86)
a. Example: .the manager under a management contract
- who is unjustly prevented by the other party to perform
his management duties is still entitled to his
management fees.114

C. CONSTRUCTIVE FULFILLMENT

b. The obliger's prevention must be unjustifiable for it to

constitute constructive fulfillment. If there is legal or
contractual basis for the prevention, there is no
constructive fulfillment.115

1. The condition that some event happen at a determinate

time shall extinguish the obligation as soon as the time
expires or if it has become indubitable that the event will
not take place. (Art. 1 1 84)

Examples: if the owner of the house stops work on

Example: payment of money on the condition that X
must pass the bar exams by 2015 the obligation is
extinguished if 2015 expires without X passing the bar,
or ifX dies before then.

his house because the contractor violated certain

city ordinances, or if the obliger cancels a contract
upon a an stipulation that he has a right to do so.116

1 14

Nielson & Company, Inc. v. Lepanto Consolidated Mining, G.R. No. L-21601, Decembe r 17,
1966.
m 1v Tolentino 162.
11' Taylo r v. Uy Tieng Piao, 43 Phil. 873 (1922).

"' IV Tolentino 156156.

40

4t

c.

(a) when it

(b) when it goes

obligor voluntarily causes its fulfillment, the condition

{c) when it

Fulfillment of

Suspensive Condition.

Before the

iii. When the thing deteriorates

govern:

creditor; (Art.

The creditor may bring the appropriate actions for the

preservation of his right. (Art. 1 1 88)

iv. Ifit deteriorates

the

creditor may also cause the registration of deeds of

sale or mortgage.

v.

If the debtor has paid by mistake, he may recover the

1 1 88)

to give (a determinate thing), the

following rules shall be observed in case of the
improvement, loss or deterioration of the thing during
the pende11cy of the condition:

(2)

(1) the rescission of

its

fulfillment,

with

(Art. 1 1 89)

If the thing is

improved by its nature, or by time,

creditor; (Art.

1 1 89)

improved at the expense of the debtor,

he

shall have no other right than that granted to the

usufructuary.

(Art. 1 189)

In this case, the debtor may remove the

improvements, but only if it will not cause

damage to the thing. (Art. 579)

lost through the fault of the debtor,

1 1 89)

The debtor

may also set off the improvement against the

he shall be obliged to pay damages; (Art.

42

and

the improvement shall inure to the benefit of the

vi. If it is

lost without the fault of the debt r,

the obligation shall be extinguished; (Art. 1 1 89)

The thing is lost-

obligation

Appreciation in value of land is generally a

consequence of nature and time. 1 1 7

In case of obligation

If the thing is

through the fault of the debtor, the

indemnity for damages in either case;

(iii) to compel execution of public instrument; (iv)

ii.

creditor may choose between

to enjoin debtor from concealing his property or

If the thing is

1 1 89)

thing in its deteriorated condition.

deterioration of the object of the obligation, or (ii)

same. (Art.

without thefault of the

This means that the creditor must accept the

from doing things that would cause the loss or

1.

in such a way that its

debtor, the impairment is to be borne by the

Examples: (i) creditor may sue to enjoin the qebtor

c.

disappears

recovered (e.g., jewelry is stolen).

suspensive condition is fulfilled, the following rules

b.

out ofcommerce (e.g., land is

existence is unknown or it cannot be

D. EFFECTS

a.

(e.g., house is burned

expropriated by the government), or

is not considered fulfilled.

I. Before

perishes

down), or

By analogy, if the condition is resolutory and the

1 11

Mactan Cebu International Airport Authority v. Tudtud, G.R. No. 174012, November 14, 2008.
Heirs of Tito Moreno v. Mactan Cebu International Airport Authority, G.R. No. 156273, October
15, 2003.
43

-- '

damage or deterioration he may have caused.

(Art. 580)

3. Upon Fulfillment of Resolntory Condition

a.

2. Upon Fulfillment of Suspensive Condition

a. The effects of a conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of
t'1e constitution of the obligation. (Art. 1 1 87)
i.

Thus, the creditor's right will generally prevail

over acts or dispositions made by the debtor during
the pendency of the condition.

ii. However, the debtor is generally not obliged to

give the fruits or interests received during the
1
pendency of the condition.
(!) If the obligation is reciprocal, the fruits and
interests during the pendency of the condition
shall be deemed to have been mutually
compensated. (Art. 1 1 87)
(2) If the obligation is unilateral, the debtor shall
appropriate the fruits and interests received.
(Art. 1 1 87)
Exception, if there is a contrary intention,
whether express or implied from the nature
and circumstances of the obligation. (Art.
1 1 87)
b. In obligations to do and not to do, the courts shall
deten,nine, in each case, the retroactive effect of the
condition that has been complied with. (Art. 1 1 87)

44

In obligations to give
upon the fulfillment of
resolutory condition, the obligation is extinguished and
the parties shall return to each other what they have
received. (Art. 1 190)
-

In case of loss, deterioration or improvement of the

thing, the provisions of Art. 1 1 89 (supra) shall be
applied to the party who is bound to return.
b. In obligations to do and not to do
upon the
fulfillment of the resolutory condition, the courts shall
determine, in each case, the effect of the
extinguishment of the obligation. (Art. 1 1 90, in rel. to
Art. 1 1 87)
-

II. OBLIGATIONS WITH A PERIOD

A. IN GENERAL
1. Period or Term. Obligations with a period or term are
those which become demandable or which terminate upon
the arrival of a "day certain". A day certain is that which
must necessarily come, although it may not be known
when. (Art. 1 1 93)
a. Examples: January 1, 2025 is a day certain because it
must necessarily come. The death of a certain person,
X, is also a day certain, because it must necessarily
come, although it is not known when.
b. If the uncertainty consists in whether the day will come
or not, the obligation is conditional, and it shall be
regulated by the rules of Art. 1 1 93. Examples: the sale

45

by the debtor of his other properties118 or the obtaining

arrival of the period, he may recover the thing paid or

of a loan from a bank.1 19

delivered, with the fruits and interests. (Art.

Otherwise put, a
event, as

period is a fature and certain

opposed to a condition which is a future

3. Retroactivity.

1 195)

Unlike a condition, a period has no effect

on the existence of the obligation, but only on their

demandability or performance.

and uncertain event.120

Thus, the arrival of a

period does not have a retroactive effeci.121

2. Period may be Susp ensive or Resolutory.

a.

Obligations with Suspensive Period (ex die)

- they

are obligations for ";hose fulfillment a day certain has

been fixed, and shall be demandable only when that

day comes. (Art.

Examples:
January

C. BENEFIT OF THE PERIOD

I.

In General.

Whenever in an obligation a period is

designated, it is presumed to have been established for the

benefit of both the creditor and the debtor. (Art.

1 193)
A promissory note payable ,on

a.

1 196)

Thus, in such a case, the debtor may not be compelled

to perform the obligation before the arrival of the

2025; a service which must be performed

period, and the creditor may not be compelled to

one year from the execution of the contract.

accept performance before the arrival of the period.

b.

Obligations with Resolutory Period (in diem)-

they

take effect at once, but terminate upon arrival of the

day certain. (Art.

Example:

b.

Also, because the term is generally for the benefit of

both creditor and debtor, a contract whose term has

1 1 93)

A usufruct that will end on

already expired may only be renewed if both parties

consent. 122

January

2025.
2. Exception.

The period may be established in favor of

either the creditor or the debtor, if it should so appear from

B. EFFECTS

the tenor of the obligation or other circumstances. (Art.

1. Loss, Deterioration or Improvement.

In case of loss,

1 1 96)

deterioration or improvement of the thing before the arrival

of the day certain, the rules in Article
obligations shall be observed. (Art.

1 1 89 on conditional
1 1 94)

a.

If the period is for the benefit of the debtor, he may not

be compelled to perform the obligation before the

arrival of the period, but he

2. Advance Payment by Mistake. If the

obligor is unaware

may

validly do so (pre

payment) if he so wishes.

of the period or believes that the obligation has become due

and demandable, and thus pays or delivers before the
1 18

Dandoy v. CA, G.R. No. 150089, August 28, 2007.

110 Berg v. Magdalena Estate, Inc., 92 Phil. 110.
120 Dandoy v. CA, G.R. No. 1 50089, August 28, 2007.
46

121 IV Tolentino 186-187.

122 Fernandez v. CA, 166 SCRA 577 (1988); LL and Co. v. Huang Chao Chun, G.R. No. 142378,
March 7, 2002; Josefa v. San Buenaventura, G.R. No. 163429, March 3, 2006.
47

Example:

If the obligation provides that payment

d.

may be made "within" the stipulated period, or "on

When

the

debtor

violates

any

undertaking,

in

or bfore" the stipulated date, the period is for the

consideration of which the creditor agreed to the

benefit of the debtor.

period; or

The debtor then has the

right, but not the duty, to pay before the deadline.

e.
b.

If the period is for the benefit of the creditor, he may

.not be compelled to accept performance before the
arrival of the period, but he

may

When the debtor attempts to a.bscond.

D. FIXINGOF PERIOD

validly demand

I. When Applicable. The courts may fix the duration of the

performance if he so wishes.

period in the following cases:

The creditor may decline pre-payment for various

a._ If the obligation does not fix a period, but from its

reasons - he may want the interest on his money,

nature and the circumstances it can be inferred that a

he may want to avoid the risk of holding his

period was intended. (Art. 1 197)

money, or the risk of near-term deprecia\ion in

currency, etc.

'

1.

Examples: When the debtor undertakes to pay "as

ii.

Example: When a donation imposes conditions but

3. Loss of the Benefit of the Period. The debtor. shall lose

the right to make use of the period (i.e., the creditor may

demand perfom1ance by the debtor even before the arrival

of the period) in any of the following cases:
a.

(Art. 1 198)

does not fix the period within which to comply

2
with them, the court must fix the perio.d. 1 7

When after the obligation has been contracted, he

becomes insolvent, unless he gives a guaranty or
security for th debt;

b.

12
soon as possible,"1 24 or as soon as he has money, 5
126
or when his means permit
or "little by little",
.
him to do so. (Art. 1 1 80)

1
In one case, 28 the Supreme Court held that

When he does not furnish to the creditor the guaranties

compliance with condition to build a school

or securities which he has promised;

had already been delayed for more than

50

years, it was no longer necessary to fix a

c.

When by his own acts he has impaired said guaranties

period.

The correctness of this ruling is

or securities after their establishment, and when

through a fortuitous event they disappear, unless he'
immediately gives new ones equally satisfactory;
Debtor's failure to renew or extend the
12
surety bond he furnished. 3

Example:

123

Gaile v. Fonacier, G.R. No. L-11827, July 31, 1961.

48

1"

Gonzales v. Jose, 66 Phil. 369 (1938).

See Patente v. Omega, 93 Phil. 218 (1953). The Supreme Court should have applied Article
1197 (Art. 1 1 28, old CC), instead of Art. 1182 (Art. 1 1 1 5, old CC). The clause "as soon as
possible or as soon as I have monej' indicates that a period was intended. Besides1 application
of Art. 1182 would have resulted in a pure obligation, instead of one where the court may fix the
period.
120 Seoane v. Franco, 24 Phil. 309 (1913).
m Barretto v. City of Manila, 7 Phil. 416 (1907).
1 28 Central Philippine University v. CA, 246 SCRA 51 1 (1995).
12s

49

doubtful. First, there is no such exoeption in

1 1 97 requiring the fixing of a period.

Second, it is necessary to fix a period if only to

Art.

Ill. ALTERNATIVE AND FACULTATIVE OBLIGATIONS

A. ALTERNATIVE OBLIGATIONS, IN GENERAL

fix the time from which the 4-year prescriptive

period for revocation should be reckoned.129

I. Alternative Obligation.

In an alternative obligation, there

is more than one object, and the fulfillment of one is

b.

If the period depends

upon the will of the debtor.

(Art.

1 1 97)
But if the performance of the obligation depends

upon

the

sole

will

of. the

debtor

In case of

breach of reciprocal obligation,

a.

1 1 91)

(i) obligation to deliver a TV

or

either a TV or a refrigerator, not both; (ii) obligation of

1 1 82)

a fire insurance company to rebuild the insured house

destroyed by fire or to pay its value.133

the court

may fix a period '(instead of ordering rescissi<;m) if

there is a just cause for the same. (Art.

Examples:

refrigerator - it is sufficient for the debtor to deliver

(purely

potestative), the obligation is void. (see Art.

c.

sufficient, determined by the choice of the party who has

the right to choose.1 32

'

b.

Contrast with Conjunctive Obligation:

There are also

several objects, which must all be fulfilled.134

2. Premature Until Period is Fixed. Until the period is first

Obligation to deliver a TV and a

determined, there can be no breach of contract or failure to

0
perform the obligation.1 3 Before the fixing of the period,

Example:

it would be premature for the creditor to complain of the

debtor's alleged breach.1 3 1

refrigerator.

refrigerator - the debtor must deliver both TV and

c.

3. Standard in Fixing the Period. In every case, the courts

shall

determine

such

period

as

may

under

the ,

circumstances have been probably contemplated by the

parties. (Art.

1 1 97)

Contrast with Facultative Obligation:

There is only

one object, but the debtor may substitute another

object.

2. Complete Performance. A person altenratively bound by

different prestations shall completely perform one of them.

4.

Finality. Once fixed by the courts, the period cannot be

changed by the courts. (Art. 1 197)

(Art. 1 199)
The creditor cannot be compelled to receive part of one
and part of the other undertaking. (Art.

129 SPJ dissent of J. Davide In Central Philippine University v. CA, 246 SCRA 511 (1995).
"' Ungson vs. Lopez, 50 Off. Gaz. 4297; Concepcion vs. People of the Philippines, 74 Phil. 63;
Gonzales vs. De Jose, 66 Phil .. 369; Pages v. Basilan Lumber Company, G.R. No. L10679, November29, 1958,
131 Spouses Vasquez v. Ayala Corp.. G.R. No. 149734, November 19, 2004; Spouses Edrada v.
Spouses Ramos, G.R. No. 154413, August 31, 2005.

50

1 1 99)

"'See Chavez v. PEA-Amari, G.R. No. 133250, May 6, 2003. J. Ynares-Santiago, dissenting.
"' Ong Guan Can v. Century Insurance Co., Ltd., 46 Phil. 592 (1924).
"' IV Tolentino 203.
51

B. RIGHT TO CHOOSE, BY DEBTOR

I.

General Rule. The right of choice belongs to the debtor.

(Art.

1200)

of the obligation, the latter may

damages. (Art. 1203)

rescind

the contract with

5. In Case of Loss of Alternative Prestations.

Exception: Unless it has been expressly granted to the

a.

creditor.

Loss ofAll
i.

2. Limitations .

Due to Debtor's Fault

When, through the fault

of the debtor, all the things which are alternatively

the object of the obligation have been lost, or the

a.

The debtor cannot choose part of one prestation and

compliance

part of another prestation. (Art. 1 199)

impossible - the creditor shall have a right to

of

the

obligation

indemnity for damages. (Art.

b.

has

become

1204)

The . debtor shall have no right to choose those

prestations which are impossible, unlawful or which

could not have been the object of the obligatio .

1 200)

The indemnity shall be fixed taking as a basis

(Art.

the value of the last thing which disapp,eared,

or . that of the service which last became
impossible. (Art.

1204)

Thus, if the obligation permits payment in local or

foreign currency, but the government outlawed all

Damages other than the value of the last

foreign currency, the debtor may only pay in the

. thing or service may also be awarded. (Art.

local currency. 135

c.

1 204)

The debtor shall lose the right of choice when among

ii.

the prestations whereby he is alternatively bound, only

one is practicable. (Art.

Not Due to Debtor's Fault

If the loss or

impossibility is not, due to the debtor's fault (for

1 202)

example, because of fortuitous event, or because of

the creditor) the debtor is relieved of liability.

3 . Effectivity. The choice shall produce no effect except from

the time it has been communicated. (Art. 1201)
The selection may be made in any form, as long as it is
unequivocal. It may even be made tacitly, such as by

(A1ts.
b.

Loss ofSome
i.

actually performing the chosen prestation.

4. Impairment of Right to Choose.

If through the creditor's

remaining prestations available.

ii.

52

If only some of the alternative prestations are lost,

the debtor is not liable even if the loss is due to his
fault, because he can still comply by choosing the

acis the debtor cannot make a choice according to the terms

"' Tambunting de Legarda v. Miailhe, 88 Phil. 637.

1 1 74, 1203)

If the loss of one or some of the prestations is

to the creditor's fault,

53

due

however, the debtor may

choose to rescind the obligation with damages

(A11. 1203).

l).

l.

C. RIGHT TO CHOOSE, BY CREDITOR

1. When App licable. The creditor has the right to choose
. between alternative prestations only when it is expressly
given to him. (Arts. 1200, 1205)

obligation, there is only one principal prestation. If the

said principal prestation is void, or lost, or becomes
impossible, the obligation is extinguished, even if the
substitutes are still available. On the other hand, in an
alternative obligation, the obligation is not
extinguished by the nullity, loss or impossibility of one
or some of the alternatives, as long as other alternatives
are still available.

2. Pending tlte Creditor's Choice. Until the selection1by the

creditor, the responsibility of the debtor shall be governed
by the following rules:

2. Before Substitution - The loss or deterioration of the

thing intended as a substitute, through the negligence of the
obligor, does not render him liable. (Art. 1 206)

a. If one of the things is lost through a fortuitous event,

he shall perform the obligation by delivering that
which the creditor should choose from among the
remainder, or that which remains if only one subsists;

3. Upon Substitution - Once the substitution, has been

made, the obligor is liable for the loss of the substitute on
account of his delay, negligence or fraud. (Art. 1206)

b. If the loss of one of the things occurs through the fault

of the debtor, the creditor may claim either Any of those subsisting, or

n.

The price of that which, through the fault of the

debtor, has disappeared, with a right to damages;.

c. If all the things are lost through the fault of the debtor,
the choice by the creditor shall fall upon the price of
any one of them, also with indemnity for damages.

Note: The same rules shall be applied to obligations to do

or not to do in case one, some or all of the prestations
should become impossible. (Art. 1205)
54

Yacultative Obligation. This is when only otie prestation

has been agreed upon, but the obligor may render another
in substitution. (A1t. 1206)

Contrast with Alternative Obligation: In a facultative

2. Effectivity. When the choice has been expressly given to

the creditor, the obligation shall cease to be alternative
from the day when the selection has heen communicated to
the debtor. (Art. 1205)

i.

lill.C'llLTll.1:WE OBLlGll.TlONS

IV TOINT AND SOLIDARY OBLIGATIONS

.

A. IN GENERAL: In both joint and solidary obligations, there is a

concurrence or plurality of debtors and/or creditors in the same
obligation. They differ, however, in the extent ofthe obligation
to which each debtor can be held liable and/or the extent which
each creditor can demand. .
1-. In a joint obligation (mancomunada or pro rata), each of
the debtors is liable only for a proportionate part of the
debt; and each of the creditors is entitled only to a
55

proportionate part of the credit.

136

Otherwise put, each

that each of the debtors is liable only for a proportionate

143
part of the debt.
(Art. 1 207)

creditor can recover only his share of the obligation, and

137
each debtor can be made to pay only his part.

a.

The credit or debt shall be presumed to be divided into

as many shares as there are creditors or debtors, the

Example: The obligation is joint if

A, B, and C say
"We promise to pay P300 to X'. A, B, and C are liable
only for P 100 each.

credits or debts being considered

In a

solidary obli gati on (joint and several

or

b.

for the entire obligation, and each of the creditors is

138
Otherwise put,
entitled to demand the whole obligation.
each creditor may enforce the entire obligation, and each
139
debtor may be obliged to pay it in full.
(Art. 1207)

Thus, if the obligation or judgment holding several

persons liable is silent as to the nature of extent of their
144
liability, such liability is consideredjoint.

2. Exception.

There is a solidary liability only in any of the

following instances

Example: The obligation is solidary if A, B, and C say,

"We jointly and severally promise to pay P300 to X',
in which case A (or B or C) can be made to pay the
entire P300. The obligation is also solidary if it says
"individunlly and jointly," 140 or "together or
separate{v,'.' 14 1 or if it says, "I promise to pay"142

a.

(Art. 1207):

When the obligation expressly so states,

It is not required that the party use the precise word

"solidary"; it is enough that the obligation state, for

example, that each of the debtors can be compelled
145

signed by two or more persons.

to pay the entire debt.

b.

JOINT OBLIGATION IS THE GENERAL RULE

I . General Rule.

(Art. 1208)

juntas o

separadamente or in solidum), each of the debtors is liable

B.

from one

another, subject to the Rules of Court governing the

multiplicity of suits.

2.

distinct

In case of concurrence of two or more

When the

law requires solidarity,

Examples:

Liability for quasi-delict

(Art. 2194)
(Art. 1 10, RPC).
927, 1824, 1 9 1 1 , 1915, 2157 of the

creditors or of two or more debtors in one and the same

and liability arising from crime

obligation, the presumption is that the obligation is joint so

See also Arts.

Civil Code.
c.

When the nature

of the obligation requires solidarity.

1 36

Solidbank Corp. v. Mindanao Ferroalloy Corp., G.R. No. 153535, July 28, 2005, citing PH
Credit Corporation v. CA, 421 Phil . 821, 832, November 22, 2001; Inciong, Jr. v. CA, 327 Phil.
364, 373, June 26, 1996; Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990; The Imperial
Insurance, Inc. v. David, 218 Phil. 298, 302, November 21, 1984.
"'Ouiombing v. CA, 189 SCRA 325, 328, August 30, 1990.
138 Inciong, Jr. v. CA. G.R. No. 96405, June 26, 1996.
139 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990.
'" Ronquillo v. CA, G.R. No. L-55138, September 28, 1984.
"' "Juntos o separadamenre: Parot v. Gemora, 7 Phil. 94 (1906).
"' Paro\ v. Gemora, 7 Phil. 94 (1906).

56

Example: Liability for torts or other wrongful acts

(e.g., abuse of rights, libel, infringment, etc.) is

143

Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.

Contreras v. Felix, 78 Phil. 570 (1947).
145 Juan Ysmael & Co., Inc. v. Salinas, 73 Phil. 601 (1942).
1 44

57

considered solidary,'46 because a "moral wrong

cannot be divided into parts. "147 Thus: corporal

2. The indivisibility of performance does not prevent the

obligation from being considered joint.

directors and officers are solidarity liable with the

corporation for the te1mination of employees done
8
with malice or bad faith. 14

a.

The indivisibility of an obligation does not necessarily

give rise to solidarity. Nor does solidarity of itself
imply indivisibility. (Art.

1210)

C. EFFECTS OF JOINT OBLIGATION

b.
I.

In a joint obligation, the debt/credit is legally divided into

The indivisible obligation is still presumed

joint.

However, in such a case of joint indivisible obligation

as many shares as there e creditors or debtors, the credits

or debts being considered

distinct from one another. (Art.

1 208) Thus, because tl)e shares are distinct from each other

i.

The right of the creditors may be prejudiced only

by their collective acts, (Art.

a.

A joint creditor cannot act in representation , of the

others. Neither can a joint debtor be compelled to
answer for the liability of the others.149

1209) and

ii. The debt can be enforced only by proceeding

against ail the debtors. (Art.

1209)

(1) Since the prestation can only be performed by

b.

The effect of a

demand

or interruption ofprescription

is limited only to the particular creditor or debtor who

made or received the demand or intefl'\lption.1 50

all of the debtors, they must all be sued. If one

of the debtors cannot perform, the prestation

becomes incapable of performance and is

converted to

c.

d.

e.

liability for damages.

The

The extinguishment of the obligation of one of the

debtors are liable only for their proportionate

debtors does not affect the shares of his co-debtors.

shares in the damages.

The nullity or vices of obligation affecting one of the

(2) If one of the debtors should be insolvent, the

debtors do not necessarily extend to the shares of his

others shall not be liable for his share. (Art.

co-debtors.

1209)

The insolvency of one of the debtors does not increase

the liability of his co-debtors. (see Art.

1 209)

(3 ) Example: If X, Y and Z are. liable to deliver a

Toyota Altis to A, the obligation is

(X cannot just deliver a 1/3 Altis), and also

joint (X
"' Worcester v. Ocampo, 22 Phil. 42 (1912). Lafarge Cement v. Continental Cement
Corporation, G.R. No. 155173, November 23, 2004, 443 SCRA 522.
"' IV Tolentino 222.
"' Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, G.R. No. 1 13907, 20
April 2001, 357 SCRA 77, 93-94.
1" Sembrano v. City of Butuan, G.R. No. 1 63605, September 20, 2006.
1so Agoncillo v. Javier, 36 Phil. 424 (1916).
58

indivisible

cannot be compelled to deliver the

entire Altis alone). A must sue X, Y, and. Z

together. If Z cannot perform, the obligation is

converted to liability for the value of the Altis,

which X, Y, and Z must all pay, but only pro

rata (113 of the value for each).

59

because active solidarity is essentially a mutual

D. EFFECTS OF SOLIDARY OBLIGATION

I.

Classification a s to

agency, which involves a relation of confidence.

S nbj ect. Solidarity may be classified

as:
a.

b.

Passive Solidarity, or solidarity in the debtors - each

of the debtors can be made to answer for the others,
with the resulting right to recover from the other co

Active Solidarity, or solidarity in the creditors - each

debtors their respective shares; there is a

guaranty. 153

creditor has the authority to claim and enforce the

rights of all, with the resulting o.bligation of paying his
co-creditors their respective shares; there is

representation or agency. 151

i.

mutual

Each of the solidarity creditors may sue alone, and

discharge the el'.tire obligation.152

Each of the solidary creditors may do whatever

2. Varied Solidarity.

Thus,

solidary

creditor

manner and by the same periods and conditions. (Art.

1211)
Example:

1212)

may

P30,000.

may

effect

the

only for

2) .1 54

novation,

debt, which shall extinguish the obligation.

However, the creditor who extinguished the
obligation shall be liable to the others for the
share in the obligation corresponding to them.
111 .. A solidary creditor cannot assign his rights without

Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990.

Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990.
60

2,

(the

J may

1213)

This is

P20,000

(the portion which matures by Year

3. Extinguishment of the Obligation, In General

a.

In general,

payment of the debt to

one of the solidary

creditors, or made by one of the solidary debtors, is

sufficient to extinguish the debt. (Arts.
1.

The

paying

debtor

is

1214, 1217)

generally

entitled

to

reimbursement of t11e shares of his co-debtors.

(Art.

151

Pl0,000

In Year

sue X or Y or Z (because they are solidarily liable), but

compensation, confusion or remission of the

152

J may sue X or. Y or Z (because

portion which matures in Year I).

1215, a solidary

the consent of the others. (Art.

1,

Solidarity still exists in such a

they are solidarily liable), but only for

is beneficial to his co-creditors.

creditor

3.

scenario. In Year

to be in default and for interest to run), which

Note, however, that under Art.

X , Y, and Z are solidarily liable t o J for

X's liability matures in Year l, Y's in Year 2

and Z's in Year

interrupt

prescription or make a demand (for the debtor

(2)

Solidarity may exist although the

creditors and the debtors may not be bound in the same

may be useful to the others, but not anything which

may be prejudicial to the latter. (Art.

(1)

Mixed Solidarity, or solidarity in both the creditors and

the debtors.

payment to the suing creditor is sufficient to

ii.

c.

mutual

1 217)

"' IV Tolentino 228.

"' lnchausti & Co v. Yulo, 34 Phil. 978.

61

extinguish the obligation or the solidarity of the

obligation.155

ii. The collecting creditor is generally responsible to

give to his co-creditors their corresponding shares.
(Art. 1215)

However, in case of suretyship (wherein the

surety is solidarily liable with the principal
debtor), an extension of time granted by the
.
creditor to the principal debtor (without
consent of surety) will extinguish the liability
of the surety.'56 (Art. 2079)

b. Novation, compensation, confusion or remission of the

debt, made by any of the solidary creditors or with any
of the solidary debtors, shall extinguish the obligation.
(Art. 1215)
i.

But mere . delay by the creditor in

collecting from the debtor is not an
extension which will discharge the
surety.157 (Art. 2079)

With such extinguishment, the debtors are released

from their obligation to the creditors. However a.

As among the creditors, the creditor who may

have extinguished or collected the debt shall be
liable to the others for their correspnding
share in the credit. (Art. 1215)

b. As among the debtors, the debtor who caused

the extinguishment of the obligation is entitled
to recover from his co-debtors their shares in
whatever he may have paid. or given up to
extinguish the obligation. (see Art. 1217)
Example: If X, Y and Z are solidarily liable to
N for P30,000, which debt is extinguished by
compensation with X's credit against N for the
same amount, then N is entitled to recover
P l 0,000 each from Y and Z as their share in
the obligation.

3. Payment to Solidary Creditors

a.

If no demand has been made by the solidary creditors,

the debtor may pay any one of them (Art. 1214)
such payment will be sufficient to extinguish the
obligation.158

b. If any demand, judicial or extrajudicial, has been made

by one of them, payment should be made to him. (Art.

1214)
4. Payment by Solidary Debtors
a. Payment made by one of the solidary debtors
extinguishes the obligation. (Art. 1217)

ii. In case the remission was made after the. debt had
already been totally paid, apply Art. 1219 (infra).
iii. Novation. - generally, a mere extension of time
for payment given to some of the solidary debtors
does not constitute a novation which will

62

1'' lnchausti & Co v. Yulo,

34 Phil. 978.
"' El Banco Espanol Filipino v. Donaldson Sim & Co., 5 Phil. 418 (1905); Radio Corp. of the
Philippines v. Roa, G.R. No. 42829, September 30, 1935; Cochingyan v. R & B Surety and
.
Insurance Co., 151 SCRA339 (1987). See also Art. 2079.
157 Palmares v. CA, G.R. No. 126490, March 31, 1998; Filipinas Textile Mills, Inc. v. CA, G.R.
No. 1 19800, November 12, 2003.
155 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990.
63

ii. The debtor-payor is not entitled to reimbursement

from his co-debtors if his payment is made after.
the obligation has prescribed or become illegal.
(Art. 1218)

If two or more solidary debtors offer to pay, the

creditor may choose which offer to accept. (Art.
1217)
b. Right ofDebtor-Payor to Reimbursement
i.

(1) The debtor-payor is also not entitled to

reimbursement if he pays a debt which had
already been extinguished (e.g., already paid or
remitted)

He who made the payment may claim from .his

co-debtors only the share which corresponds to
each, with the interest for the payment already
made. (Art. 1217)

(2) In case of prescribed debt, the debtor-payor

cannot recover his payment from the creditor
under the rules on natural obligations. (Art.
1424) But in other cases where the obligation
to pay does not exist, the debtor-payer may
recover his payment from the creditor under
the rules on quasi-contracts. (Art. 2154)

(!) If the payment is made before the debt is due,

no interest for the intervening period may be

demanded. (Art. 1 2 17)

(2) When one of the solidary debtors 'cannot,

because of his insolvency, reimburse his share
to the debtor paying the obligation, such share
shall be borne by all his co-debtors, 111
proportion to the debt of each. (Art. 1217)

c. Enforcement against Solidary Debtors. The creditor .

may proceed against any one of the solidary debtors or
some or all of them simultaneously. (Art. 1216)

X, Y and Z are solidarily liable to

pay P45,000. X pays the entire debt, which is
thus extinguished. X can then recover P15,000
from Y and P1 5,000 from Z as their respective
shares (1/3 each) in the debt. In case Z is
inso lven his share shall be borne by X and Y:
Y will therefore reimburse P7,500 (in addition
to his original share of Pl5,000), while the
other P7,500 will be a loss shouldered by X.

Example:

i.

The choice is left to the solidary creditor to

determine against whom he will enforce
collection:''

ii. The creditor may sue any of the solidary co

debtors; he need not implead all of them as they
are not indispensable parties.161
iii. The creditor may aiso choose to collect only part
of the debt from some of the solidary debtors, and
the remaining part from the other solidary debtors.

(3) Note that if the payor is merely a surety, he is

not principally liable for the debt. Thus, he
may generally recover from the principal
debtors the entire payment he has made. 159
160

Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.

Quiombing v. CA, G.R. No. 93219, 30 August 1990, 189 SCRA 331; Amor de Castro v. CA,
G.R. No. 1 1 5838, July 18, 2002; Cerezo v. Tuazon, G.R. No. 141 538, March 23, 2004.
161

1"

See Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.
64

65

Such course of action does not convert the solidary

fault of the solidary debtors, the obligation shall be

obligation into a joint one.162

extinguished. (Art.

iii. The demand made against one of them shall not be

an obstacle to those which may suqsequently be

With Fault or Delay - If there was fault on the part of

any one of them, all shall be responsible to the creditor,

b.

directed against the others, so long as the debt has

not been fully collected. (Art.

for the price and the payment of damages and interest.

1 2 1 6)

(Art.

6. Remission of Debt
a.

i.

Remission of a. Share after Payment.

ii.

the solidary debtors does not release the latter from his
responsibility towards the co-debtors, in case the debt

1.

ii.

debt which had already been extinguished by

due to fortuitous event.

a.

As mentioned, the creditor may proceed against any

one of the solidary debtors or some or all of them

The remission of the

whole obligation, obtained by one of the solidary

debtors, does not entitle him to reimbursement from his

co-debtors. (Art.

1 220)

b.

Because the debtor who obtained the remission did

not pay or lose anything.

(Art. 1221)

8. Defenses of Solidary Debtors

simultaneously. (Art.

Remission of the Entire Debt.

in delay through

the creditor, even if the loss or impossibility was

payment
b.

The same rule applies if the thing is lost or the

the judicial or extrajudicial demand upon him by

The debtor whose share was "remitted" must still

Strictly speaking, there can be no "remission" of a

1221)

the solidary debtors has incurred

pay his share to reimburse the debtor-payor.

But the faultless debtors may recover against the

performance has become impossible after one of

had been totally paid by anyone of them before the

1219)

1221)

guilty or negligent debtor. (Art.

The remission

made by the creditor of the share which affects one of

remission was effected. (Art.

1221)

1216) The choice is left to the

solidary creditor to determine against whom he will

enforce collection.163 He need not implead all of them
.
'
4
as they are not md'1spensable part1es. 1 6
A so!idary debtor may, in actions filed by the creditor,
avail himself of the following defenses1 65:
i.

Defenses which are derivedfrom the nature of the

obligation
these are defenses which pertain to
-

7. Loss or Impossibility of Performance

a.

Without Fault or Delay

If the thing has been lost or

if the prestation has become impossible without the

'" Republic Glass Corp, v. Qua, G.R. No. 144413, July 30, 2004.
66

the validity or enforceability of the obligation.

'" Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.
164 Quiombing v. CA, G.R. No. 93219, 30 August 1990, 189 SCRA 331; Amor de Castro v. CA,
G.R. No. 1 15838, July 18, 2002; Cerezo v. Tuazon, G.R. No. 141538, March 23, 2004.
'" Lafarge Cement v. Continental Cement Corporation, G.R. No. 1 55173, November 23; 2004,
443 SCRA 522.
67

They are total defenses (the debtor cannot be held

liable at all).

and a partial defense). As to the share of Z, X

can raise the derense that it has not yet become
due (a defense pertaining to Z's share, and a
partial defense).

ii. Defenses which are personal to him or pertain to

his own share;

(c) lfZ is sued in Year 2, he can be held liable

for P l 0,000 corresponding to X, which had
already. become due. As to the share of Y, Z
can invoke Y's insanity (a defense personal to
Y, and a partial defense). As to . his own share,
Z can rais"e the defense that it has not yet
become due (a .defense pertaining to his own
share, and a partial defense).

(1) Defenses which are personal to the defendant

debtor. (such as minority, insanity or vitiated

consent) are total defenses.

(2) Defenses which pertain to the share of the

defendant-debtor (e.g., that his share is not yet

due or has. already been extinguished) are
partial
defenses, i.e., the defendant cannot be
.
held liable for the portion correspondipg to
him, but he can still be held liable for the
shares of his co-debtors.166 .

V. DIVISIBLE AND INDIVISIBLE OBLIGATIONS

A. IN GENERAL

iii. Defenses which personally belong to the other

debtors (or pertain to their shares) - these are
partial defenses, i.e., the defendant-debtor cannot
be held liable for the portions corresponding to the
debtor with the defense.167 (Art. 1 222)

1.

it cannot be validly performed in parts, whatever may be

the nature of the thing which is the object thereof. 168

2. Divisible Obligation. An obligation is divisble when it can

be validly performed in parts.

Example: X, Y, and Z are solidarily liable to J

for P30,000. X's liability matures in Year l , '

Y ' s in Year 2 and Z's in Year 3. Y was insane
at the time the obligation was contracted.

B. DISTINGUISHED FROM DIVISIBILITY OF THING

I. The divisibility of the obligation refers to the prestation,
and not to the object thereof.169 Divisibility of obligation
refers to its susceptibility of partial performance.
Divisibility of the object refers to its capacity to be
divided into .parts without diminishing its value
disproportionately.

(a) If Y is sued, he can invoke his insanity and

be excused altogether (a defense personal to
him, and a total defense).
(b) If X is sued in Year 2, he can only be held
liable for P l0,000. As to the share ofY, X can
invoke Y's insanity (a defense personal to Y,
16'

"' lnchausti & Co v. Yulo, 34 Phil. 978.

"' lnchausti & Co v. Yulo, 34 Phil. 978.

169

68

Indivisible Obligation. An obligation is indivisible when

Nazarenov. CA, G.R. No. 138842; October 18, 2000.

Nazareno v. CA, G.R. No. 138842, October 18, 2000.
69

An obi igation may be considered indivisible even

when its object is divisible.
For example, the
obligation to pay insurance premium is generally
considered indivisible/70 even if the sum of money to
be paid is divisible.

D. DETERMINING DIVISIBILITY
1 . Indivisible. (a) Obligations to give definite things and (b)
those which are not susceptible of partial performance
shall be deemed to be indivisible (see Art. 1233)

2. The divisibility or indivisibility of the things that are the

object of obligations in which there is only one debtor and
only one creditor does not alter or modify the nature or
effects of the obligation. (Art. 1223)
c.

2. Divisible. When the obligation has for its object the

execution of a certain number of days of work, the
accomplishment of work by metrical units, or analogous
things which by their nature are susceptible of partial
performance, it shall be divisible. (Art. 1225)

JOINT INDIVISIBLE OBLIGATION: A joint indivisible

obligation is an obligation of several debtors where each debtor
is liable only for his part (joint) but the obligation cannot be
validly performed in part .(indivisible). Thus, it must be
performed by all of the debtors, and it can be enforced nly by
proceeding against all of them. (Art. 1209)
If any of the debtors does not comply with his undertaking, the
joint indivisible obligation gives rise to indemnity for damager..
The debtors who may have been ready to fulfill their promises
shall not contribute to the indemnity beyond the corresponding
portion of the price of the thing or of the value of the service in
which the obligation consists. (Art. 1 224)

However, even though the object or service may be

physically divisible, an obligation is indivisible if so
provided by law or intended by the parties. (Art. 1 225)
3. in obligations not to do, divisibility or indivisibility shall
be determined by the character of the prestation in each
particular case. (Art. 1225)

VI. OBLIGATIONS WITH A PENAL CLAUSE

A. IN GENERAL

Example: A, B, and

C are jointly liable to deliver a laptop

computer valued at P30,000 to X. The delivery can only be
done by all of the debtors. If C cannot deJiver, the obligation to
deliver the laptop gives rise to an obligation to indemnify X for
P30,000. A and B, who were ready to perform, can only be
held liable for P l 0,000 each.

1 . Definition. A penal clause is an accessory obligation

which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing
on the debtor a special prestation (generally consisting in
the payment of a sum of mony) in case the obligation is
not fulfilled or is irregularly or inadequately fulfilled.171

Example: A lease contract may provide that in case of

breach, the lessee would forfeit his rental deposit,1 72 or

171

"'.Makati Tuscany Condominium Corp. v. Court of Appeals, G.R. No. 95546, 6 November 1992,
215 SCRA 462, 466.

Pryce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005.

Country Bankers Insurance Corp. v. Court of Appeals, G.R. No. 85161, 9 September 1991,
201 SCRA 458, 464-465; Fort Bonifacio Development Corp. v. Yllas Lending Corp., G.R. No.
158997, October 6, 2008.

70

71

172

should pay the rentals corresponding to the rema1rung

period of the lease.173 A stipulation for attorney's fees is
also considered a penal clause.114

b. The penalty may be enforced only when it is

demandable in accordance with the provisions of the
Civil Code. (Art. 1226)

2. Functions. A penal clause serves (a) to strengthen the

2. Exceptions: Penalty as Cumulative Remedy. Damages

3. Effect of Nullity. The nullity of the.penal clause does not

carry with it that of the principal obligation. (Art. 1 230)

a. If there is stipulation for this;

b. If the obligor refuses to pay the penalty; or
c. If the obligor is guilty of fraud in the fulfillment of the
obligation. (Art. 1226)

may still be demanded. (in addition to the penalty178) in the

following exceptional cases;

coercive force of the obligation; (b) to provide for

liquidated damages resulting from a breach of
obligation;175 and (c) to punish the obligor.176

a.

But the nullity of the principal obligation carries with it

that of the penal clause. (Art. 1230)

In the foregoing cases, the purpose of the penlty is to

punish the obligor for the breach. rn

b. This is because the penal clause is just an accessory .

obligation.

3. Limitations.
a.

B. EFFECT

1 . General Rule: Penalty as Alternative. In obligations with

The debtor cannot exempt himself from the

performance of the obligation by paying the penalty.

(Art. 1 227)

a penal clause, the penalty shall substitute the indemnity

for damages and the pa0nent of interests in case of
noncompliance. (Art. 1 226)

Except in case where this right has been expressly

reserved for the debtor. (Art. 1227)

a. Proof of actual damages suffered by the creditor is not

necessary in order that the penalty may be demanded.
(Art. 1228)

b. The creditor cannot demand the . fulfillment of the

obligatio.n and the satisfaction of the penalty at the
same time. (Art. 1227)
a.

Thus, there is no difference between penalty and

liquidated damages in terms of their legal
results.177

"' Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005.

Yap Tico & Co. v. Alejano, 53 Phil. 986 (1929).
m Llgutan v. CA, G.R. No. 138671, Februaiy 12, 2002.
1 76 Pamintuan v. CA, G.R. No. L26339, December 14, 1979.
m Lambert vs. Fox, 26 Phil. 588 (1914); Yap Tico & Co. v. Alejano, 53 Phil. 986 (1929);
Pamintuan v. CA, G.R. No. L-26339, December 14, 1979.

b. However, if after the creditor has decided to

require the fulfillment of the obligation, the
performance thereof should become impossible

i2

Except in case this right has been clearly granted to

the creditor. (Art. 1 227)

Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005, citing Ligutan v. CA, G.R. No.
138671, Februaiy 12, 2002.
17' Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005.
73

without his fault, the penalty may be enforced.

(Art. 1227)

Chapter 5

Extinguishment of

C. REDUCTION OF PENALTY
1 . Partial or Irregular Compliance.

The judge

Obligations

shall

equitably reduce the penalty when the principal obligation

has been partly

or irregularly complied with by the debtor.

(Art. 1228)

1. IN GENERAL

2. Iniquitous or Unconscionable Penalty.

Even if there has

been no performance, the penalty

may also be reduced by

the courts if it is iniquitous or unconscionable. (Art. 1 228)

A. Art.

1.

courts. To be considered in fixing the amount of

2.
3.
4.

penalty are factors such as:

1.

The type, extent and purpose of the penalty;

ii.

The nature of the obligation;

iii. The mode of the breach and its consequences;

iv. The supervening realities; and

v.

The standing and relationship of the parties.1 80

enumerates the following causes of extinguishment

Book IV of the Civil Code:

The question of whether a penalty is reasona)lle or

iniquitous is addressed to the sound discretion ' of the

123 1

of obligations which are governed by Chapter 4, Title

V of

Payment or performance;
Loss of the thing due;

Condonation or remission of the debt;

Confusion o r merger of the rights o f creditor and debtor;
Compensation; and

5.
6.

Novation.

B. Other causes of extinguishment of obligations which are

governed elsewhere in the Civil Code:

I.

Annulment;

2.

Rescission;

4.

Prescription.

(Art. 1231)

3 . Fulfillment of a resolutory condition; and

C. Other causes of extinguishment not mentioned by Art.

1.

1 23 1 :

Death - it extinguishes obligations which are purely

1
personal 1 8 (e.g., support; criminal liability and the civil
.
1 82
obl'1gatton ar1s1ng
' .
ftom cnme.
'
);

Pryce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005, citing Ligutan v. CA, G.R. No.
138677, February 12, 2002.

181 Lapuz Sy v. Eufemlo, 43 SCRA 177, January 31, 1972; Javier Security Special Watchman
Agency v. Shell.Craft & Button Corp., 1 1 7 Phil. 218, January 31, 1963.
"' Republic v. Cojuangco, Jr., G.R. No. 139930, April 17, 2006.

74

75

1ao

2.

Arrival of resolutory period;

3.

Mutual desistance - since mutual agreement can create a

B. PAYMENT BY THE PROPER PERSON

contract, mutual desistance by the parties can cause its
extinguishment1 83;

I . In General. The obligation must be paid by the debtor, and

the creditor is entitled to demand payment by the debtor.
(see Art.

4. Unilateral desistance - some contracts, such as agency and

Moreover, in obligations to give, the payment must be

partnership, may be terminated by the will of one of the

made by one who has: (a) the free disposal of the thing

parties.

II.

1236)

due; and (b) capacity to alienate. (A1t. 1239)

Without these two requisites, the payment shall not

PAYMENT OR PERFORMANCE

be valid. (Art. 1 239185)

A. IN GENERAL
2.

payment or performance

by a third person who has no

interest in the fulfillment of the obligation. (Art. 1236)

Payment means not only the delivery of

I . Definition.

money but also the performance, in any other manner, of

an obligation. (Art. 1232)

2.

Requisites.

a.

paid unless

the thing or service in which the obligation

consists has been completely delivered or rendered, as the

b.

A partial payment made by

a stranger to the obligation

running of the period of prescription with respect to the

. remainder of the debt. 186

Requisites for the payment to extinguish the obligation (see

3.
a.

If there is a stipulation to the contrary.

without the authorization of the debtor will not stay the

1233)

discussion below):184

Exception:

(Art. 1236)

A debt shall not be understood to have been

case may be. (Art.

The creditor is not bound to accept

Third Party Payor.

Rights of the Third Party"Payor.

Identity of the prestation - the very thing due must be

delivered or released. (See Art. 1244; infra)

a.

If the payment was

with the knowledge and consent of

the debtor b.

Integrity of the prestation - the prestation must be

fulfilled completely. (see Art. 1248;

infra)

i:

The payor can demand from the debtor what he has

paid (full reimbursement). (Art.

c.

Payor - payment must be made by theproper person.

d.

Payee

payment must be made to

the proper person.

Saura Import & Export Co., Inc. v. DBP, G.R. No. L-24968 April 27, 1972.
"' See Alonzo v. Sps. San Juan, G.R. No. 137549, February 1 1 , 2005.

1"

76

1236)

'" Art. 1239 provides that the rule is without prejudice to Art. 1427, which provides for payments
made by a "minor between 18 and 21 years of age." Since the age of minority is now 18 years,
Art. 1427 may be considered inoperative.
186 Agoncillo v. Javier, 38 Phil. 424 (1918).
77

disobeyed the latter's instruction or exceeded

If the payor does not intend to be reimbursed

his authority),

by the debtor, the payment is deemed to be a

donation, which requires the debtor's consent.

ii.

him in his rights, such as those arising from a

mortgage, guaranty, or penalty. (Art.

subrogate the payor, this cannot be done

see also Art.

without the debtor's consent.191

1302[1])
b.

If the payment was

C, PAYMENT TO THE PROPER PERSON

without the knowledge or qgainst

the will of the debtor '

1 . In General.
i.

The payor can demand from the debtor what he has

following:

beneficial to the debtor. (Art.

a.

paid, but only insofar as the payment has been

(1)

1236)

Thus, the payor cannot recover overpayment,

The person in whose favor the obligation has been

constituted, or his successor in interest; (Art.

2. Payment to Wrong Party.

Payment made to a wrong

party does not extinguish_ the obligation, if there is no fault

or negligence on the part of the creditor. Such payment is

from the recipient of the payment which is

1
not due. 89

void even when the debtor acted in utmost good faith, or by

mistake, or through error induced by the fraud of a third

person. Such payment does not prejudice the creditor, and

accrual of interest is not suspended by it.192

An insurance agent who pays the claim of the

insured out of his personal money may be

barred from obtaining reimbursement under his

contract of agency with the insurer (if he

78

1240)

1 240)

The payor may, in proper cases, recover

"' Carandang v. Heirs ofDe Guzman. G.R. No. 160347, November 29, 2006.
"' PCIB v. CA, G.R. No. 121989, January 31, 2006; Phil. Export and Foreign Loan Guarantee
Corp.v. V. P. Eusebio Construction, Inc.. G.R. No. 140047, July 13, 2004.
'" PCIB v. CA, G.R. No. 121989, January 31, 2006.

Payment shall be made to any of the

b. . Any person authorized to receive the payment. (Art.

or payment of a debt that had already been

prescribed, remitted, compensated, paid or
otherwise extinguished.1 88

(2)

1237)

Actually, even if the creditor is willing to

creditor, such as those arising from a mortgage,

1237;

get

The payor cannot compel the creditor to subrogate

The payor is legally subrogated to the rights of the

guaranty, or penalty. (Art.

agent may

1236, 2nd par.).190

1238)

The intent not to be reimbursed must be

proven; it is not presumed.1 87
ii.

such

latter was benefited by the payment (under Art.

But the payment is in any case valid as to the

creditor who has accepted it. (Art.

but

reimbursement from the insurer insofar as the

3. Capacity.

Payment to a person who is incapacitated to

administer his property shall be valid if he has kept the

Dominion Insurance Corp. v. CA, G.R. No. 129919, February 6, 2002.

IV TolentirlJl 283.
192
Allied Banking Corp. v. Lim Sia Wan, G.R. No. 133179, March 27, 2008.
190
191

79

thing delivered, or insofar as the payment has been

(2) Other examples 194 : (a) heir who collects the

3. Payment to a Third Pa!ty. In general, payment to a third

credit who collects it, but the assignment is

beneficial to him. (Art. 1241)

credits of the estate but is later found to be

incapacitated to succeed; (b) assignee of a

later rescinded or annulled; and (c) holder of

party is void and will not extinguish the obligation.

an instrument payable to bearer, who merely

However a.

found it.

Payment made to a third person shall be valid insofar

as it has redounded to the benefit of the creditor. (Art.

ii.

1241)

Thus, the physical holder of a promissory note is

not necessarily in possession of the credit, if such

Such benefit to the creditor need not be proved in the

following cases:
i.

ii.

f after the payment, the third person

creditor's rights;

If the creditor

person;

ratifies

acquirs
'

the

the payment to the third

iii. If by the creditor's conduct, the debtor has been led

to believe

that the third person had authority to

receiv the payment. (Art. 1241)

b.

Payment made in good faith to any person in

possession of the credit shall release the debtor. (Art.

1242)
1.

holder is not the creditor named in the note.

4.

Judicial Order to Retain the Debt.

Payment made to the

creditor by the debtor after the latter has been judicially

ordered to retain the debt shll not be valid. (Art. 1243)

This refers to a situation where the credit has been

garnished by a court (by virtue of a writ of execution or

preliminary attachment) to answer for the creditor's

liability in a case or litigation.

Example:

J has a credit of P l ,000 against K. J is

then sued by X, who obtained a writ of preliminary

attachment on J's properties.

Thus, the sheriff

garnished J's credit by notifying K.

K should

refrain from paying the P l ,000. IfK pays J despite

The "person in possession of the credit" refers to

the garnishment, such payment would not be valid

to be entitled to the payment.

(assuming X eventually obtains a judgment against

J) 195
.

the person who, under the circumstances, appears

(1) Example: The lessee may pay rentals to the

registered owner of the leased premises.193

"' Orala v.

Possession of the credit is not the same as

possession of the document evidencing the credit.

as far as X is concerned, and X may hold K liable

D. IDENTITY OF PRESTATION

1" IV Tolentino 289.

'" See National Bank v. Olatunga Lumber Co., 54 Phil .. 346 (1930);Tec Bi & Co. v. Chartered
Bank of India, 41 Phil. 819(1917).

IAC, G.R. No. 73471, May 8, 1 990.

80

81

1 . In General. For payment to be valid, the very thing due

must be delivered or released.196 (Art. 1233)
a. In obligations to give a determinate thing- the debtor
of a . thing cannot compel the creditor to receive a
different one, althcugh the latter may be of the same
value as, or more valuable than that which is due. (Art.

. 1244)

Example: If X is obligated to deliver his Toyota Altis

(Plate Number JCP 888) to Y, X cannot compel Y to
accept another Toyota Altis, or even a Mercedes Benz.
b. In obligations to give an indeterminate or generic

thingI.

The debtor must deliver must deliver a thing

which meets the quality and circumstances
stipulated. (Art. 1246)

ii. If the quality and circumstances have not been

stated, the creditor cannot demand a thing of
superior quality. Neither can the debtor deliver a .
thing of inferior quality. (Art. 1246)
The purpose of the obligation and other
circumstances
shall
be
taken
into
consideration. (Art. 1246)
b. In obligations to do or not to do - an act or
forbearance cannot be substituted by another act or
forbearance against the obligee's will. (Art. 1244)

2. Dation in Payment. While the debtor is required to

deliver or perform the very thing due, the debtor and

creditor may of course agree otherwise. For instance, they

196

A!onzo v. Sps. San Juan, G.R. No. 137549, February 11, 2005.
82

may agree to a dation in payment or dacion en pago,

whereby property is alienated to the creditor in satisfaction
of a debt in money. (Art. 1245). Dati6n in payment
requires delivery and transmission of ownership of a thing
owned by the debtor to. the creditor as an accepted
equivalent of the performance of the obligation.197
a. Dation in payment is governed by the law on sales.
(Art. 1245) The creditor is deemed to be buying the
thing or property of the debtor, the payment for which
is to be charged against the debtor's debt.198
i.

In its modern concept, what actually takes place in

dacion en pago is an objective novation of the

obligation where the thing accepted as an
equivalent of the performance of an obligation is
considered as the object of the contract of sale,
while the debt is considered as the purchase
price.199

ii. In any case, common consent is an essential

prerequisite, be it sale or novation, to have the
effect of totally extinguishing the debt or
obligation.'00
b. There is no dation in payment when there is no
transfer of ownership in the creditor's favor, as when
the possession of the thing is merely given to the
creditor by way of security21 (e.g., as pledge,
mortgage,202 or under trust receipts arrangement203).
197 Fort Bonifacio Development Corp. v. Yllas Lending Corp., G.R. No. 158997, October 6, 2008,
citin!lfhilippine National Bank v. Pineda, G.R. No. 46656, 13 May 1991, 197 SCRA 1 .
196 Filinvest Credit Association v. Philippine Acetylene Co., G.R. No. L-50449, January 30, 1 982.
'" Filinvest Credit Association v. Philippine Acetylene Co., G.R. No. L-50449, January 30, 1982.
200
Filinvest Credit Association v. Philippine Acetylene Go., G.R. No. L-50449, January 30, 1982.
201 Philippine National Bank v. Pineda, G.R. No. 46658, 13 May 1991, 197 SCRA 1 .
202
DBP v. CA, G.R. No. 1 1 8342, January 5, 1998.
203 See also Vintola v. Insular Bank of Asia and America, G.R. No. L-73271 , 29 May 1987, 150
SCRA 578; Landi & Co. (Phil.) Inc. v. CA, G.R. No. 159622. July 30, 2004.

83

c.

2. Exceptions/Qualifications.

Requisites for dation in payment:204

1.

There must be a perfonnance of the prestation in

lieu of payment

(animo solvendz)

which may

a.

When there is a stipulation to the contrary. (Art.

b.

When the debt is

There must be

may effect the payment of the fonner without waiting

for the liquidation of the latter.

some difference between the

and

that

which

prestation

due

substitution

(aliudpro alio); and

is

given

c.

in

Substantial Performance. When the obligation has

may recover as though there had been a strict and
complete fulfillment, Ii:ss damages suffered by the
obligee.

and debtor that the obligation is immediately

extinguished by reason of the perfonnanc,e of a

'

i.

ii.

A person entering into a contract has a right to insist on its

perfonnance in all particulars.206
Partial perfonnance is generally not allowed.

d.

is

97 ,5%

1 1 9 1 is not proper.209

Acceptance Without Protest. When the obligee accepts

the

may the debtor be required to make partial payments.

perfonnance, . knowing

its

incompleteness

or

irregularity, and without expressing any protest or

(Art. 1248)

objection, the obligation is deemed fully complied

with.

In an obligation to pay certain amount of

money, the full amount must be paid; in aiJ. obligation

to

which

There must be an attempt in good faith to perform

rescission under Art,

The

creditor cannot be compelled partially to receive the

Examples:

construction

iii. Where there has been substantial perfonnance,

prestations in which the obligation consists. Neither

b.

Example:

the obligation, without any willful or intentional

8
departure therefrom. 20

In General. The prestation must be fulfilled completely.205

a.

(Art. 1234)

complete.207

E. lNTEGRITY OF THE PRESTATION

I.

(Art. 1 248)

been substantially performed in good faith, the obligor

iii. There must be an agreement between the creditor

prestation different from that due.

in part liquidated and in part

unliquidated, the creditor may demand and the debtor

consist in the delivery of a corporeal thing or a real

right or a credit against the third person;
ii.

1248)

construct

a house,

the

i.

construction must be

207

20

Aquintey v. Sps, Tibong, G.R. No. 1 66704, December 20, 2006.

Alonzo v. Sps. San Juan, G.R. No. 137549, February 1 1 , 2005,
200 Palmares v. CA, G.R. No. 126490, March 31, 1998. Empire East Land Holdings, Inc. v.
Capitol Industrial Construction Groups, Inc,, G.R. No. 168074, September 26, 2008,
84

This is based on the principles of waiver and

estoppel.

completed.

20s

(Art. 1235)

..

Diesel Conslruclion Co., Inc. v. UPSI Property Holdings, Inc. G.R. No. 1 54885, March 24,
2008.
we See Sps, Buenaflorv. CA, G.R. No. 142021, November29, 2000.
209 Angeles v. Calasanz, G.R. No. L42283, March 18, 1985.
85

ii.

The law does not require the protest or objection of

contractor, and hired another contractor - the

the creditor to be made in a particular manner or at

obligee may no longer recover from the previous

a particular time. So long as the acts of the

contractor the cost to finish the construction.213

creditor, at the time of the incomplete or irregular

(c) The obligee, knowing that the construction is

. payment or within a reasonable time thereafter,

evince that the creditor is not satisfied with said

unfinished, barred the contractor's workers and

be deemed fully extinguished.210

not demand completion of the work - the obligee

stopped payment of the progress billings but did

payment or performance, the obligation shall not

iii.

cannot demand the cost of the completion works.2.14

An obligee is deemed to have waived strict

compliance when the following elements are
present:
(I) An intentional acceptance of the defective or

F.

0THER PROVISIONS
I.

or defect; and

2.

(3) Under circumstances that would indicate an

consider the performance as

complete and renounce any claim arising from

the defect

(a) the bank accepted delayed payments

of a loan on several occasions without objection.212

(b) The obligee, without protest, took over an

unfinished construction, deducted the value of the
work

from

the

payment

to

the

'" sguerra v. Villanueva, G.R. No. L-23191, December 19, 1967.

'" Amor de Castro v. CA, G.R. No. 1 1 5838, July 18, 2002. Esguerra v. Vnlanueva, G.R. No. L23191, December 19, 1967.
.
'" See Pagsibigan v. CA, G.R. No. 90169, April 7, 1993.
86

stipulated,

the

1247)

Currency. 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. (Art.
a.

R.A.

1249)

529 prohibited the stipulation of a currency other

than Philippine currency, but R.A.

acceptance of incomplete performance.211 '

unfinished

otherwise

is

extrajudicial expenses required by the payment shall be for

8 i 83 removed this

prohibition. Thus, obligations or transactions may now

Mere receipt of partial payment is not per

se equivalent to a waiver of the balance or

Examples:

it

Rules of Court shall govern. (Art.

(2) With actual knowledge of the incompleteness

iv.

Unless

the account of the debtor. With regard to judicial costs, the

incomplete performance;

intention to

Expenses.

be paid in the currency a reed upon by the parties.215

b.

Obligations in foreign currency may be discharged in

Philippine currency based on the prevailing rate at the
6
time ofpayment. 21

"' Empire East Land Holdings, Inc. v. Capitol Industrial Construction Groups, Inc., G.R. No.
168074, September 26, 2008.
'" Hanjin Heavy Industries & Construction Co., Ltd. v. Dynamic Planners & Construction Corp.,
G.R. Nos. 169408 & 170144, April 30, 2008
215 C.F. Sharp & Co. v. Northwest Airlines, Inc., G.R. No. 133498, 18 April 2002, 381 SCRA 314;
BPI v. Leobrera, G.R. No. 137147, November 18, 2003.
21 6
C.F. Sharp & Co. v. Northwest Airlines, Inc., G.R. No. 133498, 1 8 April 2002, 381 SCRA 314;
BPI v. Leobrera, G.R. No. 137147, November 18, 2003. Note that this is the same rule even
when R.A. 529 was in effect. Kalalo v. Cruz, 34 SCRA 337 11970]; Ponce v. Court of Appeals, et
al., 90 SCRA 53311979]; General Insurance & Surety Corporation v. Union Insurance Society of
87

third persons and delivered by the debtor to the

creditor, and does not apply to instruments executed by
the debtor himself and delivered to the creditor.220

3. Payment in Legal Tender. The delivery of promissory

notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment
only (a) when they have been cashed, or (b) when through
the fault of the creditor they have been impaired. (Art.

Impairment may happen if a bill of exchange

(issued by third party) is dishonored and is not
protested on time, resulting in the loss of right of
recourse.221 .

1249)

a. In the meantime, the action derived from the original

obligation shall be held in the abeyance. (Art. 1249)
b. The delivery of a negotiable instrument does not, by
itself, operate as payment. The obligation is not
extinguished and remains suspended until the payment
by commercial document is actually realized.2 17
,

e. A check may be used for the exercise of the right of

redemption, the same being a right and not an
obligation. The. tender of a check is sufficient to
compel redemption (but is not in itself a payment that
relieves the redemptioner from his liability to pay the
redemption price).222

A check, whether a manager's check or ordinary check,

3. Extraordinary Inflation or Deflation. In case an

c.

is not legal tender, and an offer of a check in payment

of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor.'"

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. (Art. 1250)

The creditor's acceptance of the check, however,

implies an undertaking of due diligence in
presenting it for payment. If such diligence is
wanting, and debtor sustains loss as a resul it will
be held to operate as actual payment of the debt or
obligation for which it was given.219

a. Extraordinary inflation exists when there is a decrease

or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common
fluctuation in the value of said currency, and such
increase or decrease could not have been reasonably
foreseen or was manifestly beyond the contemplation
of the parties at the time of the establishment of the

d. The clause of Article 1249 relative to the impairment

of commercial paper by the fault of the creditor, is
generally applicable only to instruments executed by
canton, Ltd., 179 SCRA 530 11989]; Republic Resources and Development Corporation v. CA,
203 SCRA 164 [1991]; San Buenaventura v. CA, 181 SCRA 197 11990]; Philippine Manpower
Services, inc. v. NLRC, 224 SCRA 691 [1993].
211 Philippine Airlines, Inc. v. Court of Appeals, .G.R. No. 49188, 30 January 1990, 181 SCRA
557, 568; Citibank, N.A. v. Sabeniano, G.R. No. 156132, October 16, 2006.
'" Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 49188, 30 January 1990, 181 SCRA
557, 568; Citibank, N.A. v. Sabeniano, G.R. No. 156132, October 16, 2006.
'" Papa v. A. U. Vancla & Co., G.R. No. 105188, January 23, 1998.
88

National Marketing Corp. v. Federation of United NAMARCO Distributors, Inc., G.R. No. L22578. January 31, 1973, citing Compania General de Tabacos v. Molina, 5 Phil. 142.
'" Quiros v. Tan-Guinlay, 5 Phil. 675 (1906). See, however, Papa v. A. U. Valencia & Co., G.R.
No. 105188, January 23, 1998, involving checks drawn by the debtor himself.
221 Siana v. Gimenez, G.R. No, 132768, September 9, 2005; Fortunado vs. CA, 196 SCRA 269,
279 (1991).
210

89

obligation.223 It does not include a normal "erosion" in

i.

the value of the currency which is a universal trend.224

b.

c.

the payment shall be made

1250 to apply, the inflation (or deflation) must

be extraordinary, such as in Germany where the
deutschemark went from 4.2 to the U.S. dollar in 1921 ,
225
to 4.2 trillion to the U.S. dollar in 1923.
rate in

1980's (50.34%

If the undertaking is to deliver a determinate thing,

might be

For Art.

The economic crisis in the

constituted. (Art.
ii.

domicile of the debtor. (Art. 1251)

inflation

If the debtor changes his domicile in bad faith

1984), or in 1997 (the Asian financial crisis,

or after he has incurred in delay, the additional

expenses shall be borne by him. (Art.

rate by l 7 points), does not constitute extraordinary

inflation.'26

The existence of extraordinary inflation m,ust be

1 . In General.

officially proclaimed by competent authorities, i.e., the

b.

The rules on application of payments apply to

a person owing several debts of the same kind of a single

creditor. (Art.

1252)

They are not applicable to a person whose obligation as

4. Place of Payment.

a mere surety is both contingent and singular; his

Payment shall be made in the place designated in the

obligation. (Art.

1251)

G. APPLICATION OF PAYMENTS

Bangko Sentral.227

a.

1251)

In any other case, the place of payment shall be the

where there was a drop in the dollar-peso exchange

d.

wherever the thing

at the moment the obligation was

liability is confined to such obligation, and he is

entitled to have all payments made applied exclusively

1251)

to said obligation and to no other.228

If there is no express stipulation on the place, the

following rules apply -

2. General

Rule

- Debtor's

Right.

The

debtor

who has

various debts of the same kind in favor of one and the same

creditor may declare at the time of making the payment, to

which of them the payment must be applied. (Art.

223

Singson v. Caltex, G.R. No. 137798, October 4, 2000; Huibonhua vs. Court of Appeals, G.R.
Nos. 95897 and 102604, December 14, 1999; Sierra vs. Court of Appeals, 229 SCRA 60; Hahn
vs. Court of Appeals, 173 SCRA 675; Filipino Pipe and Foundry Corporation vs. NAWASA, 161
SCRA32.
,,. Fiiipino Pipe and Foundry Corporation vs. NAWASA, 161 SCRA 32; Singson v. Caltex, G.R.
No. 137798, October 4, 2000; Citibank, N.A. v. Sabeniano, G.R. No. 156132, February 6, 2007.
220 Filipino Pipe and Foundry Corporation vs. NAWASA, 161 SCRA 32.
"' Singson v. Caltex, G.R. No. 137798, October 4, 2000; Citibank, N.A. v. Sabenlano, G.R. No.
156132, February 6, 2007.
221 Citibank, N.A. v. Sabeniano, G.R. No. 156132, February 6, 2007; Telengtan Bros. & Sons v.
U.S. Lines, Inc., G.R. No. 132284, February 28, 2006; Ramos v. Court of Appeals, G.R. No.
1 1 9872, 7 July 1997, 275 SCRA 167, 175; Mobil Oil Philippines, Inc. v. Court of Appeals, 180
SCRA 651 (1989).
.

90

1252) In

other words, the right to specify which among his various

obligations to the same creditor is to be satisfied first rests

with the debtor.

'29

Exceptions/Limitations:
a.

If the parties stipulate otherwise. (Art.

2" Magdalena Estates, Inc. v. Rodriguez, G.R. No. L-1841 1 ,

229 Paculdo v. CA, G.R. No. 123855, November 20, 2000.
91

1252)

December 17, 1966.

b.

Application shall not be made as to debts which are

not

ii.

yet due. (Art. 1252)

Unless the application is made by the party for
whose benefit the term has been constituted

iii. The older debt is more onerous than a more recent

(Art.

one232 (unless the more recent debt bears interest,

1252)
c.

while the older one does not233).

If the debtor accepts from the creditor a

receipt

in

iv. A secured debt is more onerous than an unsecured

which an application of the payment is made, the

former cannot complain of the same, unless there is a

cause for invalidating the contract.

debt.234

(Art. 1252)

b.

The debtor is deemed to have waived his right to

application.

H.

If the debt produces

interest, payment of the principal

shall not be deemed to have been made until the

interests have beeu covere.d.

(Art. 1253)

Thus, if the creditor agrees to apply a payment to

3. In

Default

of

the

Foregoing Rules.

I.

In General. The debtor may cede or assign his property to

(Art. 1255)

his creditors in payment of his debts.

a.

This cession is voluntary on the part of the debtor. It is

b.

The creditors do not become owners of the property

When the payment

if application

can

not

be

inferred from

circumstances (e.g., if neither the debtor nor the creditor

a.

The debt which is

most onerous to the debtor, among

assigned (unlike in dation in payment). The creditors

cash, which will be used to pay their credits.

other

makes the application), apply the following roles:

also subject to the acceptance by the creditors.

merely become authorized to convert the property into

carmot be applied in accordance with the preceding roles,

or

payment shall be applied to all of them proportionately.

PAYMENT BY CESSION

the principal, it may be assumed that the interest

had already been paid or wai:ved.230

If the debts due are of the same nature and burden, the

(Art. 1253)

apply payments and acquiesced to the creditor's

d.

An interest-bearing debt is more onerous than one

without interest.231

c.

Payment by cession contemplates the existence of two

or more creditors, and involves the assignment of all

the debtor's property.235

those due, shall be deemed to have been satisfied. (Art.

1253)
i.

In general -

A debt incurred as a principal is more onerous than

a debt as a mere surety or guarantor.

'" Swagman Hctels and Travel In v. CA, G.R. No. 161 135, April 6, 2005; Al)ama v. CA, G.R.
No. 126609; January 29, 2004.

'" Menzl & Co. v. Quing Chuan, 69 Phil, 46 (1939).

'" Phil. National Bank v. Veraguth, 50 Phil. 253 (1927).
"' Menzi & Co. v. Quing Chuan, 69 Phil. 46 (1939).
'"Traders Insurance & Surety v. Dy Eng Giok, 104 Phil. 606 (1956j.
'" DBP v. CA, G.R. No. 1 18342, January 5, 1998.

93

2. Effect. This cession, unless there is stipulation to the

creditor cannot accept or refuses to accept payment.140

contrary, shall only release the debtor from responsibility

(Art. 1258)

for the net proceeds of the thing assigned. (Art. 1255)

i.

'

The agreements which, on the effect of the cession, are

made between the debtor and his creditors shall be

governed by special laws.

ii.

Tender of payment must be distinguished from

consignation.

Tender

is

the

antecedent

of

consignation, that is, an act preparatory to the

I . In General.

consignation, which is the principal act with results

in the discharge of the obligation. Tender of

Tender ofpayment is the manifestation by the debtor

of his desire to comply with or to pay the obligation.236

payment may be extrajudicial, while consignation

is necessarily judicia!.242

made refuses without just cause to accept it, !lie debtor

2. Consignation Without Prior Tender. As a rule,

If the creditor to whom tender of payment has been

shall

be

released

from

responsibility

by

consignation of the thing or sum due. (Art. 1256)

i.

the

Tender of payment must be made in legal tender to

be valid. 237

However, payment in check may be considered

valid, if no prompt objection to said form of

. .
8
payment 1s made.23
ii.

b.

is not followed by consignation, the debtor is not

discharged from the obligation.241

(Art. 1255)

I. TENDER OF PAYMENT AND CONSJGNATION

a.

If the tender of payment (which has been refused)

consignation must be preceded by tender of payment to

discharge the obligation. However, in the following cases

specified by Art.

the obligation:

Consignation is the act of depositing the thing due

When the creditor is absent or unknown, or does not

b.

When he is incapacitated to receive the payment at the

c.

When, without just cause, he refuses to give a receipt;

d.

When two or more persons claim the same right to

e.

When the title of the obligation has been lost.

with the court or judicial authorities whenever the

236 Ramos v. Sarao, G.R. No. 149756, 1 1 February 2005, 451 SCRA 103, 118119.
'" Sooo v. Militante, 208 Phil. 151, 160 (1983); see also Philippine Airlines, Inc. v. Court of
Appeals, G.R. No. 49188, 30 January 1990, 181 SCRA 557, 568; Citibank, N.A. v. Sabeniand,
G.R. No. 156132, October 16, 2006.
23e Saco v. Militante, 208 Phil. 151, 160 (1983); Pabugais v. Sahijwanl, G.R. No. 156846,
February 23, 2004.
.
239 Vda. De Zuluela v. Octaviano, G.R. No. L-55350, March 28, 1983.
.
94

consignation alone shall discharge

a.

letter merely expressing intent to pay, but not

accompanied by payment, is not equivalent to

tender of payment.239

1256,

appear at the place of payment;

time it is due;

collect;

1256)

"' Pabugais v. Sahijwanl, G.R. No. 156846, February 23, 2004.

241 Solid Homes, Inc. v. Laserna, G.R. No. 166051, April 8, 2008.
242 Saco v. Militante, 208 Phil. 151, 160 (1983).
95

(Art.

3. Requisites. In order that consignation may be effective, the

debtor

must

show

compliance

with

the

payment thereby avoiding consignation and the

following

subsequent litigation. 249

reqllisites:243
a.

d.

244;

Consignation is not necessary where the payor

seeks to exercise a
redemption245

or

The amount due was placed at the

court; (Art. 1258) and

There was a debt due

e.

(such as the right of

repurchase246 or option247),

instead of performing an

obligation.

After the consignation had been made,. the person

interested was

right

disposal of the

Tender of

notified thereof. (Art. 1258)

Two notices are required:

prior to

and

after

the

payment is sufficient for such exercise of right.

consignation. The reason for the second notice is to

The consignation of the obligation had been made

money deposited, to avoid risk of deterioration,

50
depreciation or loss. 2

enable the creditor to withdraw the goods or

b.

because the creditor to whom tender of payment was

made rfused to accept it without just cause, or ecause
of any of the

grounds in Art. 1256

which dispenses

with the need for tender of payment; (Arts.

Notes:
i.

1256, 1258)

Strict compliance.

The foregoing reqms1tes and

mandatory and must be strictly complied with.m

If the creditor justly refused to accept the. payment

because it was not in legal tender, consignation is

ii. Inejfectuar consignation.

not proper.248

The consignation shall be

ineffectual (a) if there is failure in any of the

foregoing requisites252; or (b) if the consignation is

c.

Previous
the

notice of the

person

consignation had been given to

not made strictly in.consonance with the provisions

interested in the performance of the

obligation; (Art.

which regulate payment. (Art.

1257)

1257)
iii.

This is to give the creditor an opportunity to

Applicability.

The . foregoing reqnisites

do not

strictly apply to debts pursuant to a judgment. In

reconsider his unjustified refusal and to accept

such a case, if the judgment creditor refuses to

accept the payment of the amount due on the

judgment, the court may direct the money to be

Soco v. Militante, 208 Phil. 151, 160 (1983); Pabugais v. Sahijwani, G.R. No. 156846,
February 23, 2004.
244 Ascue v. CA, G.R. No. 84330, May 8, 1991.
245 Villanueva v. Malaya, G.R. No. 94617, April 12, 2000, citing Co. vs. Philippine National Bank,
1 14 SCRA 842; De Castro vs. Intermediate Appellate Court, 165 SCRA 654; Enage vs. De
Escano, 38 Phil. 687.
246 Legaspi v. CA, 142 SCRA 82, 88 (1986), citing Asturias Sugar Central v. .Pure Cane
Molasses Co., 60 Phil. 255 (1934), Villegas v. Capistrano, 9 Phil. 416; Rosales v. Reyes, et al.,
25 Phil. 495; Paez, eta\. v. Magno, 46 O.G.,p, 5425.
247 Vda. de Quirino v. Pa\arca, 29 SCRA 1 [196g] citing Asturias Sugar Central v. Pure Cane
Molasses Co., 60 Phil. 255 and Conejero v. CA, L-21812, April 29, 1966.
"' Roman Catholic Bishop of Malolos, Inc. v. \AC, G.R. No. 72110, November 16, 1990.

Cabanos v. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058; Limkako vs. Teodoro.
74 Phil. 313; Socov. Militante, 208 Phil. 151, 160 (1983).
Cabanas v. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058; Saco v: Militante, 208
Phil. 151, 160 (1 g83).
251 Saco v. Militante, 208 Phil. 151, 160 (1983);
252 Pabugais v. SShijwanl, G.R. No. 156846, February 23, 2004.

96

97

243

249

even before the actual approval of the

'55
court or acceptance by the creditor.

paid in court and when this is done, order

'53
satisfaction of the judgment to be entered.
ii.

4. Effect of Consignation.

After

the

creditor

consignation,
a.

or

has

after

already

accepted

the . court has

the

already

Cancellation or Discharge of the Obligation. Once the

declared that consignation is proper .- the debtor

consignation has been duly made, the debtor may ask

may withdraw the thing or sum deposited only if

the 'creditor consents.

the judge to order the cancellation of the obligation.

(Art. 1 260)

If the creditor should consent or authorize the

b.

Expenses.

The

expenses

of

consignation,

withdrawal -

when

properly made, shall be charged against the creditor.

(Art. 1259)

(a) The creditor shall lose every preference

which he may have over the thing. (Art.

c.

1261)

Withdrawal.
1.

Before the creditor has accepted the consignation,

or before a judicial declaration that the

(b) The co-debtors, guarantors and sureties

shall be released. (Art. 1261)

consignation has been properly made - the debtor

may withdraw the thing or the sum deposited,
allowing the obligation to remain in force. (Art.
1260)

ill . LOSS OF THE THING DUE

A. IN GENERAL - IN 0BLIGATIONS TO GIVE A

At this point, the debtor is still the owner of the

DETERMINATE THING

property deposited and may thus withdraw

254
it.

1.

General Rule. An obligation to deliver a determinate thing

shall be extinguished if it should be lost or destroyed

It has been held, however, that when all

without the fault of the debtor, and before he has incurred

the

in delay. (Art. 1262)

requisites

for

consignation

are

complied with (and there is no reason to

disapprove the consignation), the property

a.

Broadly speaking, loss (as a cause for extinguishment

deposited becomes for the account of the

of the obligation)

refers to the

creditor, who must bear .the risk of loss,

performance of the prestation.

impossibility

of

The impossibility which extinguishes obligation

refers to that which occurred
253 Salvante v.

1990.

Cruz, 88 Phil. 236 (1951): Francisco v. Bautista, G.R. No. 44167, December 19,
255

254 IV Tolentino 331.

98

Sia v. CA, 92 Phil. 355 (1952).

99

after the

creation of

d. When the obligor is guilty of contributory fault or

negligence.256 (Arts. 1262, 1 1 70)

the obligation. If the impossibility existed at the

time of the creation of the obligation, it is void ctb
initio. (Art. 1348)

Whenever the thing is lost in the

possession of the debtor, it shall be presumed that
the Joss was due to his fault:

Presumption
b. A thing is considered Jost when it: (i) perishes; (ii)
goes out of commerce; or (iii) disappears in such a way
that its existence is unlmown or it cannot be recovered
(Art. 1 1 89, S;tpra).

(1) unless there is proof to the contrary, and

without prejudice to the provisions of article
1 165 (Art. 1265).

If the Joss is partial, the courts shall

c. Partial Loss
determine whether, under the circumstances, the partial
loss is so important as to extinguish the obligation.
(Art. 1264)
-

d.

(2) except in case of earthquake, flood, storm, or

other natural calamity. (Art. 1265)

The extinguishment of an obligation which has ,become

impossible to perform follows from the principle that
no person shall be liable for fortuitous events, or those
which could not be foreseen, or which, though
foreseen, were inevitable. (Art. 1 1 74, supra).

e. When the Joss or impossibility occurred after the

obligor has incurred in delay. (Arts. 1262, 1 1 65)
f.

2. Exceptions. The obligation is not extinguished, and the

debtor is thus liable for damages, in any of the following
cases:

When debt of a thing certain and determinate

proceeds from a criminal offense, the debtor shall
not be exempted from the payment of . its price,
whatever may be the cause for the loss. (Art. 1268)

The bailee (Art. 1 942), depositary (Art. 1 979) and

the officious manager (Art. 2147) are, by law,
liable for fortuitous events under certain
circumstances.

Unless the thing having been offered by him to

the person who should receive i the latter
refused without justification to accept it. (Art.
1268)

b. When, by stipulation, the obligor is liable even for

fortuitous events. (Arts. 1262, 1 174)
c. When the nature of the obligation requires the
assumption ofrisk. (Arts. 1262, 1 1 74)

When the obligor has promised to deliver the same

thing to two or more persons who do not have the same
interest. (Art. 1 1 65)

g. When the obligation to give the thing due arose from a

criminal offense. (Art. 1268)

a. When, by law, the obligor is liable even for fortuitous

events. (Arts. 1262, 1 174)

: ;

3. Creditor's Remedy. The obligation having . been

extinguished by the loss of the thing, the creditor shall have
'" Austria v. CA, G.R. No. L-29640, June

100

10, 1971.
101

all the rights of action which the debtor may have against
third persons by reason of the loss. (Art.

a.

1 269)

Physical impossibility arises when the prestation, by its

nature, cannot be accomplished or performed.

Under this provision, the creditor may seek recourse to

Impossibility refers to the nature of the thing to be

the insurance indenmity for the thing lost.257

done, and not to the inability of the obligor to do it.

If others can perform the prestation, it is not

4. Effect on Reciprocal Obligations.

In

impossible.'"

reciprocal

obligations, the release of the debtor due to loss or

impossibility also releases the creditor from the counter

b.

prestation, because each obligation depends on the other.258

illegal or prohibited by law.

2. Extreme Difficulty Due to Unforeseen Events When the

B. IN OBLIGATIONS TO GIVE A GENERIC THING

In

Legal impossibility arises when the prestation becomes

General, Loss Does Not Cause Extinguishment

service has become so difficult as to be

In an

puction

obligation to deliver a generic thing, the loss or des

the contemplation of the parties,

manifestly beyond

the obligor may also be

released therefrom, in whole or in part. (Art.

1267)

of anything of the same kind does not extinguish the

obligation. (Art.
a.

1263)

a.

Art. 1267 is said to be based on the principle of rebus

sic stantibus, under which the parties are considered to

This rule is based on the principle that the genus of a

have stipulated in the light of certain prevailing

thing can never perish.

conditions, and once these conditions cease to exist,

Genus nunquan perit.'59

the contract also ceases to exist. However, Art.

b.

An obligation to pay money is generic; therefore, it is

1267 is

not an absolute application of the principle of rebus sic

which would endanger the security of

not excused by fortuitous loss of any specific property

stantibus,

of the debtor.260

contractual relations. The parties to the contract must

be presumed to have as'sumed the risks of unfavorable
developments.

C. IN OBLIGATIONS TO Do

exceptional

1.

It

is

changes

therefore

only

in

of circumstances

absolutely
that equity

demands assistance for \he debtor.

Imp ossibility The debtor in obligations to do shall also be

.

released when the prestation becomes legally or physically

impossible without the fault of the obligor. (Art.

1 266) .

An "abrupt change in the political climate of the

cow1try after the EDSA Revolution" and the
debtor's "poor financial condition" do not warrant

"'A. Urrutia & Co. v. Saco River Plantation, Inc., 26 Phil. 632 (1913).
2ss IV Tolentino 337, 346, citing Colin & Capitant; Von Tuhr; Perez Gonzalez & Alguer; and
Enneccerus1 Kipp & Wolff.
259 Gaisano Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8,
2006, citing Bunge Corp. and Universal Comm. Agencies v. Elena Camenforte & Company, 91
Phil. 861, 865 (1952).
"" Gaisano Gagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8,,
2006, citing Ramirez v. Court of Appeals, 98 Phil. 225, 228 (1956).

i02

application of Art.
b.

1267262

If performance has become impossible altogether, Art.

1266 should be applied.

"' Reyes v..Caltex (Philippines), Inc., 84 Phil. 654 (1949).
"' Phil. National Construction Co. v. CA, G.R. No. 1 1 6896, May 5, 1997.
103

donations

with

respect . to

acceptance,

amount,

and

Condonation must be accepted by the debtor.

(Art.

revocation:265

IV. CONDONATION OR REMISSION OF THE DEBT

a.

1 270)

A. IN GENERAL
l.

Definition.

If the debtor refuses to accept the condonation, but

Condonation or remission is an act of liberality

the creditor still does not enforce the debt, the debt

wlrereby the creditor, without receiving any equivalent,

may eventually be extinguished by prescription.

renounces the enforcement of the obligation, which is

accordingly extinguished in its entirety or in that part
23
remitted. 6
2.

Gratuitous.

Condonation

or rem1ss10n is

The condonation is subject to the rule on inofficious

b.

donations, i.e., the amount condoned cannot be more

essentially .

gratuitous, and requires the acceptance by the obligor.

than what the creditor may give by will. (Art.

rel. to

(Art.

1 270, in

Art. 752)

1 270)
4. Effect on Accessory

Obligation. The renunciation of the

It is an essential characteristic of remission that it be

principal debt shall extinguish the accessory obligations.

gratuitous, that there is no equivalent received for the

(Art.

benefit given; once such equivalent exists, the nature of

the act changes.264
i.

It may become
creditor receives

dation in payment
a thing

It may become a

novation,

affecting the principal debt previously secured by the

b.

delivery to the creditor, is found in the possession of

when the matter

Condonation i s essentially a donation

of the credit to the debtor, and is thus subject to the rule on

104

(Art. 1274)

and in

receives.

'" Dizon v. CTA, G.R. No. 140944, April 30, 2008.

"' Dizon v. CTI\ G.R. No. 140944, April 30, 2008.

the debtor, or of a third person who owns the thing.

'

exchange of some concession which the creditor

3 . Governing Rules.

It is presumed that the accessory obligation of pledge

has been remitted when the thing pledged, after its

changed; or

renounced is in litigation or dispute

Thus, the

pledge.

when the object or

compromise,

(Art. 1273 )

accessory obligation of pledge may be waived without

that

principal conditions of the obligation should be

iii. It may become a

But the waiver of the accessory obligation shall leave

. the principal obligation in force.

when the

different from

stipulated; or
ii.

a.

1273)

B. MANNER OF CONDONATION: Condonation

expressly or impliedly. (Art. 1 270)
l.

Express condonation
donation. (Art. 1271)

"' IV Tolentino 354.

105

may be made

shall comply with the forms of

If the condonation is made mortis causa, the forms of a

will must be followed.

2. Implied

con dona tion.

V.

CONFUSION OR MERGER OF RIGHTS

A.

CONCEPT
1 . The obligation i s extinguished from the time the characters

The Civil Code provides two

instances where condonation is implied:

of creditor and debtor are merged in the same person. (Art.

1275)
a. The

delivery of a private document evidencing a credit,

made voluntarily by the creditor to the debtor, implies

2.

the renunciation of the action which the former had

against the latter.

Confusion or merger usually takes place when the debtor

acquires the credit.
heir.

1.

Example:

X borrowed

Pl0,000

from

his father, who subsequently died and left X as his sole

(Art. 1271)

X thus succeed to his father's credit of

Pl0,000

Whenever the private document in which the debt

against X. Thus, as far as the Pl 0,000 credit is concerned,

appears is found in the possession of the debtor, it

the characters of creditor and debtor have become merged

shall be

in the person of X.

presumed

that the creditor delivered it

vo I untarily, unless the contrary is prov d. (Art.

1272)

3.

Confusion or merger may also take place when the creditor

acquires an encumbered property.

ii.

debtor and his heirs may uphold it if they can

obligation is extinguished266 (but not necessarily the

prove that the delivery of the document was made

principal obligation secured by the mortgage).

1271)
B.

An

when the

mortgagee acquires the mortgaged property, the mortgage

in virtue of payment of the debt. (Art.

b.

Example:

The waiver may be nullified if inofficious, but the

implied condonation may also result from

EFFECT AND EXTENT

the

presun1ption that the accessory obligation ofpledge has

1.

Confusion or merger which takes place in the person of the

been remitted when the thing pledged, after its delivery

principal debtor or creditor

to the creditor, is found in the possession of the debtor,

1276)

or of a third person who owns the thing. (Art.

enefits

the guarantors. (Arf.

1274)
a.

But merger which takes place in the person of any of

the guarantors does not extinguish the obligation. (Art.

However, being a mere presumption, it may be

overcome by proof that no condonation was

1276)

intended.
b.

Example: X is indebted to Y, which debt is guaranteed

by J. If X's debt to Y is extinguished due to merger,
J's obligation as guarantor (which is merely accessory)
is also extinguished.

But if J acquires Y's credit

'" Yek Tong Lin Fire & Marine Insurance v. Yusingco, 64 Phil. 473 (1937).
106

107

thereby extinguishing J's obligation as guarantor, this

does not affect X's . obligation. J can still collect from

b. According to Cause
i.

x.

2. Confusion does not extinguish a joint obligation except as

If the obligation

is solidary, it may be extinguished by

the confusion or merger between any of the creditors
with any of the debtors. (see Art. 1215)

In certain cases, compensation may be claimed

by only one of the parties, by waiving his right
to object to it. This is calledfacultative
compensation. Example: if X's debt to Y is
pure, while Y's debt to X is with a term for
Y's benefit and has not yet become due, Y
may object to the compensation, but Y may
also choose to waive the term and claim
compensation.

V. COMPENSATION
A. IN GENERAL
! . Definition. Compensation (or offsetting) is a mode of
extinguishing (to the concurrent amount) the obligations of
persons who, in their own right and as principals, are
reciprocally debtors and creditors of each other.267 (Art.

iii. Judicial compensation decreed by a court in a

case where the defendant has counterclaims against
the plaintiff.
-

1278)

If one of the parties to a suit over an obligation

has a claim for damages against the other, the
former may set it off by proving his right to
said damages and the amount thereof. (Art.

2. Kinds of Compensation.
a. According to Extent
when the two debts are of the same
amount, in which case both debts are totally
extinguished. (Art. 1281)

Total

1283)

B. LEGAL COMPENSATION

ii. Partial when the two debts are not of the same
amount, in which case the debts are extinguished
only to the concurrent amount. (Art. 1281)

I.

168

201

PNB Madecor v. Uy, G.R. No.

67649, June 26, 1968.

129596, August 15, 2001; see also Francia v. IAC, G.R No. L
108

ii. Conventional takes place when the parties agree

to compensate their mutual obligations even in the
absence of some requisites.269 (A1't. 1 282) (il)jra)

regards the share corresponding to the creditor or debtor in

whom the two characters concur. (Art. 1277)

i.

takes place by operation of law when all

the requisites . are present.'68 (infra)

Legal

In General. Legal compensation takes place by operation

of law (ipso Jure) when all the requisites are present 270 It

PNB Madecor v.
June 28, 1968.
169 PNB Madecor v.

Uy, G.R. No. 129598, Augusl 15, 2001;

Francia

Uy, G.R. No. 129598, August 15, 2001; Francia

June 26, 1988.
11o PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001.
109

v.

IAC, G.R. No.

L-67649,

v. IAC, G.R. No. L-67649,

occurs even without the awareness of the parties,

1290) or even against their will

(Art.

or without their consent.271

(4)

Its effects arise at the moment when all the requisites

concur.272

Taxes

cannot

taxpayer's
because

be

claim

taxes

compensated
against the

are

not

"debts"

Government and the taxpayer

In order that (legal) compensation may be

2. Requisites.

proper, the following five requisites are necessary

with

the

Government,
and the
cannot be

considered creditor and debtor to each other.277

(Art.
b.

1279):

That both debts consist in a sum of money, or if the

. things due are consumable, they be of the same kind,

a.

That each one of the obligors be bound principally,

and also of the same quality if the latter has been

and that he be at the same time a principal creditor of

stated;

the other;
Compensation is also possible for fungible things
(not necessarily consumable) because, by their

The parties must be mutually debtors and creditors

in their own right and as principals.273

(1)

very nature, fungible things may be substituted for

each other.'78 .

Thus, X corporation's debt to Y cannot be

offset with Y's debt to a stockholder of X,
because the corporation is distinct from its
stockholder.'74

(2)

(3)

c.

That the two debts be due;

d.

That they be liquidated and demandable;

i.

Also, the debt of partnership ABC to X cannot

"Liquidated" means that the existence and amount

be offset with X's debt to B (a partner in

of the

ABC).275

"unliquidated" claims (such as damages) which are

still

the

corporation.

Thus,

determined,

as

opposed

to

and whose amount is not yet

Compensation

cannot extend to

unliquidated, disputed claim existing from brea:ch

corporation, and stockholders, as such, are not

of

are

disputed

determined.

A share of stock is not a credit against the

creditors

debt

of contract.'79

corporation's credit against its stockholder

ii.

cannot be offset with the latter's share of

"Demandable" means that the debt is legally

enforceable, i.e., it is a civil (and not natural

stock.276

obligation), it has not yet prescribed, it is not

Bank of the Philippine Island v. Court of Appeals, 325 Phil. 930, 938 (1996).
212 Republicv. Court of Appeals, G.R. No. 25012, July22, 1975, 65 SCRA 186, 190.
2n
PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001; see also Francia v. IAC, G.R. No. L
67649, June 28, 1988.
274 See CKH Industrial and Development Corp. v. CA, G.R. No. 1 1 1890, May 7, 1997, 272 SCRA
333.
210 Escano v. Heirs of Escano, 28 Phil. 73 (1914).
276 Garcia v. Lim Chu Sing, 59 Phil. 562 (1934).

subject to a suspensive period or condition which

211

110 .

has not yet.happened, and it is not unenforceable.

211

Francia v. IAC, G.R. No. L67649, June 28, 1988.

See IV Tolentino 369-370,
279 Silahis Marketing Corp. v. IAC, G.R. No, 74027, December 7, 1989. See also Sps. Mirasol v.
CA, G.R. No. 128448, Februaiy 1, 2001.

21s

1il

a.
Note, _however, that when one or both debts are
or

rescissib/e

voidable,

they

may

be

compensation has already taken place before the

assignment - the obligation is deemed extinguished
by operation of Jaw, and the debtor is thus discharged

compensated against each other before they are

judicially rescinded or avoided. (Art.

If

of liability by invoking the compensation.

1284)

'
They are considered valid until annulled or

Exception:

rescinded.

assignment, this is considered a waiver of the

if

the

debtor

consented

to

the

compensation.
iii. Legal compensation is possible even though the
debts may be payable at different places, but there

e.

b.

If

shall be an indemnity for expenses of exchange or

compensation has not yet taken place before the

assignment (because, e.g., the debts are not yet mature

transportation to the place of payment.

(Art. 1286)

or liquidated) -

retention or

i.

That over neither of them there be any

controversy,

commenced

by

third

communicated in due time to the debtor.

perspns

and

If the debtor

to him against the assignor. (Art.

(1196)

When a credit is garnished by court

Example:

1285)

Unless the assignor was notified by the debtor

(execution or attachment).

2. Who May

consented - he cannot set up against

the assignee the compensation which would pertain

at the time he gave his consent, that he

reserved his right to the compensation.

Invoke

Generally, compensation may be

invoked or claimed by the principal debtor (who is also at

the same time a principal creditor).

(Art.

1285)
ii. Jf the

debtor was informed of the assignment, but

did not consent thereto -he may set up the

However, the guarantor may also set up compensati,on

compensation of debts before the assignment, but

as regards what the creditor may owe the principal

not of subsequent ones.

debtor. (Art.

1280)

(Art. 1285)

That is, the guarantor may invoke

any available compensation between the principals,

iii. If the

debtor was not informed of the assignment

and thus benefit from the extinguishment of the

principal

prior to the assignment and also later ones until he

obligation

which

results

from

such

compensation.

he may set up the compensation of all credits

had knowledge of the assignment. (Art.

3. Assignment of Credit.280

In case the creditor assigned his

credit to a third party, who then attempts to enforce it, the

debtor has the foJlowing rights:

Note:

The reason for the foregoing rules is to protect a

party from being fraudulently deprived of the benefits

of compensation.281

'" IV Reyes & Puno 155, citing Manresa.

'' IV Tolentino 374-375, citing Manresa.

112

1285)

1 13

4. Plurality of Debts. If

a persou should have agaiust him

a.

several debts which are susceptible of compensation, the

seeks to compensate, and

rules on the application of payments shall apply to the

order of the compensation.

That each of the parties can dispose of the credit he

b.

(Art. 1289)

That they agree to the mutual extinguishment of their

credits.

Thus, the debt which is most onerous to the debtor,

D. LIMITATIONS: The following debts cannot be compensated-

among those due, shall be deemed to have been offset.

If the debts due are of the same nature and burden, the
offsetting

shall

proportionately.

be

applied

to

all

of

(Art. 1289 in rel. to Art. 1253)

them

I.

Debts arising from a contract of depositum; (A .

2.

Debts arising from a contract of commodatum;

5. Effect of Compensation. When all the requisites

mentioued in Article 1279 are present, compensation talces

a.

effect by operation of law, and extinguishes both ciebts to

1290)
b.

In General.

Both depositurn and commodatum are based on the

thing deposited or lent will be returned.

C. CONVENTIONAL COMPENSATION
I.

The prohibition is against the depositary and the

borrower, in favor of the depositor and bailor.

The

depositor and bailor may choose to waive the benefit

Conventional (or voluntary) compensation is

and set up compensation (facultative).

compensation by agreement; it takes place when the parties

agree to compensate their mutual obligations even in the

c.

absence of some requisites.'"

Note that bank deposits (whether fixed, savings or

current deposits) are considered simple loans

1 980),
Thus, the parties may agree upon the compensation of

set-off against the depositor's

bank.'85

(Art. 1282)

Conventional compensation is possible only

3.

(Art.

and are therefore subject to compensation or

debts which are not yet due.

2. Requisities.

(Art. 1287)

trust and confidence of the depositor or bailor

that the
'

the concurrent amount, even though the cred tors and

debtors are not aware of the compensation. (Art.

1287)

obligations to

Claims for support due by gratuitous title; (Art.

the

1287)

when the parties are mutual creditors and debtors of each

other.283 Aside from this, the requ rements of conventional

co1npensation are:284

a.

Allowing compensation may defeat the purpose of

support, which is to maintain the person to be
supported and answer his needs. It may also defeat the
exemption of support from attachment and execution.
(FC, Art.

282

PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001; Francia v. IAC, G.R. No. L67649,
June 28, 1988.
283 CKH Industrial and Development Corp. v. CA, G.R. No. 1 11890, Mar 7, 1997, 272 SCRA

205)

333.

'" CKH Industrial and Development Corp. v. CA G.R No. 111890. May 7, 1997, 272 SCRA

333.

1 14

285

Sps. Nlsce v. Equitable PC/ Bank, G.R. No. 167434, February 19, 2007,
115

Support in arrears may be subject to compensati:

b.

because the need for the same has already passed.

301, par. 2, in rel. to Art.

4.

1287)

Debts consisting of civil liability

(M ,,

offended party.

and

set

up

compensation

Obligation to,pay

Novation has

d.

Extinctive novation does not necessarily imply that the

2. Classification.
a.

According to Manner
i.

obligation by changing its object or principal conditions,

by substituting a new debtor in place of the old one, or by
snbrogating a third person to the rights of the creditor. 287

1291)

In order that an obligation may be extinguished by

another which substitutes the same, it is imperative: (i)

declared in unequivocal terms, or (ii) that

the old and the new obligations be on every point

incompatible with each other. (Art. 1292)

b.

Express - when the parties

terms

Novation, properly speaking, is

extinctive,

that

the

new

extinguishes the old .one.

Definition. Novation is a mode of extinguishing an

that it be so

to

tenns and conditions may be carried, expressly or by

implication, over to the new obligation.290

taxes to the government. Taxes are not

IN GENERAL

a.

(i)

new agreement should be complete by itself; certain

VII. NOVATION

(Art.

extinguish an
to substitute a new one in

dual function:

existing obligation, and (ii)

its p\ace.289

The offended party may choose to

benefit

the

"debts", and are not subject to compensation as a matter of

public policy.'86

I.

e'!,.\.ent \na\ \\ tema'm.s com\la\\'o\e 'W\.\b. \b.e amencl.atot'j

"'
aiteement.
c.

(facultative).

A.

<:>1.1\\.e <:i\:1\\1!,a\\<:it\, \.e., \\\.e <:>\(; <:i\)\\1!,a\\<:in s'l.\:ls\s\s \ci ,fue

The prohibition is against the offender, in favor of the

waive

5.

mete\1 modif\catory (;<:ies n<:i\ <:a'll'Oe t'tl.e e'!,.\\n'i!,'l.\\\m.en\

arising from a penal

offense. (Art. 1288)

-

lb.at ta;,es t'tl.e \)\ace cit t'tl.e fo=et. h ne>'1at\C>n t\\at .\s

ii.

declare in unequivocal

obligation

novates

or

(Art. 1292)

Implied- the novation is inferred from the fact that

the old and the new obligations are on every point
incompatible with each other. (Art.

1292)

The test of incompatibility is whether the two

obligations can stand together, each one having
an independent existence; if they cannot and
the subsequent obligation
1
would extinguish the first. 29
are

irreconcilable,

i.e., an old

obligation is terminated by the creation of a new one

Francia v. IAC, G.R. No. L-67649, June 28, 1988, citing Republic v. Mambulao Lumber Co., 4
SCRA 622.
"' Garcia v. Llamas, G.R. No. 1 54127, December 8, 2003.

"' Garcia v. Llamas, G.R. No. 154127, December 8, 2003.

'" California Bus Lines, Inc. v. State Investment House, Inc., 463 Phil. 689, 702 (2003). Sps.
Bautista v. Pilar Dev't Corp., G.R. No. 135046, August 17, 1999.
290 Ligutan v. CA, G.R. No. 138677, February 12, 2002.
291
lloilo Traders Finance, In v. Heirs of Sps. Oscar Soriano, Jr., 452 Phil. 82 (2003).

i 16

117

266

b.

According to Cause
1.

Objective

b e c\a\me<': on\'j b'f tbe llebtor, anll be \m"Q\\el\\'f

object or principal conditions (Art.

ii.

Subjective

waives it by agreeing to tb.e new ob\igation?-94

- novation caused by change in the

1291

[l])

b.

novation caused by change in the

person of the debtor or the creditor (Art.

1291 [2]

The parties concerned must agree to a new contract.

i.

There must be an intention to novate or

ii.

This requirement presupposes that the parties have

& [ 3 ])

3.

Requisites. For novation to take place, the following

. .
22
reqms1tes must concur: 9
a.

the capacity to agree to the new contract.

c.

There must be a previous valid obligation.

The old contract must be extinguished.

If the

i. If the original obligation was void, the n vation is

also void. (Art.

1298)

ulment may

If

the

original

suspensive

debtor or when ratification

1298)

obligation was voidable,

the

d.

i.

an implied waiver of its defect. (see Art.

condition,

expromision, wherein the debtor

If the original obligation has prescribed, the

A prescribed debt is a natoral

obligation and suffices as a consideration for the

2
new obligafion. 93 Besides, the prescription may

the new

'" Garcia v. Llamas, G.R. No. 154127, December 8, 2003; Sueno v. Land Bank, G.R. No.
174711, September 17, 2008.
293 Villaroel v. Estrada, 71 Phil. 140 (1940).

1299)

If the new obligation is void, the original one shall

1297)
ii.

If the new contract' has not yet been executed, the

previous obligation is not novated and remains
subsisting.295

iii. If the new contract is voidable, it is valid until

annulled (Art.

1390),

so the novation becomes

effective. But once the new contract is annulled, it

is

deemed

void,

so

the

novation

ineffective as well.

118

to

subsist, unless the parties intended that the former

1298)

does not consent

novation is valid.

subject

relation should be extinguished in any event. (Art.

deemed a ratification of the original obligation or

m.

resolutory

was

There must be a valid new contract.

novation is valid, because the debtor's consent is

Exception: in

or

obligation

unless it is otherwise stipulated. (Art.

be claimed

validates acts which are voidable. (Art.

ii.

original

obligation shall be under the same condition,

Exception: when a
only by the

animus

novandi.

294 Estrada v. Villaroel, (CA) 40 O.G. (5th Supp.)

201, cited in IV Tolentino 398.

"' Sueno v. Land Bank, G.R. No. 17471 1 , Seplember 17, 2008.
1 19

becomes

iv. If the new contract is unenforceable (because it is

not in writing, per the Statute of Frauds), novation

296
cannot be proven.

4.

Not Pres u med

animus novandi

In other words, there must be

Changes that breed incompatibility must be essential in

nature and not merely accidental.302 Even if there is no

Novation is never presumed, and the

express novation, such essential change would cause an

(intent to novate), whether totally or

implied novation by creating an incompatibility between

partially, must appear by express agreement of the parties,

the old and the new obligations.

or by their acts that are clear and unmistakable.297

5. Effect on Accessory Obligation.

On the other hand, accidental changes - or changes

When the principal

which are merely incidental to the main obligation, or refer

obligation is extinguished in consequence of a novation,

accessory obligations are also extinguished.

merely to secondary agreements - do not cause extinctive

{Art. 1296)

novation.303 The novation

This is because the accessory obligations (e.g., mortgage

is merely modificatory, in which

case the new agreement will not have the effect of

and pledge) were given to secure a particular obligation

extinguishing the first but would merely supplement it or

supplant some but not all of its provisions.304

and the solvency of a particular debtor; thus, a cqange in

the obligation or debtor destroys the basis of the consent to

.
.
give the accessory obl"1gatlons.298

2. Determination of the Natre of Change. It is thus

important to determine if the change refers to the object or

"Exception": accessory obligations may subsist only

the principal conditions

insofar as they may benefit third persons who did not

give their consent.

essential change.301

incidental

(Art. 1296) However, these

conditions

(essential change), or merely to

(accidental change).
The

determination is factual in nature, and relative to the

obligations for the benefit of third persons are in reality

circumstances of the case, the intention of the parties, the

distinct obligations.299

economic importance of the modification, and other similar

factors.305

B. OBJECTIVE NOVATION

3. Examples of essential changes.

I.

Essential Change vs. Accidental Change.

novation is caused by change in the

object

Objective

or in the

principal conditions of the obligation. (Art. 1291) Changes

in the juridical relation300 (from ccimmodatum to lease of
things, or from negotiorum gestio to agency, or from a

mortgage to antichresis, or from a sale to a loan) may also

be subsumed under this category.

Change in the price.306

b.

Reduction of the period or duration of an easement of

right of way. 307

301 Young v. CA, G.R. No. 83271, May 8, 1991.

"' Pilipinas Bank v. Ong, G.R. No. 1 33176, August 8, 2002; California Bus Lines, Inc. v. State
Investment House, Inc., G.R. No. 147950, December 1 1, 2003.
io3 Young v. CA, G.R. No. 83271 , May 8, 1991; lloilo Traders Finance, Inc. v. Heirs of Sps.
Oscar Soriano, Jr., 452 Phil. 82 (2003); Young v. CA, G.R. No. 83271, May 8, 1991.
. '' lloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr., 452 Phil. 82 (2003).
"5 IV Tolentino 389, citing Castan.
306 Matute v. Hernandez, 66 Phil. 68 (1938).

"' Evadel Realty & Dev't Corp. v. Sps. Soriano, G.R. No. 144291, April 20, 2001.
"' Philippine Savings Bank v. Manalac, Jr., G.R. No. 145441, 26 April 2005, 457 SCRA 203,
218.
'" IV Tolentino 395.
299 IV Tolentino 396.
'" See Ligutan v. CA, G.R. No. 138677, February 12, 2002.
120

a.

121

c.

i.

Change from a contract to sell (written) to a contract of

lease (even if merely verbal).308

d. Change from a sale of real estate to a conditional sale

of real estate.309

Extension of the period315 - the period affects

only the performance of the obligation and does
not create a new one.

ii. Restructuring of the payment scheme (e.g., from

repayment in one year to repayment in twenty
quarterly instalhnents31 6, or providing for a new
schedule ofpayments and additional security"')

In a contract of sale, the title to the property passes

to the vendee upon the delivery of the thing sold;
in a contract to sell, ownership is, by agreement,
reserved in the vendor and is not to pass to the
vendee until full payment of the purchase price;

iii. Change or reduction in the interest rate.318

It has been held that an obligation to pay
money is not novated by an instrument that
expressly recognizes or ratifies the old,
changes only tile terms of payment, and adds
'
other obligations not incompatible with the old
ones, or where , the new contract merely
supplements the old one.'19

e. Change from trust receipt agreement to a simple

loan.'10
f.

Change from a mortgage to antichresis.311

g. Change from a sale to a loan.312

c.

4. Examples of incidental changes.

a. Execution of a mortgage to secure the payment of a
loan313 - the contract of loan is not novated by the
mortgage, which is merely an accessory contract.
b. Changes in the terms of payment . of an obligation to
pay,314 such as:

C.

In a construction contract, changes for the redesign of

the structure and corresponding reduction in the
contract price (particularly where the contract states
that changes may be made in the works without
invalidating the contract). 320

SUBJECTIVE

NOVATION: Subjective novation is novation by

changing the person of the debtor or the person of the creditor.

307

Kabankalan Sugar Co. v. Pacheco, 55 Phil. 555 (1930).

Gofii v. CA, G.R. No. L-27434, September 23, 1986.
309 Heirs of Bernabe v. CA, G.R. No. 154402, July 21, 2008.
'10 Pilipinas Bank v. Ong, G.R. No. 133176, August 8, 2002.
'" Jagunap vs. Mirasol, [CA], 48 O.G. 3911, cited in Ugutan v, CA, G.R. No. 138677, February
12, 2002.
"' Soncuya vs. Azarraga, 65 Phil. 635 (1938), cited In Llgutan v. CA, G.R. No. 138677, February
.
12, 2002.
'" Ugutan v. CA, G.R. No. 138677, February 12, 2002. Asia Banking Corp. v, Lacson Company,
Inc., 48 Phil. 482 (1926),
.
314 Magdalena Estates, Inc. vs. Rodnguez, 18 SCRA 967, as reiterated in Velasquez vs. Court of
Ar peals, 309 SCRA 539,

315 Kabankalan Sugar Co. vs. Pacheco, No. 33654, 29 December 1930, 55 Phil. 555; Tible v.
Aquino, G.R. No. L-28967, 22 July 1975, 65 SCRA 207, 218; Pascual v. Lacsamana, 100 Phil.
381, 385 (1956).
316 Sps. Reyes v. BPI Family Savings Ban G.R. Nos. 149840-41, March 31, 2006.
" 7 California Bus Lines, lnc.. v. State Investment House, Inc., G.R. No. 147950, December 1 1
'
2003.
"' Bank of P.I. vs. Abaladejo, No. 30490, 27 March 1929, 53 Phil. 14; Sps. Aguilar v. Manila
Banking Corp., G.R. No. 1579 1 1 , September 19, 2006. '
319 Sps. Reyes v. Court of Appeals, G.R. No. 147758, 26 June 2002, 383 SCRA 471, 482.
320 Gammon Phil., Inc. v. MRTDC, G.R. No. 1 44792, January 31, 2006.

122

123

''

1.

Change in the Debtor

a.

iii. The consent of the old debtor is

required. (Art.

Necessity of Consent
i.

(1)

on whether the old debtor has given consent:326

(1) Expromision

The consent may be express or implied, and

the debtor, since it consists of a third person's

assumption of the obligation. As such, it

requires the consent of the thi.rd person and the

creditor.

release of the old debtor. 323

(2) Deliigacion

The mere fact that the creditor receives a

necessary.'27

original debtor. 324

b.

Effect ofInsolvency ofNew Debtor

i.

is

without

the

the part of the original debtor (i.e., the old

obligation shall not be revived). (Art.
ii.

124

(substitution

the obligations shall not give rise to any liability on

required.

Asia Banking Corp. v. Elser, 54 Phil. 994 (1929).

Aquintey v. Sps. Tibong, G.R. No. 166704, December 20, 2006, citing Babst v. Court of
Appeals, 403 Phil. 244, 259-260 (2001).
323 Aquintey v. Sps. Tibong, G.R. No. 166704, December 20, 2006, citing Lopez v. Court of
Appeals, L33157, June 29, 1982, 1 1 4 SCRA 671, 688.
'" Magdalena Estates Inc. v. Rodriguez, 125 Phil. 151, 157 (1966). Quinto v. People, G.R. No.
126712, April 14, 1999, citing Rios vs. Jacinto, etc., 49 Phil. 7; Garcia vs. Khu Yek Ching, 65
Phil. 466; La Campana Food Products, Inc. vs. Philippine Commercial and Industrial Bank, 142
SCRA 394.
325 Ajax Marketing Corp. v. CA, G.R. No. 118585, September 14, 1995; Aquintey v. Sps. Tibong,
G.R. No. 166704, December 20, 2006.

expromision

the new debtor's insolvency or non-fulfillment of

The consent of the new debtor is aiso always

322

In

knowledge or against the will of the old debtor) -

debtor merely becomes a co-debtor or a surety.

325

321

and the

thus, the consent of these three persons are

does not extinguish the obligation of the

ii.

the debtor offers,

to the substitution and assumes the obligation;

person does not constitute a novation and

old debtor, there is no novation; the third

creditor accepts, a third person who consents

guaranty or accepts payments from a third

person who has assumed the obligation of t,he

the initiative for the change

does not come from (and may even be made

For novation to take place, the creditor milst

consent
(expressly or impliedly322) to the

Without the creditor's consent to release the

without the knowledge or against the will of)

with the debtor subsists.'21

(3)

Thus, substitution of the

1293)

may be given at any time while the agreement

(2)

always

debtor may be classified into two kinds, depending

The consent of the creditor .to the change in the

debtor is always required. (Art.

1293)

not

In

delegacion

1294)

(substitution is proposed by the

original debtor and accepted by the creditor) - the

new debtor's insolvency shall not revive the action
of the latter against the original obligor, but (unlike
in expromision) it is subjection to the following

exceptions

326 Garcia v. Llamas, G.R. No. 154127, December 8, 2003.

'" Garcia v. Llamas, G.R. No. 154127, December 8, 2003.

125

(I)

when said insolvency was

already existing and

of

when

public knowledge,

the

debtor

delegated his debt, or

(2)

a.

when said insolvency was

and

known to the debtor,

his debt. (Art. 1295)
c.

2. Change in the Creditor or Subrogation.

of the creditor to a third person, who substitutes him in

already existing

all his rights.328 It transfers to the persons subrogated

when he delegated

the credit with all the rights thereto appertaining, either

againsi the debtor or against third person, be they
guarantors or possessors of mortgages, subject to

Right ofNew Debtor

stipulation in a conventional subrogation.

Payment by the new debtor gives him the rights

mentioned in Articles

1236

and

In

(without the knowledge or against

,
the will of the old debtor) -

expromision

The new debtor may recover from the qld

(1)

debtor only insofar as the payment has been

beneficial to the old debtor.

(2)

(Art. 1236)

creditor is either legal or conventional. (Art.

subrogated to the rights of the creditor. (Art.

1237)
ii.

In

delegacion

(with the knowledge and consent of

the old debtor) -

(1)

The new debtor may demand from the old

debtor what he has paid. (Art.

(2)

1236)

subrogated to the rights of the creditor.

Conventional Subrogation - is subrogation which

takes place by agreement329; it requires the consent of

the original parties and of the third person. (Art.

1301)

1.

clearly

Conventional

subrogation

established in
1300)
ii.

must

be

order that it may take effect. (Art.

Distinguished from

Assignment

Conventional subrogation is
.
.
assignment of erectt
t , thus330:

not

of Credit.
identical

to

(1) Conventional sbrogation:

(a) the debtor's consent is necessary;

a new one;

(Art.
"' Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corp., G.R. No.
136729, September 23, 2003. Philippine National Bank vs. Court of Appeals, G.R. .No. 128661,
August 8, 2000, 337 SCRA 381, 404.
3i9 Astra Electronics Corp. vs. Philippine Export and Foreign loan Guarantee Corp., G.R. No.
136729, September 23, 2003.
"' Licaros v. Gatmaitan, G.R. No. 1 42838, August 9, 2001; Leoonio v. Capitol Dev't Corp., G.R.
No. 149040, July 4, 2007.

126

1 300)

(b) extinguishes an obligation and gives rise to

The new debtor, upon payment, is legally

1302[2])

b.

The new debtor, upon payment, cannot be

(Art. 1303)

Subrogation of a third person in the rights of the

1237. (Art. 1293)

Thus:

i.

Jn General. Subrogation is the transfer of all the rights

127

(c) the nullity of an old obligation may be

cured by subrogation, such that the new
obligation will be perfectly valid;

i.

Legal subrogation is not presumed, except in cases

expressly mentioned in the Civil Code. (Art.

ii. There is legal subrogation in the following cases:

(Art. 1302)

(2) Assignment ofcredit:

(1)

(a) the debtor's consent is not required;

When a creditor pays another creditor who is

knowledge; (Art.

knowledge (either by formal notice or

Example:

some other means) of the assignment

(Art.

(2)

same right which

by the assigmnent of the creditor's right to

another.
is subrogation which talces place
by operation of law because of certain acts. 332 The
-

parties' consent or agreement is not necessary, and it

may

take

place

even

without

the

When a third person, not interested in the

(3)

When, even without the knowledge of the

debtor, a person

(c) the nullity of an obligation is not remedied

Legal Subrogation

if an unsecured creditor pays off

obligation, pays with the express or tacit

approvalofthe debtor; (Art. 1302)

1 626) .
passes from one person to another;

debtor's

knowledge. 333

debtor's

senior security.

debtor who, before knowing of the

released from the obligation.

the

junior security pays off a creditor with

proper party (the assignee).331 The

assignment, pays his creditor :shall be

without

1302)

a secured creditor, or if a creditor with

so that he may pay the debt to tl'ie

(b) assigmnent refers to the

even

preferred,

Nonetheless, the debtor must have

c.

1 300)

interested in the fulfillment of

the obligation pays, without prejudice to the

effects of confusion as to the latter's share.
(Art.
(a)

1302)

Examples f interested persons:

co

debtors, sureties, guaranties, mortgagors

and pledgors.
(b) By express provision of Art.

guarantor

2067,

the

who pays is subrogated by

virtue thereof to all the rights which the

331.

Ledonio v. Capitol Dev'\ Corp., G.R. No. 149040, July 4, 2007, citing Sison v. Yap Tico, 37
Phil. 584, 587-588 (1918) and Aquintey v. Spouses Tibong, G.R. No. 166704' 20 December
2006.
332 Astra Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corp., G.R. No.
136729, September 23, 2003. Chemphil Import & Export Corp. vs. Court of Appeals, G.R. Nos.
1 12438-39, December 12, 1 995, 251 SCRA 257, 279.
333 Astra Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corp., G.R. No.
.
136729, September 23, 2003.

128

creditor had against the debtor.

(c) The

insurer

who

pays

claim

for

indemnity is legally subrogated to the

rights of the person indemnified.

129

The

insurer may then seek to recover from the

person who is liable for the loss.334
d. Effect of Partial Payment. - A creditor, to. whom
partial payment has been made, may exercise his right
for the remainder, and he shall be preferred to the
person who has been subrogated in his place in virtue
of the partial payment of the same credit (Art. 1304)

Chapter 6

Introduction to Contracts
I. IN GENERAL
\.

Definition. The Civil Code defines a contract as "a meeting of

minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some
service." (Art. 1305)
a.

"Meeting of minds" - once the minds of the contracting

parties meet, a valid contract exists, whether it is reduced
to writing or not'" (except in certain contracts, infra).
i.

The area of agreement must extend to all points that

the parties deem material. Otherwise, there is no
contract.336

ii. While a contract need not be in writing, the lack of

signature on the draft written contract is indicator that
the parties did not reach agreement on all points
deemed material.337
b.

there must be at least two parties to a

contract. However, a contract may also be multilateral, or
involving more than two parties.

"Two persons"

Autocontracts are contracts made by a single person

representing two parties (one is a party he represents,

while the other is either another party he represents or
he himself, in his personal capacity). Generally,

"' Federal Express Corp. v. American Home Assurance Co., G.R. No. 150094, August 18, 2004.
citing Philippine Americen General Insurance Co., Inc. v. Sweet Lines, Inc., 212 SCRA 194.
August 5, 1992
130

"' National Irrigation Administration v. Gamit. G.R. No. 85869, November 6, 1992.
1.00 Phil. 351 (1956).
337 A. Magsaysay, Inc. v. Cebu Portland Cement Co., 100 Phil. 351 (1956).
3" A. Magsaysay. Inc. v. Cebu Portland Cement Co.,
131

autocontrac.ts
8

prohibited.33
Article

1941

are permissible if not expres ly

Express prohibitions may be found in

ii.

However, some contracts are

real contracts, i.e., they

are not perfected until the delivery of the object of the

(sales) and Article .1890 (agency).

obligation. (Art.

1 3 1 6) Examples:

deposit, pledge and

commodatum.
However, this rule does not apply to administrators
m.

of decedent's estates, in view of the fiducia1y

In a solemn orformal contract, compliance with certain

relationship that they occupy with respect to the

. formalities prescribed by law is essential in order to

heirs of the deceased and their responsibilities

make the act valid, the prescribed form being an

toward the probate court. An administrator is not

essential element thereof.

permitted to deal with himself as an individual in

property. .

Example: donation of real

any transaction concerning trust property. 339

c.
c.

"One binds himself, with respect to the other" - the

respective undertakings under the contract culminating in

contract may .also be reciprocal, wherein both parties are

the extinguishment thereof.

obliged to perform a prestation.

2.

3.

Stages of Contract.340
a.

Consummation begins when the parties perform their

Classification of Contracts.

The following are some of the

common classifications of contracts341 -

Negotiation covers the period from the time the

a.

According to dependence:

prospective contracting parties indicate interest in the

contract to the time the contract is concluded (perfected).
b.

i.

ii.

Perfection of the contract takes place upon the concurrnnce

(e.g., pledge, mortgage, or suretyship)

of the essential elements thereof. Until the contract is

perfected, it cannot, as an independent source of obligation,

principal - may exist alone (e.g., lease, sale or loan)

accessory
existence. depends on another contract

b.

According to perfection:

serve as a bindingjnridical relation.

i.

In

i.
general, contracts are

mere consent

consensual, i.e., perfected by

(Art. 1 315),

ii.

or upon a mere meeting of

(e.g., commo.datum or pledge);

minds, i.e., the concurrence of offer and acceptance, on

the object and on the cause thereof.
(Art.

consensual - perfected upon consent (e.g., sale);

real - perfected upon delivery, in addition to consent

iii.

Example: sale

formal - perfected upon execution of required

formalities

(e.g.,

donation

property)

1 458).
c.

'" IV Tolentino 408

"' Jaroda v. Cusi, Jr., G.R. No. L-28214, July 30, 1969.
"' Ang Yu Asuncion v. CA, 238 SCRA 602 (1994); San Miguel Properties Phllippines, Inc. v.
Spouses Huang, G.R. No. 137290, July 31, 2000, 336 SCRA 737.
132

According to cause:

"' IV Tolentino 410411 .

133

or

mortgage

of real

i.

E.g., a renunciation of interest in real

- parties exchange equivalent values (e.g.,

onerous

property

as payment of loan by the

33
renouncer is analogous to sale. 4

sale); and
ii.

gratuitous

one party does not receive an equivalent

d.

(d) Customs of the place.

value (e.g., commodatum)

(3)

According to the parties obliged:

i.

bilateral

Contracts which do not strictly conform to the

standard contracts . are allowed and may be
considered innominate contracts. 344

- both parties are required to perform

reciprocal prestations (e.g., sale);

ii.

unilateral -

only one party is required to perform a

prestation (e.g., commodatum or gratuitous deposit)

e.

terms and conditions as they may deem convenient, provided they

nominate (those with particular names, like sle, lease,

deposit, etc.)

ii.

innominate (those without particular names)

(1)

are not contrary to law, morals, good customs, public order, or

public policy. (Art.

1306)

A person's freedom to contract about his own affairs is part ofthe

Innominate contracts are traditionally divided inio

liberty of the individual under the Constitution.

However, this

four types:

freedom is not absolute and must yield to the common good.345

(a)

public order or public policy are void.

(b)
(c)
(d)

(2)

AUTONOMY OF CONTRACT
The contracting parties may establish such stipulations, clauses,

According to name:
i.

II.

Thus, stipulations which are contrary to law, morals, good customs,

Do ut des (I give and you give);

Do ut facias (I give and you do);
Facio ut des (I do and you give)342;
Facio utfacias (I do and you do).

Innominate
following:

contracts

are

regulated

A.

"LAW''
I.

by

the

(Art. 1307)

(a) Stipulation ofthe parties;

(b) Provisions of Titles I (Obligations) and II
(Contracts) of Book !Vof the Civil Code;

2.

Applicable laws form part of and are read into the contract
without needfor any express reference.346
Examples of contracts or stipulations prohibited by law:
a.

Pactum commissorium

The

creditor

cannot

appropriate the things given by way of pledge or

(c) Rules governing the most analogous nominate

contract;

'" Perez v. Pomar, 2 Phil. 682 (1903); Corpusv. CA, G.R. No. L-40424, June 30, 1980.
134

.
343 Caolbes, Jr. v. Caoibes-Pantoja, G.R. No. 162873, July 21, 2006.
344 Santos v. Acuna, 100 Phil. 230 (1956)
34' People v. Pomar, 46 Phil. 440 (1924).
346. lntra-Strata Assurance Corp. v. Republic, G.R. No. 156571, July 9, 2008; Maritime Company
of the Philippines v. Reparations Commission, G.R. No. L-29203, July 26, 1971, 40 SCRA 70.
135

mortgage, or dispose of them. Any stipulation to the

contrary is null and void. (Art. 2088)
b. Stipulation in contract of employment discriminatirig
against women (Labor Code, Art. 135) or prohibitirig
them from gettirig married.347 (Labor Code, Art. 136)
c. An agreement :o deprive a court of jurisdiction
conferred on it by law is void.348 Jurisdiction over an
action is conferred by law, and may not be changed by
.
mere agreement ofthe parties.349

b. Contracts for domestic. services without payment of

wages are void. 357
C. PUBLIC POLICY OR PUBLIC ORDER
1 . Public policy or public order refers to the public good or
the interest of the society. No person can lawfully do that
which has a tendency to be injurious to the public or
against the public good. 358
2. Examples:

B. MORALS AND GOOD CUSTOMS

I. Morals and good customs refer to general prii:iciples of

morality which have received a good measure' of social
acceptance.350 According to the Code Commission, morals
and good customs are distinct concepts, but some
commentators disagree.351
2. Examples:
a. Iniquitous, exorbitant and unconscionable stipulations
on interest rates, penalties and attorney's fees,352 such
as interest rates of 66% per armum,353 72% per
armum,354 or 108-120% per armum.355 Note, however,
that there is no fixed mle on what is unconscionable; in
one case, interest rate of 7% per month (or 84% per
armum) was upheld.356
'" Phil. Telephone and.Telegraph v. NLRC, G.R. No. 1 1 8978, May 23, 1997.
"' Principe v. Philippine-Singapore Transport Services, Inc., G.R. No. 80918, August 16, 1989.
'" Calimlim, et al. vs. Ramirez, et al., 118 SCRA 399; De Jesus, et al. vs. Garcia, et al., 19
SCRA554.
350 IV Tolentino 418.
351 See, e.g., IV Tolentino 418.
'" Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004, 427 SCRA 517, 519.
'" Medel v. CA, 359 Phil. 820 (1998).
354 Carpo v. Chua, G.R. Nos. 150773 & 153599, September30, 2005.
'" Dino v. Jardines, G.R. No. 145871, January 31, 2006.
356 Sps. Pascual v. Ramos, G.R. No. 144712, July4, 2002.
136

a.

Void: stipulation that a credit card holder who reported

the loss/theft of his credit card continues to be liable
for unauthorized charges until the credit company
notifies .its member establishments. Such clause leaves
the holder at the mercy of the credit card company.359

b. Void: stipulation which repudiates the existence of

employer-employee relationship to circumvent the
compulsory coverage of the employee under the Social
Security law. 360 The employment status of a person is
defined and prescribed by law and not by what the
parties say it should be. 36 1
c.

Void: agreement to stifle prosecution of a crime.362 It

would
be detrimental to the administration ofjustice.
.

351 See De las Reyes v. Alo]ado, 1 6 Phil. 499 (1910).

"' Ferrazzini v. Gsell, 34 Phil. 697 (1916).
'" Ermitano v. Court of Appeals, 365 Phil. 671 (1999); Acol v. Phn. Commercial Credit Card,
Inc.. G.R. No. 1.35149, July 25, 2006.
"' Republic v. Asiapro Cooperative, G.R. No. 172101, ovember 23, 2007.
'" Republic v. Aslapro Cooperative, G.R. No. 172101, November 23, 2007, citing Chavez v.
National Labor Relations Commission, supra note 26 a.I 493; Lopez v. Metropolitan Wateiworks
and Sewerage System, G.R. No. 154472, 30 June 2005, 462 SCRA 428, 445446.
"' Arroyo vs. Berwln, 36 Phil. 386 (1917); Monterey vs. Gomez, et al., 104 Phil. 1059 (1958);
United General Industries, Inc. v. Par; G.R. No. L-30205, March 15, 1982.

137

d.

a stipulation by a

Void:

common carrier

exempting

h.

itself from liability or limiting its liability for injury or

363
loss caused by its own negligence.
(see Art. 1745)

automatic

Valid:

forfeiture

clause

sale

in

by

installment, which deems any previous payments

forfeited and the contract automatically rescinded upon
the failure of the buyer to pay three successive monthly

i.

installments or any one yearend lump sum payment.368

However, a stipulation fixing the sum that may be

recovered from a common. carrier is valid if it is
reasonable and just under the circumstances, and
has been fairly agreed upon.

ii. In a contract of private

i.

carriage,

dues.369

the parties may

loss of or damage to the cargo caused even by the

j.

negligence of the ship captain. As the contract is

k.

the buyer must be in a.ctual possession of the house at

Valid: stipulation that the creditor may apply any of the

payment of the debtor's obligation.371

allocations or foreign exchange allocations from the

365

3. "Non-involvement clauses"
f.

Valid:

provision in a construction contract providing

for a I -year period during which the contract is liable

for defects. Contractor cannot be expected to make a

Valid:

trade and place, and if they .are not greater than is necessary

fixed-period employment contracts, unless the

a.

workmanship.

g.

they are valid if there are reasonable limitations as to time,

to

guarantee
366

on

all

materials

are those which prevent an

employee from working for another employer. In general,

and

perpetual

debtor's moneys in the creditor's hands for the

prosecution or following-up of applications for import

govenunent.

stipulation in the sale of soCialized housing that

years.370

strictly involved.364
stipulation for the commission of an agent in the

Valid:

all times and cannot dispose of the same within

not of common carriage, public interest is not

Void:

provision in deed of restrictions that a buyer of

homeowners' association and must pay association

validly stipulate that the shipowner is not liable for

e.

Valid

a parcel of land automatically becomes member of the

(Art. 1750)

afford

fair

and

reasonable

protection

to

the

employer.372 Examples:
Clause prohibiting the employee from working for any

period was purposely intended to circumvent the

company or business in the Philippines for

employee's right to his security of tenure. 367

void, as there is no limitation as to trade.373

years

363 Ysmael & Co. v. Barretto, 51 Phil. 90.

Valenzuela Hardwood and Industrial Supply, Inc. v. CA, G.R. No. 102316, June 30, 1997.
365 Tee v. Tacloban Electrlc and Ice Plant Co., 105 Phil. 168 (1959); Sy Suan v. Regala, 105 fhil.
1024 (1959).
366 William GolangcO Construction Corporation, v. Philippine Commercial International Bank,
G. R. No. 142830, March 24, 2006.
367 Brent School vs. Zamora, 181 SCRA 702 [1990].

"' Valarao v. CA0G.R. No. 130347, March 3, 1999.

369 Cariday Investment Corporation v. Court of Appeals, 176 SCRA 31 (1989); Bel Air Village
Association, Inc. v. Dionisio, 174 SCRA589 (1989).
3;o Republic v. David, G.R. No. 155634, August 16, 2004.
371 National Sugar Trading v. PNB, G.R. No. 151218, January 28, 2003.
"'Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28, 2007.
373 Ferrazziniv. Gsell, 34 Phil. 697, 714 (1916).

138

139

36"

Clause prohibiting the employee from working for any

company engaged in the same businesses of his former
employer for I year
void, as the limitation as to
trade is not reasonable; the employee only worked in
the abaca business of the employer, and not in. any of
its numerous other businesses.374

b.

also required. In real contracts (e.g., commodaturn;

pledge), delivery of the object is also required.

C. OBLIGATORINESS: Obligations arising from contracts have the

force of law between the contracting parties and should be

complied with in good faith. (Art. 1 1 59)

c. Clause prohibiting employee from opening, owning or

having any connection with any other drugstore within
a radius of four miles from the employer's place of
business d1iring the time the employer was operating
his drugstore
valid.315

!.

d.

2. The mere fact that one has made a poor bargain may not be

Clause prohibiting an independent agent for 1 year

from engaging directly or indirectly in actiyities of
other companies that compete with the business of her
principal
valid.316

a ground for setting aside the agreement. 378 The law does
not relieve a party from the effects of an unwise, foolish or
disastrous contract, entered into with full awareness of
what he was doing and entered into and carried out in good
faith. Courts have no jurisdiction to look into the wisdom
of the contract entered into by the parties or to render a
decision different therefrom. 3 79

e.

Clause prohibiting employee from engaging in any pre

need business akin to her employer's within 2 years

valid.371

From the perfection of contract, the parties are bound not

only to the fulfillment .of what has been expressly
stipulated but also to all the consequences which,
according to their nature, may be in keeping with good
faith, usage and law. (Art. 13 15)

D.

III. CHARACTERISTICS
A. AUTONOMY: (see discussion above)

MUTUALITY: The contract must bind both contracting parties;

its validity or compliance cannot be left to the will of one of

them. (Art. 1308)

! . The determination of the performance may be left to a third

person, whose decision shall not be binding until it has
been made known to both contracting parties. (Art. 1309)

B. CONSENSUALITY: Contracts are generally deemed perfected

by mere consent. (Art. 13 15) No special form is necessar>y.
(Art. 1356)

The determination shall not be obligatory if it is

evidently inequitable. In such case, the courts shall
decide what is equitable under the circumstances. (Art.
1310)

Exceptions: In formal contracts (e.g., donation; mortgage

of real property), compliance with special formalities is

374 G. Martini, Ltd. v. Glaiserman, 39 Phil.

120, 125 (1918).

Del Castillo v. Richmond, 45 Phil. 679, 683 (1924).
376 Consulta v. Court of Appeals, G.R. No. 145443, March 18, 2005, 453 SCRA 732, 745.
377 Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28, 2007.
375

140

'" Fernandez v. Manila Electric Railroad, etc., Co., 14 Phil. 274 (1909).
Sanchez v. Court of Appeals, 345 Phil. 155, 190-191 (1997).

379

141

2.

Under the principle of mutuality, no party can renounce a

b.

contract unilaterally or without the consent of the other.

30
To abandon a contract, mutual assent is required. 8

1 3 1 1, contracts are generally

transmissible to the assigns and heil"s of the original
contracting parties, except in the following cases387

2. Transmissibility.

Unless the parties stipulated that either one of them

may unilaterally terminate the contract.381

3.

Escalation clauses which grant the creditor an

a.

absolute

right to adjust the interest independently and upwardly,

(Art. 1 3 1 1)

1 . Not Binding on Third Parties.

Where the rights and obligations are not transmissible

This refors to rights and obligations which are

Contracts take effect only between the parties,

their assigns and heirs.

strictly personal (intuitu personae). Examples:

. (1)

Contracts can only

bind
'

the parties who entered into it, and it generally cannot

Those relating to family relations (such as

parental

authority,

action

for

nullity

or

(such

as

annulment of marriage or for legal separation,

favor or prejudice a third person, even if he is aware of

cohabitation);

such contract and has acted with knowledge thereof. Since

a contract may be violated only by the parties thereto as

(2)

against each other, a party who has not taken part in it

cannot sue for performance, unless he shows that he has a

real interest affected thereby.383

a.

UnderArt.

by their nature.

without the consent of the debtor, is void.'82

E. RELATIVITY:

A subsidiary of the creditor corporation cannot collect

from the debtor. 386

(3)

Those arising

from public

suffrage or public office);

law

Those which involve or require the personal

skills,

characteristics,

qualifications

or

A party who is not privy to the contract cannot sue

circumstances of a particular individual (such

privy to a contract cannot be sued or held liable for

or

upon breach thereof.384 Similarly, a person who is not

breach thereof.385

as a contract for a concert by a famous singer,

(4)
"' HDMF v. CA, G.R. No. 118972, April 3, 1 998: Professional Academic Plans, Inc. v.
Crisostomo, G.R. No. 148599, March 14, 2005.
381 Cruz v. Puna, G.R. No. L-50998, January 31, 1983.
"' Philippine National Bank v. Court of Appeals, G.R. No. 107569, November 8, 1994, 238
SCRA 20; Sps. Florendo v. CA, G.R. No. 101771 , December 17, 1996; New Sampaguita
Buflders Construction, Inc. v. Philippine National Bank, G.R. No. 148753, July 30, 2004;
Fioirendo v. Metrobank, G.R. No. 148325, September 3, 2007; Equitable PCI Bank v. Ng Sheung
Ngor, G.R. No. 171545, December 19, 2007.
363 MWSS v. Bautista, G.R. No. 171351, March 14, 2008; Sps. Borromeo v. CA, G.R. No.
169846, March 28, 2008.
384 Sps. Tan v. G.V.T. Engineering Services,,G.R. No. 1 53057, August 7, 2006.
"' Integrated Packaging Corp. v. CA, G.R. No. 115117, June 8;2000.
142

portrait

commissioned

distinguished painter);

Criminal responsibility (Art.

Code)

from

89, Revised Penal

However, civil liability arising from crime

continues to be an obligation of the

deceased offender's estate.388

3" Sps. Borromeo v. CA, G.R. No. 169846, March 28, 2006.
3" Estate of K. H. Hemady v. Luzon Surety Co., 100 Phil. 388 (1956).
368

Beiamala v. Poiinar, G.R. No. L-24093, November 18, 1967.

143

b. Where the rights and obligations are not transmissible

by stipulation.
c.

sufficient. The contracting parties must have clearly

and deliberately conferred a favor upon a third person.
(Art. 1 3 1 1)

Where the rights and obligations are not transmissible

by provision oflaw.

b. Requisites of a valid stipulation pour autrui'91 :

i.

Examples: usufruct (Art. 603); agency (Art. 1919)

commodatum (Art. 1939)

There _must be a stipulation in favor of a third

person;

The heir is not liable beyond the value of the

property he received from the decedent. (Art. 1 3 1 1)
Money debts left by the decedent are not transmissible
in the sense that they are paid from the estate of the
decedent, and only the net estate or remainder goes to
the heirs. If the decedent's estate is not sufficient to
'
pay his debts, his heirs cannot be held liable for said
debts in their personal capacity.389

ii. The stipulation in favor of a third person should be

a part, not the whole, of the contract;

3 . Qualifications to the Principle of Relativity. In the

following cases, a contract may be said to affect even non
parties390: (a) stipulation pour autrui (Art. 131 1); (b)
contracts creating real rights (Art. 1 3 1 2); (c) creditors'
right to rescind contracts which defraud them (Art. 1313);
(d) stranger's liability for unlawful interference with a
contract (Art. 1 3 14); (e) accion decreta (Art. 1729).

interest and privy in the promise.

Put
otherwise, the contracting parties must have
intended to create a cause of action in favor of
the beneficiary.392

Note:

iii. The contracting parties must have clearly and

deliberately conferred a favor upon a third person,
not a mere incidental benefit or interest;

(1) There must be an intent to benefit a third party,

and to recognize Ilim as the primary party-in

..

(2) An agent who stands to receive a commission

under a contract to sell a property is not a

beneficiary of a stipulation pour autrui and
thus cannot enforce the contract. His interest
is merely incidental.393

These are further discussed below.

4.

Stipulation Pour Autrui. If a contract should contain

some stipulation in favor of a third person (stipulation pour
autrui), he may d.emand its fulfillment provided he
communicated his acceptance to the obliger before its
revocation. (Art. 1 3 1 1)
a.

To constitute a valid stipulation pour autrui, a mere

incidental benefit or interest of a person is not

"' See Rules of Court, Rules 88-90.

390 Sps. Lagandaon v. CA, G.R. Nos. 102526-31, May 21, 1998. J. Vitug, dissenting.
144

iv. The third person must have communicated his

acceptance to the obliger before its revocation; and
(1) Acceptance may be in any form. Even if the
benefit amounts to a donation, the acceptance
391

Baluyot v. CA, G.R. No, 122947, July 22, 1999; Sps. Ramos v. CA, G.R. No. 132196,
December 9, 2005.
392 Limitless Potentials, Inc. v, Quilala, G.R. No. 157391, July 15, 2005.
393 Uy v, CA, G.R. No, 120465, September 9, 1999.
145

(2)

need not follow the fonnalities required for the

provisions of the Mortgage Law and the Land Registration

acceptance of a donation.394

Laws. (Art.

1312)

Acceptance may be implied from the third

A real right directly affects the property subject to it;

party's

thus, whoever comes into possession of such property

enjoyment

of benefits

under

the

stipulation,395 or from his perfonnance of his

must respect that real right.401

obligations under the stipulation.396

Example: a registered mortgage over a property is

(3)

Before acceptance by the third party, the

binding even on a third person who subsequently

original contracting parties may revoke the

acquires it, even if he was not party to the

mortgage.402

stipulationpour autrui.
v.

'

Neither of the contracting parties bears the legal

6. Contracts to Defraud Creditors.

. representation or authorization of the third party.

c.

Examples:

(i) a stipulation in a sublease contract that

a.

the sublessee should directly pay rent to the principal

1313)

Example: contracts of the debtor disposing his property

gratuitously, without reserving sufficient property to

lessor391; (ii) a stipulation in a deed of donation

pay off his previous debts. (Art.

requiring the donee to transfer title over a portion of

the subject property to the present occupants of the said

b.

portion398; (iii) a stipulation in a deed of partition that

1387)

The defrauded creditor may sue for the resc1ss1on

(accion pau/iana) of the contract

13 81, par. 3 ; Art. 1 1 77)

the frnits of a particular parcel of land will be given to

intended to defraud

him. (Art.

the Church to defray certain religious expenses399; (iv)

a stipulation in a contract between BANKARD, a

7. Unlawful Interference with Contracts. Any third person

credit card company, and its affiliated establishment

who induces another to violate his contract shall be liable

that the latter will honor the BANKARD credit card

offered by a cardholder.400

for damages to the other contracting party. (Art.

a.

5. Contracts Creating Real Rights.

Creditors are protected

in cases of contracts intended to defraud them. (Art.

1 314)

Elements of unlawful or tortious interference403:

In contracts creating

real rights, third persons who come into possession of the

i.

Existence of a valid contract;

object of the contract are bound thereby, . subject to the

ii.

Knowledge on the part of the third person of the

existence of contract; and

394 Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1 977, 79 SCRA 193;
Limitless Potentials, Inc. v. Quilala, G.R. No. 157391, July 15, 2005.
"' Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1977, 79 SCRA 193.
"' Tabar v. Becada, 44 Phil 619 (1923).
397 Limitless Potentials, Inc. v. Ouilala, G.R No. 157391, July 15, 2005.
"' Baluyot v. CA, G.R. No. 122947, July 22, 1999.
399 Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1977, 79 SCRA 193.
<00
Mandarin Villa, Inc. v. CA,.G.R. No. 1 19850, June 20, 1996.
146

iii. Interference of the third person is without legal

justification or excuse.

''

IV Tolentino 438.
Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
403
So Ping Bun v. CA, G.R. No. 120554, September 21, 1999.
4o2

147

b.

Examples.\ (a) X induced the owner to lease a building

to him, knowing that said building had already been

leased to another person, y44;

Unless it is

(b) J induced the owner

of a cinema film to break his contract of lease with a

theater owner, K, and lease the film to

J,

authority to do the act had been previously given,

except where the rights of third parties have

Remedies:

intervened between the act and the ratification.'0'

The wronged party is entitled to

damages, but the

liability for damages of the meddler cannot be

worse than the liability of the contracting party

who breached the contract.406
ii.

Injunction is also

a proper remedy to res ain such

unlawful interference.'07

8. Accion directa.

Those who put their labor upon or furnish

materials for a piece of work undertaken by the contractor

have an action against the owner up to the amount owing

from the latter to the contractor at the time the claim is
made.

IV.

(A1t. 1729)

UNAUTHORIZED CONTRACTS

I.

No one may contract in the name of another without being

authorized by the latter, or unless he has by law a right to
represent him.

(Art. 13 17)

Ratification is generally retroactive. It is as though

city.405

i.

expressly or impliedly, by the

is revoked by the other contracting party.

for the

purpose of exhibiting it in another theater in the same

c.

ratified,

person on whose behalf it has been executed, before it

(Art. 1 317)

2. A contract entered into in the name of another by one who

has no authority or legal representation, or who has acted

beyond his powers, shall be unenforceable.

(Art. 1317)

404 So Ping Bun v. CA, G.R. No. 120554, September 21, 1999.
405 Gilchrist v. Cuddy, 29 Phil. 542 (1915);
406 Daywalt v. Corporaclon de PP. Agustinos Recoletos, 39 Phil. 587 (1919).

407 Yu v. Court of Appeals, G.R. No. 86683, January 21,

148

1993.

40' De

Jesus v. Daza, 77 Phil. 170 (1946).

149

Chapter 7

Essential Requisites of

a.

The offer must be certain. (Art.

b.

The acceptance must be absolute. (Art.

Contract

1 3 1 9)
1319)

A qualified acce'ptance constitutes a counter-offer.

(A11.
c.

L GENERAL PROVISIONS

1319)

In addition to the subject matter and the consideration,

the area of agreement must extend to

all points that the

parties deem material.4\0

There is no contract unless the following requisites concur:

B. OFFER

1 . Consent o f the contracting pa11ies;

2. Object certain which is the subject matter of the contract;
.

3. Cause o fthe obligation which i s established. (Art. 13 18)

Note that for formal contracts, compliance with special formalities
is additionally required. For real contracts, delivery of the
object is additionally required.

1. Definition.

"Offer" means a unilateral proposition which

one party makes to the other for the celebration of the

Contract. 4J I

2. Certain. The offer must be certain. (ii.rt. 13 19)

There is an offer in the context ofArticle

1 3 1 9 only if

the contract caii come into existence by the mere

acceptance of the offeree, without any further act on

the part of the offerer. Hence, the offer must be
.
definite, complete and intentional.412

II. CONSENT
A.

IN GENERAL
I.

Concept.

.
An. invitation to negotiate,4" or an offer to
Consent is the conformity of the parties to the

terms of the contract; the acceptance by one of the offer

made by the other; the concurrence of the minds of the
parties on the objeCt and the cause which shall constitute
the contract. 409

2. Manifestation.

Consent is manifested by the meeting of

"entertain" or deliberate on whether to purchase a

yacht,414 is not a definite offer.

3 . Effectivity. An offer is effective until either party becomes

incapacitated, or until the offer is withdrawn by the offerer.

Greater Metropolitan Manila Solid Waste Management Committee v. JANCOM Environmental

Corp., G.R. No. 163663, June 30, 2006.

"" A. Magsaysay, Inc. v. Cebu Portland Cement Co 100 Phil. 351 (1 956); Bugatti v. CA, G.R.
No. 138113, October 17, 2000.
41 1 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
41 2 Sps. Paderes v. CA, G.R. No. 1 47074, July 15, 2005.
413 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
41 4 Rosenstock v. Burke, 46 Phil. 217

150

151

the offer and the acceptance upon the thing and the cause

which are to constitute the contract. (Art.

4'

1 3 1 9)

a.

Incapacity. . An offer becomes ineffective upon the

(2)

death, civil interdiction, insanity, or insolvency of

either party before acceptance is

conveyed. (Art. 1323)

and sell which, as long as the object is

Withdrawal. As a general rule, the offerer may

by

the

its mailing,

offeree

learns

withdrawal.415 Thus, if A makes an offer to

when

ii.

and not
of

Ji!,

its

As an

exception, the

bilateral

offer may not be withdrawn

consideration, as
(Art. 1324) The
In such a

the price in the principal contract.

situation, a contract of "option" is created.

withdrawal (before the contract could be perfected by

(1)

B's receipt of the acceptance).

An "option contract" grants a person the

choice,

for

distinct

and

sep'arate

consideration, to purchase a determinate thing

42
at a predetermined fixed price. 0

When the offerer has allowed

the offeree a certain period to accept -

(2)

As a general rule, the offer may still be withdrawn

Withdrawal of the offer or option would be a

breach of the option contract, which would

at any time before acceptance by communicating

render the offerer liable for damages.421

1324) .Thus, a unilateral

sell under Art. 1479 may be withdrawn

such withdrawal. (Art.

In case of . breach, the remedy of the

at any time.416

(1)

is
first

consideration must be separate and distinct from

already mails withdrawal to B, there is no contract.

promise to

becomes

something paid or promised.

and B

The offer is deemed withdrawn upon B's mailing of

i.

accepted,

when it is founded upon a

mails his acceptance to A, but before receipt thereof, A

When Period is Given.

1479,

promise to buy and sell.419

The withdrawal is effective immediately after its

when

certain,

Note also that a unilateral promise to sell,

acceptance by the offeree.

necessarily

price

par.)

withdraw the offer at any time before he learns of the

such as

the

reciprocally demandable.41 8 (Art.

learns of the acceptance by the offeree.

manifestation,

and

determinate

"Conveyed" means the time when the offerer

b.

Also, a unilateral promise to sell must be

distinguished from a bilateral promise to buy

offeree/optionee is damages for breach of

the option contract,. and not damages or

However, this right should not be exercised

specific performance of the contract which

whimsically or arbitrarily, as it could give rise

to a claim for damages under Art.
ofrights.417

1 9 on abuse

Laudico v. Anas, 43 Phil. 270 (1922).

Atkins, Kroll & Co. v. Cua, 102 Phil. 948 (1958); Ang Yu Asuncion v. CA, 238 SCRA 602, 613
(1994).
417 Ang Yu Asuncion v. CA, 238 SCRA 602, 613 (1994).

4"
41'

152

is the object of the option.

The option

contract is distinct from the main contract

Ang Yu Asuncion v. CA, 238 SCRA 602, 612 (1994).

Atkins, Kroll & Co. v. Cua, 102 Phil. 948 (1958).
420 Beaumont v. Pneto, 41 Phil. 670 (1916).
421 Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1 994).
416

419

153

(e.g., sale) which is the object of the

seek specific performance of the owner' s

option.422

(3)

obligation to grant him the right of first

refusal427 (by allowing the right-holder to .

If the consideration given is really intended as

buy the property at the same terms and

part of the consideration for the main contract,

the

main

perfected.423

contract
Thus,

an

conld

be

(Art. 1482)
A

party).

"earnest money" in a

contract of sale is evidence of its perfection.

(4)

conditions at which it was sold to the third

deemed

"right offirst refusar' (where X gives Y the

right to buy a property should

4. Advertisements.
a.

X decide.to sell

invitations to make an offer. (Art.

it) is not an option contract because it depends

on whether X will decide to sell the property
.
2
and on terms that are not yet determmte.4 4

b,

refusal

does

not

need

refusal may be a clause in a principal

contract (e.g., lease), in which case the
consideration for the right of first refusal
forms part of the consideration for the

. .

prmc1pa1 contract.'2'

Advertisements for bidders are simply invitations to

accept the highest or lowest bidder, unless the contrary
appears. (Art.

separate

consideration to be valid. The right of first

1325)

make proposals, and the advertiser is not bound to

Since it is not an option contract, a right of

first

Unless it appears otherwise, business advertisements of

things for sale are not definite offers, but mere

c.

1326)

Public advertisements offering rewards or prizes, such

as in contests or competitions, constitute unilateral
promise. When a member of the public performs an
act pursuant to the offer (e.g., participates in the
contest), such action constitutes an acceptance which
converts the promise into a contract binding on the

In case the right of first refusal is violated

advertiser.428

- i.e., the owner sells the property to a

third person without first allowing the
right-holder to purchase it - the right

"' Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1994).

423 Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1994); Sps. Co v, CA, G.R. No. 1 12330,
August 17, 1999.
42 Ang Yu Asuncion v. CA, 238 SCRA 602, 614-615 (1994). Equatortal Realty Development, Inc.
v. Mayfair Theater, Inc,, 264 SCRA 483, 500 (1996).
"" Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 505 (1996).
426 Equatorial Realty Development, In v. Mayfair Theater, Inc,, 264 SCRA 483, 510 (1996);
.
Paranaque Kings Enterprtses, Inc. v. CA, 268 SCRA 727 (1997); Riviera F1lipma, Inc. vs. Court

of Appeals, G.R. No. 1 173!i5, Aprtl 5, 2002, 380 SCRA 245, 259-260; Tanay Recreation Center
and Development Corp. v. Fausto, G.R. No. 140182. April 12, 2005.
421 Equatorial Realty Developmen\ Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 509-10 (1996);
Paranaque Kings Enterprises, Inc. v. CA, 268 SCRA 727 (1997); Riviera Filipina, Inc. vs, Court
of Appeals, G.R. No. 117355, April 5, 2002, 380 SCRA 245, 259-260; Tanay Recreation Center
and Development Corp. v. Fausto, G.R. No. 140182. April 12, 2005.
Note that in Ang Yu Asuncion v. CA, 238 SCRA 602, 614615 (1994), the Supreme Court
(through J. Vitug) held that a right of first refusal is not governed by the law of contracts, and
violation cannot give rtse to action for specific pertormance. It Is covered by the provisions of
human relations and violation may give rtse to damages for abuse of rights under Art. 19. In
Equatortal, J. Vitug dissented and reiterated that a right of first refusal cannot be considered a
contract because the basic terms (particularly the consideration for the future sale) wou1d have
yet to be determined and fixed.
429 Dela Rosa v. BPI, 51 Phil. 926 (1924).

154

155

holder may: (a) seek the rescission of the

sale as a rescissible contract426; and (b)

C.

ACCEPTANCE
1. Definition. Acceptance is the conformity by the offeree to
the proposition of the offerer.

2. Absolute.
a. The acceptance must be absolute. (Art. 1319)
To produce a contract, the acceptance must not
qualify, modify or vary the terms of the offer.
There is no acceptance sufficient to produce
consent, when a condition in the offer is removed,
.or a pure offer is accepted with a condition, or
when a term is established, or changed, in the
acceptance, or when a simple obligation is
converted by the acceptance into an alternative
one; in other words, when something is desired
which is not exactly what is proposed in the
offer.429
b. A qualified acceptance constitutes a counter-offer.
(Art. 1 3 1 9)
Any modification or variation from the terms of
the offer annuls the latter and frees the offerer.430
The original offerer is free to accept or refuse the
counter-offer.
3. Knowledge of the Acceptance. The acceptance of an offer
must be made known to the offerer.431 The contract is
perfected only from the time the acceptance of the offer is
made known to the offerer.432 Unless and until the offerer

knows of the acceptance, there is no meeting of the minds

of the parties, no real concurrence of offer and
acceptance.433
a. The offerer may withdrriw his offer before he learns of
the acceptance thereof by the offeree.434 The contract is
not perfected if the offerer withdraws his offer, and the
withdrawal is made before he learns of the
acceptance.435
b. Acceptance made by letter or telegram does not bind
the offerer except from the time it came to his
knowledge. (Art. 13 19)
The contract,' in such a case (acceptance by letter
or telegram), is presumed to have been entered into
in the place where the offer was made. (Art. 1 3 1 9)
c. An offer made through an agent is accepted from the
time acceptance is communicated to him (i.e., the
agent). (Art. 1 322)
A messenger or intermediary or Jetter-earner who
brings the offer is not necessarily an agent. The
contract is not perfected by communicating the
acceptance to a messenger.

4. Express or Implied. An acceptance may be express or

implied. (Art. 1320)

a. Acceptance may be implied from the contemporaneous

and subsequent acts of the contracting parties. Thus,
performance of the conditions in a "conditional

42' Sps. P.aderes v.

CA, G.R. No. 1 47074, July 15, 2005.

Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
'" Malbarosa v. CA, G.R. No. 125761, April 30, 2003, citing Jardine Davies, Inc. v. Court of
Appeals, et al., 333 SCRA 689 (2000).
432 Malbarosa v. CA, G.R. No. 125761, April 30, 2003.

"' Malbarosa v. CA, G.R. No. 125761, April 30, 2003, citing Enriquez v. Sun Life Assurance, 41
Phil. 269. Laudico v. Arias, 43 Phil. 270 (1922).
"4 Laudico v. Arias, 43 Phil. 270 (1922).
4" Laudico v. Arias, 43 Phil. 270 (1922); Malbarosa v: CA, G.R. No. 125761, April 30, 2003.

i56

157

430

D. CAPACITY TO GIVE CONSENT

counter-offer" amounts to acceptance of said counter

offer. 436

b.

I . Capacity.

give consent to a contract unless there is a ground for his

In general, the offeree is not bound to answer a

incapacity provi_ded by law.

proposal, and his silence per se cannot be construed as

an

acceptance.437

an

As

exception,

however,

Capacity is presumed; the party who alleges the

acceptance may be implied from silence if clearly

incapacity of a certain person has the burden to prove

warranted by the circumstances. (see Art. 1 870)

c.

2. Incapacity.

(Art. 1321)

5. Time, Place and Manner.

contract:

The person making the offer

a.

may, fix the time, place, and manner of acceptance, all of

which must be complied with.
a.

b.

such incapacity. 440

If the offeree requires express acceptance, it should be

done expressly.

As a general rule, any person of legal age can

(Art. 1321)

The following cannot give consent to a

Unemancipated minors (Art. 1327)

i.

The reference to "unemancipated" minors is meant

An acceptance which is not made in the manner, place

to distinguish them from minors who had been

constitutes a counter-offer, which the offerer may

. persons below 1 8 years old could marry). With the

emancipated by marriage (under the Civil Code,

or period prescribed by the offerer is not effective but

setting the age of consent for

accept or reject. 438

Family Code

In general, when the offerer has not fixed a period for

majority, there is no longer a possibility of an

marriage to

a person present, the acceptance must be made

n.

immediately. 439

however, has been criticized on the ground that a

but the revocation must be niade known to the offerer

Davis, Inc. v. CA, G.R. No. 1 28066, June 19, 2000.

'" Mendoza v. CA, G.R. No. 116710, June 25, 2001.
438 Malbarosa v. CA, G.R. No. 125761, April 30, 2003.
439 Malbarosa v. CA, G.R. No. 125761, April 30, 2003.

436 Jardine

158

minor cannot be bound by his representations in

For as soon as the

offerer learns of the acceptance, the contract is deemed

perfected.

A minor (near the adult _age) who misrepresented

that he was of legal age may be deemed estopped

to deny his lack of capacity.44 1 This doctrine,

6. Revocation of Acceptance. Acceptance may be revoked,

he learns of the acceptance.

years old, which is also the age of

emancipated minor.

the offeree to accept the offer, and the offer is made to

before

18

the same way that he cannot be bound by his

contracts. 442

44 Calalan v. Basa, G.R. No. 159567, July 31, 2007, citing Miguela Carillo v. Justimiano Jaojoco
46 Phil. 957, 960 (1924), Vitalista, el al. v. Perez, et al., G.R. No. 164147, June 16, 2006, 49 {
SCRA 127.
441 Mercado v. Espiritu, 37 Phil. 215 (1917); Suan v. Alcantara, 85 Phil. 669 (1950).
442 J. Padilla, concurring, in Suan v. Alcantara, 85 Phil. 669 (1950). J. Padilla cited Young vs.
Tecson, 39 O.G. 953.

159

b.

Note that in this case, the burden of proof

Insane or demented persons; (Art. 1 327)

1.

valid. (Art.
ii.

has shifted to the party alleging sanity or

lucidity.

Contracts entered into during a lucid interval are

1328)

c.

Contracts agreed to in a state of drunkenness or

during a hypnotic spell are voidable. (Art.

Deaf-mutes

who do not know how to write.

1328)
3. Other Grounds for Incapacity/Disqualification.

Notes:
(!)

incapacity declared in Article

1327

The

.is subject to the

modifications determined by law, and is understood to be

The person who questions the sanity of a party

to a contract must prove that such party was of

without prejudice to special disqualifications established in

unsound mind at the

the laws. (Art.

contract.443

time of the making of the

a.

(a) It is not sufficient to show ,that the

'
contracting party was judicially declared
incompetent

several

days

after

(b) A person suffering from

1329)

The Rules of Court provide that an "incompetent"

person may be placed 6n guardianship.

The word

"incompetent" includes:446

the

execution of the contract444

schizophrenia

does not necessarily lose . his competence

i.

Persons suffering the penalty of civil interdiction;

ii.

Hospitalized lepers;

to intelligently dispose his property. The

iii. Prodigals;

years, with only very slow deterioration of

iv. Persons who are deaf and dumb who are unable to

said illness waxes and wanes over many

intellect. The party who challenges the

read and write;

capacity of the schizophrenic must still

show that at the time of the contract, the

v.

schizophrenic was not of sound mind.445

(2)

(Art.

1327)

they have lucid intervals, and

A person who has been judicially declared

mentally

incapacitated

guardianship may still

and

placed

vi. Persons not of unsound mind, but by reason of age,

on

disease, weak mind, an.d other similar causes,

validly enter into

contracts if it can be shown that he had a

cannot,

160

without

outside

aid,

take

care

of

themselves and manage their property, becoming

lucid

interval at the time of execution.

"' Carrillo v. Jao]oco, 46 Phil. 597 (1924); Ctalan v.

444 Carrillo v. Jaojoco, 46 Phil. 597 (1924).
445 Catalan v. Basa, G.R. No. 159567, July 31, 2007.

Persons who are of unsound mind, even though

thereby an easy prey for deceit arid exploitation. .

Basa, G.R. No. 159567, July 31 , 2007.

.

"' Rule 92, Section 2.

161

b.

The law also provides for specific disqualifications,

such as the disqualification of foreigners to acquire

land or

the

disqualification of spouses

to sell to each

other.

Defect or lack ofvalid consent, to make a contract voidable,

must be established by full, clear and convincing evidence, and

not merely by a preponderance thereof.450 The presumption is

4. Effect of lncapacity.

that a person takes ordinary care of his concerns and that

a: If one of the parties to a contract is incapacitated, the

contract is

b.

by error; freedom is vitiated by violence, intimidation

or undue
.
il:ifluence; spontaneity is, vitiated by fraud.449

voidable (not void). (Art. 1390)

1. Mistake.

If both parties to a contract are incapacitated, the

contract is

private transactions have been fair and regnlar.451

unenforceable (not void). (Arts. 1403[3] and

1407)
If a party is disqualified by law, the cqntract is

void,

a.

In order that mistake may invalidate consent, it should

refer to:
i.

The substance of the thing which is the object of

the contract (Art.

1 3 3 1), or

ii. Those conditions which have principally moved

E. VICES OF CONSENT

one or both parties to enter into the contract. (Art.

Consent is essential to the exiStence of a contract. If consent is

441
absent, the contract is non-existent.

1331)
(I)

Mistake as to the identity or qualifications of

If consent is present, but it was given through mistake,

one of the parties will vitiate consent only

voidable. (Art. 1330)

the principal cause of the contract. (Art.

when such identity or qualifications have been

violence, intimidation, undue influence, or fraud, the contract is

Consent has the following requisites:

or with an exact notion of the matter to which it refers;

should be

free;

Identity

(1) it should be intelligent

and (3) it should be

spontaneous.448

(2)

can

usually

to perform in a concert or paint a portrait).

These

vices or defects of consent intelligence in consent is vitiated

qualifications

become material in obligations to do (e.g.,

it

requisite characteristics are vitiated by the aforementioned

or

1331)

(2)

A simple mistake of account shall give rise to

its correction.

(Art. 1331)

'"Amado v. Salvador, G.R. No. 171401, December 13, 2007.

"' Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102, 106107; Leonardo v.
CA, G.R. No. 125485, 13 Seplember2004; Vcia. De Ape v. CA, G.R. No. 133638, April 15, 2005;
Catalan v. Basa, G.R. No. 1 59567, July 31, 2007; Espino v. Vicente, G.R. No. 168396, June 22,
2006; Amado v. Salvador, G.R. No. 171401, December 13, 2007.

'" Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102, 106-107; Leonardo v.
CA, G.R. No. 125485, 13 September 2004; Vda. De Ape v. CA, G.R. No. 133638, April 15, 2005.
450 Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102; Acabal v. Acabal, G.R.
No. 148376, March 31, 2005.
451 Heirs of Zambas v. CA, G.R. No. L-54070, February 28, 1983.

162

163

This

refers

computation.

to

error in mathematical

be considered valid even if there is a mistake

The amount intended will

in the designation of its lot number or TCT

number.456 The remedy here is reformation of

govern.

instrument.

Notes:
(1)

The concept of error in

both: (a)

ignorance,

Art. 1331

b.

includes

which is the absence of

doubt, contingency or risk

contract. (Art. 1333)

knowledge with respect to a thing, and (b)

mistake

There is no mistake if the party alleging it

knew the

affecting the object of the

properly speaking, which is a wrong

i.

conception about said thing, or a belief in the

To invalidate consent, the error must be real and

existence of some circumstance, fact, or event,

not one that could have been avoided by the party

which in reality does not exist. In both cases,

alleging it. An error so patent and obvious that

nobody could have made it, or one which could

there is a lack of full and correct knowledge

about the thing.452

have been avoided by ordinary prudence, cannot be

invoked by the one who made it in order to annul

his contract.457

Examples of mistake proper: (a) ale of a

parcel of land which the seller mistakenly
thought he owned453; (b) sale a parcel of
land

which

the

seller

thought

represented to be
out to be only

(2)

30 hectares,
18 hectares454

ii.

and

thereon

may

be

considered

inexcusable as it could be avoided through a

geodetic survey.458

but turned

The error must be the . causal, not merely

c.

Mutual error

as to the

legal effect

of an agreement

when the real purpose of the parties is frustrated, may

incidental, factor that induced the complaining

ss
party to enter into the contract. 4
Error as to quality (a DVD movie which

Alleged mistake as to the area of the land or

encroachments

vitiate consent. (Art.

i.

1334)

As a rule, mistake of law,459 or misappreciation of

turned out to be boring) or as to value (a

the legal import of the contract, 460 will not vitiate

jewelry which turned out tO be overpriced)

consent.

is generally merely incidental.

ii.

(3)

Art.

1334

provides for an exception, but the

Mere error as to designation will not vitiate

following requisites must be present: (a) the error

consent, as long as the intended object is clear .

is

mutual;

(b) it refers to the

legal effect

of the

Thus, a sale of a particular parcel of land may

452 Sps. Theis v. CA, G.R. No. 126013, February 12, 1997.
'" Sps. Theis v. CA, G.R. No. 126013, February 12, 1 997.
"' Asian v. Jalandoni, 45 Phil. 296
450 Periquet v. Reyes, G.R. No. L-23886, December 29, 1967.

164

"' Atilanov. Atilano, G.R. No. L-22487, May 21, 1969.

"' Alcasid v. CA, G.R. No. 104751, October 7, 1994; Domingo Realty, Inc. v. CA, G.R. No.
126236, January 26, 2007.
"' Domjngo Realty, Inc. v. CA, G.R. No. 126236, January 26, 2007.
.
"' Dandan v. Ariel Realty & Management Corp., G.R. No. 173114, September 8, 2008.
"' Periquet v. Reyes, G.R. No. L-23886, December 29, 1967.
165

agreement; (c) the real purpose of the parties is

weakness, tender age or other handicap, the courts

must be vigilant for his protection. (Art.

jiustrated.
iii. Art.

1334 may encompass mistake as to the nature

e.

of the contract.461 Thus, if A promises to lend B a

particular thing, and B agrees in the belief that it is

donated to him, there is no contract.462

d.

2. Violence.

unable to read, or if the

language not understood by him, and

a.

mistake or fraud is alleged, the person enforcing the

contract must show that the terms thereof have been

fully explained to the former. (Art.

(i) Note that Art.

1332

There is violence when in order to wrest consent,

serious or irresistibleforce is employed. (Art. 1335)

Requisites of violence as a vice of consent:

1332)

i.

creates a presumption of

mistake and fraud, upon a showing that:

(!) one of

a language not understood by him.

If these

b.

other party (who seeks to enforce the contract) to

showing that the contract was fully explained to

If the illiterate party is the one seeking to enforce

the contract, he need not prove that the contracts

was fully explained to him.

3.

moral dependence, ignorance, indigence, mental .

Intimidation.
a.

There is intimidation when one of the contracting

parties is compelled to give his consent by a reasonable

and well-grounded fear of an imminent and grave evil

property of his spouse, descendants or ascendants.

(Art.

v.

1 335)

Requisites of intimidation as vice of consent466:

i.

166

who did not

upon his person or property, or upon the person or

iii. A11. 1334 is based on the principle that when one

of the parties is at a disadvantage on account of his

'" IV Tolentino 488.

'" IV Tolentino 478.
"' Sales v. CA, G.R. No. L40145, July 29, 1992; Leonardo
September 2004.
'" Sales v. CA, G.R. No. L-40145, July 29, 1992.

of the

Violence shall annul the obligation, although it may

have been employed by a

third person
take part in the contract. (Art. 1336)

rebut the presumption of mistake and fraud463 (by

the disadvantaged party and was freely consented

determining cause

contract, or. must have caused the consent to be

ii, The force must be serious or irresistible.

circumstances .are shown,. the burden shifts to the

to).464

The force must be: the

given;

the parties is unable to read, or (2) the contract is in

ii.

If a party signed a contract without knowing what it

.
' vo1' d.465
was, there is no consent, and the contract is

When one of the parties is

contract is in a

24)

The intimidation must be the

determining cause of

the contract, or must have caused the consent to be

given;

CA, G.R. No. 125485, 13

'" Baranda v. Baranda, G.R. No. L-73275, 20 May 1987, 150 SCRA 59.
"' De Leon v. CA, G.R. No. 80965, June 6, 1990.
167

u.

iv. The threat produces a

groundedfear fro1n

The threatened act be unjust or unlawful;

A threat to enforce one's

whom it comes has the necessary means or ability

to inflict the threatened injury.

claim through

competent authority, if the claim is just or

legal, does not vitiate consent.

b.

(Art. 1335)

(a) There is nothing unlawful in a threat to sue

as a means to enforce a claim, even if a

the claimant believes it was his right to do

absolutely to act as requested, but is nevertheless

overcome by force or intimidation to such an

extent that he becomes a mere automaton and acts

criminal charges against a bank . teller

mechanically only. 472

unless she returns the proceeds of a

mortgage

foreclose

To vitiate consent, it must be

judgment, and his will rebel and he refuses

file an estafa case against an eriployee

unless the latter resigns,'68 or to file

to

does not vitiate it.

pressure he cannot resist; or that his sense,

(b) Thus, therei s no intimidation in a threat to

or

Mere reluctance or hesitation in giving consent

shown that the party acted against his will under a

so.467

check,'69

To determine the degree of intimidation, the age, sex

and condition of the person
. shall be borne in mind.
(Art. 1335)
i.

claim proves to be unfounded, as long as

spurious

reasonable and well

the fact that the person from

ii. A high level of education usually entails that a

unless the debtor signs

promissory notes to restructure the loan.470

person is less susceptible to intimidation.473

c.

(c) Thus, a threat to file a case for immorality

against a bar candidate if he does not

Intimidation shall annul the obligation, although it may

have been employed by a

third person

take part in the contract. (Art.

marry a girl he had sex with, does not

vitiate consent. 47 1

who did not

1336)

4. Undne lnflnence.
iii. The threat must be real and serious, there being an
evident disproportion between the evil and the

a.

resistance which all men can offer, leading to the

depriving the latter of a reasonable freedom of choice.

choice of the contract as the lesser evil; and

"' Lee v. CA. G.R. No. 90423, September 6, 1991, Berg v. National City Bank of New York, 102
Phil. 309, 316.
466 Callanta v. NLRC, G.R. No. 105083, August 20, 1993.
'" Lee v. CA, G.R. No. 90423, September 6, 1991.
"' Development Bank of the Phils. v. CA, G.R. No. 138703, June 30, 2006; 'Development Bank
of the Phils. v. Perez, G.R. No. 148541, November 11, 2004.
471 Ruiz v. Atienza, CA, 40 O.G. 1903.
168

There is undue influence when a person takes improper

advantage of his power over the will of another,

. (Art.

1337)

Undue influence is any means employed upon .a

party which, under the circumstances, he could not

"'Lee v. CA, G.R. No. 90423, September 6, 1991, citing Vales v. Villa, 35 Phil, 769, 789.
See Lee v. CA, G.R. No. 90423, September 6, 1991; Sicangco v, NLRC, G.R. No. 110261,
August 4, 1994; Amkor Technology Phils, Inc. v. Juangco, G.R. No. 166507, January 23, 2007,

473

169

well resist and which controlled Iris volition and

ignorance, indigence, mental weakness, tender age,

induced him to give his .consent to the contract,

and other similar handicap.478 (Art.

24)

which otherwise he would not have entered into. It

ii.

must destroy the free agency of a party and

In some exceptonal cases, the court may even set

interfere with the exercise of that independent

aside

discretion which is necessary for determining the

contract (such as a clause on an inconvenient

advantages

venue).479

or

disadvantages

of

proposed

prejudicial

stipulations

in

an

adhesion

A typical example is transportation

tickets, which are usually accepted by passengers

contract.474

or the riding public without paying much attention,

b.

The following

particularly when the available common carriers

0
serving a given area "are few ,48

circumstances shall be considered (Art.

1337):
i.

The

confidential,

family,

spiritual

and

iii. Note, however, that contracts of adhesion are not

other

invalid per se and not strictly against the law; they

.relations between the parties, or

ii.

are as binding as ordinary contracts.481

'

so

in

contracts

entered

This is

The fact that the person alleged to have been

particularly

into by

unduly influenced was suffering from mental

educated persons or by seasoned businessmen,

since they are presumed to have acted with due

weakness, or was ignorant or in financial distress.

care and to have signed the contracts with full

However, financial distress

per se

knowledge of its import.482

cannot be

The court may also .

consider the nature of the transaction and the

equated with undue influence.475

amount of money involved; major transactions

c.

A contract of adhesion is one

involving huge sums of money are naturally

wherein almost all of the provisions are drafted by one

deemed to have b.een entered only with care,

party. The participation of the other party is limited to

deliberation and diligent study.483

Contracts ofAdhesion
affixing

his

signature

or his

'adhesion'

to

the

contract.476
i.

Any ambiguity, obscurity or doubt in a contract of

"'Alcasid v. CA, G.R. No. 1 04751, October 7, 1994.

Nos. 150773 & 153599, September 30, 2005.
476 Equitable PCI Bank v. Ng Sheung Ngor, 541 SCRA233, 239 (2007).
477 Spouses Panlilio v. Citibank, N.A., 539 SCRA 69, 93 (2007). See also Ayala Corporation vs.
Ray Burton Development Corporation, 294 SCRA 48, 69 (1998); Spouses Litonjua v. L&R Corp.,
328 SCRA 796, 805 (2000); Rizal Commercial Banking Corporation v. Court of Appeals, 305
SCRA 449, 454-455 (2002).

Corporation vs. Ray Burton Development Corporation, 294 SCRA 48, 6869 (1998).
Sweet Lines, Inc. v. Teves, 83 SCRA361 (1978).
"' Sweet Lines, Inc. v. Teves, 83 SCRA 361 (1978).
481 Rizal Commercial Banking Corporation v. Court of Appeals, 305 SCRA 449, 454 (2002);
Ayala Corporation vs. Ray Burton Development Corporation, 294 SCRA 48, 67-68 (1998).
482 Development Bank of the Philippines vs. National Merchandising Ccrporation, 40 SCRA 624
(1971); Spouses Liton)ua v. L&R Corp., 328 SCRA 796 (2000); Pilipino Telephone Corporation v.
Tecson, 428 SCRA 378 (2004); Dia v. St. Ferdinand Memorial Park, Inc., 509 SCRA 453 (2006);
Spouses Panlilio v. Citibank, N.A., 539 SCRA 69 (2007); Uy v. People, G.R. No. 174899,
September 1 1, 2008.
'" Development Bank of the Philippines vs. National Merchandising Corporation, 40 SCRA 624
(1971); Pilipino Telephone Corporation v. Tecson, 428 SCRA 378 (2004); Spouses Panlilio v.
Citibank, N.A., 539 SCRA 69 (2007); Uy v. People, G.R. No. 174899, September 1 1 , 2008.

170

171

adhesion is construed or resolved strictly against

the party who prepared it.477 The purpose of this is
to protect a party who is disadvantaged because of

4" Sps. Carpo v. Chua, G.R.

47' Ayala
419

d. Undue influence shall annul the obligation, although it

may have been employed by a

third person

who did

not take part in the contract. (by analogy with

b.

Classification. The fraud or dolo which is present at

the time of birth or perfection of a contract may either

Art.

488

be dolo causante or dolo incidente.

1336)

i.

5. Fraud.

Dalo causante or causal fraud - insidious words

or mchinations of one of the contracting parties,

a.

In General. There. is fraud when, through insidious

through which the other is induced to enter into a

words or machinations of one of the contracting

contract which, without them, he would not have

agreed to. (Art.

parties, the other is induced to enter into a contract

1338)

which, without them; he would not have agreed to.

(I) Dalo causante

(Art. 1338)

detennines or is the essential

cause of the consent.

i.

It is the type of fraud

which vitiates consent. 489

"Insidious words or machinations" include false

promises, the exaggeratio11 of hopes or benefits,
the abuse of confidence, the use of !pretended

(2)

names, qualities, or powers, and the thousand other

To vitiate consent, the following requisites

must ollcur490:

forms of deceit, .by which one may be misled.484

(a) It must have been employed by one
ii.

The fraud under Art.

contracting party upon the other (Art.

1338 which is deemed a vice

and

of consent refers to that which is employed prior or

creation of the contract.4"

simultaneous to the

This should be distinguished from fraud under Art.

1344);

(b) It must have induced the other party to

enter into the contract (Art. 1338);

1 171, which is fraud in thefulfillment of a contract

or obligation

1342

already existing. Fraud under Art

1 1 71 is bad faith in the performance of an

(c) It must have been serious (Art.

1344);

obligation or a conscious and intentional design to

evade

the

normal

fulfillment

of

(d) It mnst have resulted in damage and injury

existing

to the party seeking annulment.

obligations.486
iii. Good faith is presumed, and allegations of fraud
must

be

proved
.

evidence.487

by

clear

and

ii. Dalo inc/dente or incidental fraud - fraud which

is not serious in character and without which the

convincing

other party would still have entered into the

contract. 491

..

'" Strong v. Gutierrez Repide, 6 Phil. 680 (1906).

"' Caram, Jr. v. Laureta, G.R. No. L-28740, February 24, 1981.
486 Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L
25885, January 31, 1972, 43 SCRA 93
487 Chiang Yla Min v. CA, G.R. No. 137932, March 28, 2001.
172

488 Geraldez v. CA,

G.R. No. 108253, February 23, 1994.

Geraldez v. CA, G.R. No. 108253, February 23, 1994.
"" Alcasid v. CA, G.R. No. 104751, October 7, 1994.
"' Geraldez v. CA, G.R. No. 108253, February 23, 1994.

489

173

remained

Dalo incidente refers

unimpaired

regardless of

the

consideration of the sale.494

only to some particulars

or accident of the obligations. It merely obliges

the person employing it to pay damages. 492

ii.

The usual exaggerations in trade, when the other

party had an opportunity to !mow the facts, are not

(Art. 1344)

in themselves fraud lent.

c.

(Art. 1 340)

Determination ofFraud.
(1) The law allows considerable latitude to seller's
i.

Failure to disclose facts, when there is a duty to

statements or dealer's talk; it is natural for the

reveal them, as when the parties are bound by

seller to exaggerate the value, qualities and

confidential:relations, constitutes fraud. (Art.

characteristics of his products.

1339)

The buyer is

expected to make the proper inquiries and not

Examples: (1) X,

controlling

to simply rely on or accept the

the managing director and

stockholder

of company

ABC

seller's

assertions at face value.495

purchased, through an agent, additiol)al ABC

shares from an existing stockholder;

Y.

(2) However, there may be fraud if the seller

!mew, but did not disclose to Y, that the value

makes false statements of fact or gives his

products false appearances which are designed

of the shares would be greatly enhanced

because of a transaction being negotiated.

to mislead.

It

was held that the purchase was fraudulent. As

managing director,

X .had the

duty to disclose

Also, Art.

(3)

1 10 of the Consumer Act (RA 7394)

the circumstances affecting the value of the

prohibits

shares. 493

advertisement" to induce the purchase of

(2)

"false,

deceptive

or

misleading

consumer products or services496

A mortgaged his .land to Bank to secure a

loan. A then sold the land to Z who assumed

the mortgage.

Z entered into an agreement

"'.ith the Bank for the restructuring of A's lo\lll

and for the discharge of the mortgage. Bank
later cancelled its agreement with Z when it
discovered that the real consideration for A's
sale of the land to. Z was much higher than
what Bank thought. It was held that there was
no fraud in Z's failure to disclose the real
consideration for the sale, as Z had no duty to
make

such

4" Geraldez v.
493

disclosure;

CA, G.R. No. 108253, February 23, 1994.

Strong v. Gutierrez Replde, 41 Phil. 947; 213 U.S. 419.
174

the bank security

"4 Rural Bank of Sta. Maria, Pangasinan v. CA, G.R. No. 1 10672, September 14, 1999.
4" Songco v. Sellner, 37 Phil. 254; Trinidad v. IAC, G.R. No. 65922, December 3, 1991.
496 "ARTICLE 1 10. Fatsa Deceptive or Misleading Advertisement. - It shall be unlawful for any

person to disseminate or to cause 1he dissemination of any false, deceptive or misleading

advertisemant by Philippine mail or in commerce by print, radio, television, outdoor
advertisement or other medium for the purpose of inducing or which is likely to induce directly or
indirectly the purchase of consumer products or services.
An advertisement shall be false, deceptive or misleading if it is not in conformity with the
provisions of this Act or if it is misleading in a material respect. - In determining whether any
advertisement Is false, deceptive or misleading, there shall be taken into account, among other
things, not only representations made or any combination thereof, but also the extent to which
the advertisement fails to reveal material facts in the light of such representations, or materials
with respect to consequences which may result from the use or application of consumer products
or services to which the advertisement relates under the condition prescribed in said
advertisement, or under such conditions as are customaiy or usual."

t75

ii.

iii. A mere expression of an opinion does not signify

fraud. (Art.

party has relied on the former's special

1 . Definition. Simulation occurs when an apparent contract is

1341)

a declaration of a fictitious wil deliberately made by

agreement of the parties, in order to produce, for the

iv. Misrepresentation by a third person does not vitiate

purpose of deception, the appearance of a juridical act

1342)

Unless (1)

which does not exist or is different from that which was

0
really executed. 5 0

such misrepresentation has created

substantial mistake and (2) the same is mutual.

(Art

2. Requisites of simulation501:

1342)

The deceived person has a cause of action

against the third prson who
him.497

v.

d.

aeceived

a.

An outward declaration of will different from the will

b.

The false appearance must have been intended by

Misrepresentation made in good faith is not

fraudulent but niay constitute error.

(Art. 1343)

c.

Effects of Fraud.
i.

Dula causante

makes

the

t<Ontract voidable,

employed by both. contracting parties. (Art.

also

renders

the

employing it liable for damages. 498

The fraud is

serious

impress, or to lead

person into error.499

of the parties;

mutual agreement; and

The purpose is to deceive third persons.

3. Types of Simulation. Simulation of a contract may be

absolute or relative. (Art. 1345)

provided that it is: (a) serious, an4 (b) has not been

Dalo causante

1344)

person

a.

Absolute simulation
to be bound at all.
i.

176

when the parties do not intend

Example: When X and Y enters into a sale of land,

but did not really intend it; no consideration was

given and the land was not delivered.

when it is sufficient , to
an

(Art. 1345)

ordinarily prudent

n.

An absolutely simulated or fictitious contract is

void (Art.

1346), because consent is totally absent.

Villaflor v. Court of Appeals, 280 SCRA 297, 337 (1997): Mendezona v. Ozamiz, G.R. No.
143370, February 6, 2002; Sps. Payongayong v. CA, G.R. No. 144576, May 28, 2004.
501 Loyola v. Court of Appeals, 326 SCRA 285, 294 (2000); Penalosa v. Santos;363 SCRA 545,
556 (2001); Sps. Payongayong v. CA, G.R. No. 144576, May 28, 2004.
500

"' Hill v. Veloso, 31 Phil. 160 (1915).

498 Geraldez v. CA, G.R No. 108253, February 23, 1994.
'" Sierra v. CA, G.R. No. 90270, July 24, 1992.

(Art. 1344)

F. SIMULATED CONTRACT

Unless (!)' made by an expert and (2) the other

consent. (Art.

only obliges the person employing

it to pay damages.

1341)

knowledge. (Art.

Dalo incidente

177

Ill. OBJECT OF CONTRACTS

iii. An

absolutely

from

distinguished
alienation. 502

(I)

simulated

contract

fraudulent

must

contract

be

or

"Object" is the thing, right or service which is the subject matter of

the contract. (see Arts.

In absolutely simulated- contract, no contract

The following are the requisites for a thing, right or service to be an

really exists or was intended; it may thus be

object of contracts:

attacked by any creditor, at any time, and even

if the debtor is not insolvent.

(2)

A. WITIDN THE COMMERCE OF MAN

In fraudulent alienation, a contract exists and

was intended to take effect (for

purpose).

If intended

I 3 1 8 and 1347)

I.

fraudulent

All things which are not outside the commerce of man,

including futUre things, may be the object of contracts.

to defraud a creditor, it

(Art. 1347)

may be rescinded by creditors prior to the

contract, upon showing that the debtor is

a.

insolvent, and within a prescription1 period of

Relative Simulation
true agreement.
i.

Example:

when the parties conceal their

b.

(Art. 1345)

When

X and Y enters into a purported

c.

The real or true agreement is binding on the

parties, provided that:

law, morals, good customs, public order or

public policy. (Art.

so2

1346)

Rodriguez v. Rodriguez, 20 SCRA 908 (1967); IV Tolentino 517.

178

or

private

(i) public office'04 and political rights; (ii)

relations;

and

(iii)

Even fature things may be the object of contracts.

(Art.

1 347) Future things are those which are not yet

existing, or not yet owned by the obligor at the time of

( I) It does not prejudice a third person, and

It is not intended for any purpose contrary to

Examples:

of appropriation

properties of public
dominion, such town plaza,'05 airport lands and
8
buildings,'06 forest lands,5 07 roads and highways,50
1
0
foreshore land,'09 watershed,'1 submerged lands. 51

sale of land, but their real intent is for it to be

(2)

susceptible

purely personal rights, such as those arising from

family

donation, or equitable mortgage.

ii.

are not

ownership. 503

four years.
b.

Things "outside the commerce ofman" are those which

the contract.

See Land Bank v. Republic, G.R. No. 150824, February 4, 2008 and Republic v. CA. G.R.
No. 126316, June 25, 2004.
504 Collantes v. CA, G.R. No. 169604, March 6, 2007.
505 Municipality of Cavite v. Rojas, 30 Phil. 602 (1915); Espiritu v. Municipal Council, 102 Phil.
866 (1958).
5" Manila International Airport Authority v. CA, G.R. No. 155650, July 20, 2006.
"' Land Bank v. Republic, G.R. No. 150824, February4, 2008.
50 Villarico v. Sarmiento, G.R. No. 136438, November 1 1 , 2004.
'' Republic v. CA, G.R. No. 126316, June 25, 2004.
"' Santa Rosa Realty Dev't Corp. v. CA, G.R. No. 112526, October 12, 2001.
51 1 Chavez v. Public Estates Authority, G.R. No. 133250, May 6, 2003 an<! November 1 1 , 2003.
503

179

(2)
Thus, a person may sell "future goods", i.e., those

That the object of the contract forms part of.the

inheritance; and

which are not yet existing at the time of perfection

of sale, but are to be manufactured or acquired
thereafter. (Art.

(3)

That the promissor has, with respect to the

object, an expectancy of a right which is purely

1462)

hereditary in nature.
d.

No

contract may be

inheritance except
law. (Art. 1 347)
i.

entered

into

upon

future

in cases expressly authorized by

iii. The exception referred to in Art.

inter vivas under Art. 1080.

such partition takes effect only upon his death, and

1
is revocable at any time during his lifetime.5 7

person may in the future acquire by succession.512

A renunciation of the right to inherit from
someone who is still alive is void.m

(2)

expect to inherit frorn some.one who is still

alive is void.514
ii.

the

following

reqnisites

must

concur:515

(I)

All rights which are not intransmissible may also be the

3.

1 347)

All services which are not contrary to law, morals, good

customs, public order or public policy may likewise be the
object ofa contract. (Art.

To be considered a "contract upon a future

inheritance,"

2.

object of contracts. (Art.

A partition by the heirs of the property they

A person may, during

his lifetime, make a partition of his properties, but

Future inheritance is any property or right that a

(1)

1347 is a partition

1347)

B. POSSIBLE
Impossible things or services cannot be the object of contracts.

That the succession has not yet been opened;

(Art.

1 348)

It is impossible for a lessor to undertake the maintenance of

Upon the death of deceden the succession
opens, and the heirs may thus enter into
contracts

over

their

shares

in

the

inheritance, even before the settlement or

16
partition of the estate. 5

the public drainage system; he can only maintain the

.
.
18
.
.
.
5
pnvate
pipes
or dramage of the 1eased premises.

C. CERTAIN
I . As to Kind. The object of every contract must be
determinate as to its kind. (Art.

1349)

512 Blas v.

Santos, 1 1 1 Phil. 503 (1961); J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March
1 1 , 2005.
"' Uson v. Del Rosario, G.R. No. L-4963, January 29, 1953.
514 Tordilla v. Tordilla, 60 Phil. 162 (1934).
515 J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March 1 1 , 2005.
51' Osorio v. Osorio, 41 Phil. 531 (1921).

517 J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March 1 1 , 2005.
'" Guevent Industrial .Dev't Corp. v. Phil. Lexus Amusement Corp., G.R. No. 159279, July
. 11,
2006.

180

181

The object may be generic (a car, a dog). (see Art.

2.

Cause of Contracts.

1 1 65)
a.

2. As to Quantity. The fact that the quantity is not

each contracting party, the prestation or promise of a

thing or service by the other. (Art. 1350)
.

determinate shall not be an obstacle to the existence of the

contract, provided it is possible to determine the same,
without the need of a new contract between the parties.
(Art.

i.

undertaking to pay the purchase price. The cause

should not be confused with the object, which is

circumstances stipulated in the contract.

the thing sold.

ii. In

IV. CAUSE OF CONTRACTS

Definition. Cause i s the essential reason which moves the

guaranty

or

This is true even if the mortgagor, surety,

guarantor or accommodating party is a third
party or stranger to the principal obligation.522

is the immediate, direct and proximate reason which

justifies the creation of an obligation through the will of the

51
contractmg parties. 9
.

b.

consideration is often used

interchangeably with cause .or "causa ", the two are not

Bonuses granted

exactly similar. "Causa" is broader than consideration

Anglo-American

legal

concept),

as

In remuneratory contracts, the cause is the

benefit which is remunerated. (Art. 1350)

Although the term

(an

surety,

"accommodati-0n", the cause is the same as that of

contracting parties to enter into it. In other words, the cause

mortgage,

the principal obligation secured by the mortgage,

.
.
521
surety, guaranty or accomrnodatton.

IN GENERAL
I.

In a sale, the cause consists of the seller's

undertaking to deliver the property and the buyer's

1349)

The quantity must at least be determinable, based on

A.

In onerous contracts, the cause is understood to be, for

to

service or

employees to excite their zeal

and efficiency, with consequent benefit for the

"causa"

employer, do not constitute donation having

2
l'b
1 eral'tty c
1or a const'derat'10n.5 3

encompasses even a natural obligation and pure

liberality as sufficient cause for a contract.520
c.

In gratuitous contracts (contracts ofpure beneficence),

the cause is the mere

liberality of the benefactor.

(Art.

1350)
121

'" General Enterprises Inc. vs. Lianga Bay Logging Co., 1 1 SCRA 733 (1964); Basic Books
(Phil.), Inc. vs. Lopez, et al., 1 6 SCRA 291 (1966); Uy v. CA, G.R. No. 120465, September 9,
1999; Roxas v. De Zuzuarregui, Jr., G.R. No. 152072, January 31, 2006, 481 SCRA 258, 276;
Camacho v. CA, G.R. No. 127520, February 9, 2007.
520 IV Tolentino 530-531.

Pyle v. Johnson, 9 Phil. 249 (1907); China Banking Corporation v. Lichauco, 46 Phil. 460
(1924); Acuna v. Veloso, 50 Phil. 241 (1927); Severino v. Severino, 56 Phil. 185 (1931); Sps.
Carpo v. Chua, G.R. Nos. 150773 & 153599, September 30, 20Q5:
522 China Banking Corporation v. Lichauco, 46 Phil. 460 (1924); Acuna v. Veloso, 50 Phil. 241
(1927);
'" Philippine Long Distance Co. vs. Jeturlan, G. R. L-7756, July 30, 1955, cited in Liguez v. CA,
102 Phil. 577 (1957).

182

183

i.

a.
This

covers

exclusively

contracts
to

procure

designed
the

welfare

of the

a failure of cause when it turned out that the lands are

not suitable for housing.528

satisfaction for the donor or without serving the

self-interest of the donor.524

b.

Example 2: Where the owner of a company transferred

c.

Example 3:

Examples: commodatum; donation.525

B. DISTINGUISHEJJ FROM MOTIVE: The particular motives of the

parties in entering into a contract are different from the cause
thereof.

In a case where the National Housing

Authority bought lands to be used for housing, there is

beneficiary, without any intent of producing any

ii.

Example I:

and

solely

(Art. 1 351) While cause is the essential reason for the

motive is the particular reason of a party in entering

into a contract and which does not affect the other party.526
is the seller's undertaking to deliver a computer to him.

The buyer' s motive may be different, e.g., to be able to surf

C.

EXISTENCE OF CAUSE: Contracts must have a cause, as it is an

essential requisite. Contracts
whatever (Art

I. Presumption.
do not affect the contract. A party's motive does not even

have to be known to the other party.

without cause produce

no effect

1352), i.e., void.

the internet, or edit his photos, or start an online business.

2. Ordinarily, a party's motives for entering .into the contract

Where a man donated land to a woman

with the motive of getting her to agree to have sexnal

relations with him, the motive was deemed the (illegal)

cause.530

contract,

I. Example: In the sale o f a computer, the cause for0the buyer

his shares to a government. crony with the motive of

obtaining a government contract, the motive was
deemed the (illegal) cause.529

Although the cause is not stated in the

contract, it is presumed that it exists (and is lawful), unless

the debtor proves the contrary.

(Art. 1354)

2. Distinguished from Failure to Pay the Consideration.

3. However, as an exception, the motive may be regarded as

Lack of consideration is different from failure to pay the

when the contract is conditioned upon the attainment of the

contract, while the latter results in a right to demand the

the cause "'V11hen the motive predetermines the cause", i.e.,

consideration. The former prevents the existence of a valid .

motives of one of the contracting parties. 527

fulfillment or cancellation of the obligation under an

existing valid contract.531

5"

Philippine Long Distance Co. vs. Jeturian, G. R. L-7756, July 30, 1955, cited in Liguez v. CA,
102 Phil. 577 (1957).
52' Although donation is referred to as an act of liberality under Art. 725, it Is actually a contract,
since it requires the consent of both parties. See concurring opinion of J. Antonio In Alejandro v.
Geraldez, G.R. No. L-33849, August 18, 1977.
5" Republic vs. Claribel, 36 SCRA534 (1970); Uyv. CA, G.R. No. 120465, September 9, 1999.
527 Llguez v. CA, 102 Phil. 577 (1957); E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA
233 (1987); Philippine National Construction Corp. vs. Court of Appeals, 272 SCRA 183 (1997);
Uyv. CA, G.R. No. 120465, September9, 1999.
184

528 Uyv. CA, G.R. No. 120465, September9, 1999.

'" E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA 233 (1987).
"' Liguez v. CA, 102 Phil. 577 (1957).
53 1 San Miguel Properties Philippines., inc. v. Huang, 336 SCRA 737 (2000); Montecillo
Reynes, G.R. No. 13801 B, July 26, 2002.

185

v.

consideration, is contrary to public policy and the due

Where the deed of sale states that the purchase price

administration ofjustice.536

has been paid but in fact has never been paid, the ded

of sale is void ab initio for lack of consideration.532

c.

3. Manner of Payment. In a contract of sale, a definite

agreement on the manner of payment of the price is an
essential element.'33

The agreement as to the manner of

(illegal) cause.'37

payment goes into the price, such that a disagreement on

d. Where a man donated land to a woman with the motive

the manner of payment is tantamount to a failure to agree

of getting her to agree to have sexual relations with

on the price or consideration.534

him, the motive was deemed the (illegal) cause.'38

OF CAUSE: The cause must be legal. Contracts

unlawful cause produce no effect whatever (Art. 1352),

n. LEGALITY
with

3. False Cause.

Presumption.

The statement of a false cause in contracts

shall render them void, unless it should be proved that they

i.e., void.

I.

Where the owner of a company transferred his shares

to a government crony with the motive of obtaining a
government contract, the motive was deemed the

were founded upon another cause which is true and lawful.

The cause is presumed lawful.

'

(Art. 1353)

Although

the cause is not stated in the contract, it is presumed that it

(exists and) is lawful, unless the debtor proves the contra1y.

E. ADEQUACY OF CAUSE

(Art. 1354)

2. Unlawful Cause.

I.

The cause is unlawful if it is contrary to

law, morals, good customs, public order or public policy.

General Rule.

b.

lesion

(injury) or

inadequacy of cause shall not invalidate a contract.

(Art.

1355)

(Art. 1352) Examples:

a.

As a general rule,

consideration which renders the contract void.'"

The Jaw does not require that the price or consideration

be equal to the exact value of the subject matter of the
It will not relieve a party from the
contract."'

An agreement to stifle the prosecution of a person

bargain.'40

The tetmination of marital relations is an unlawful

consequences of an unprofitable

charged with a crime, for a pecuniary or other valuable

2.

532

Ocejo Perez & Co. vs. Flores, 40 Phil. 921; Mapalo vs. Mapalo, G.R. No. L21489, May 19,
1966, 1 7 SCRA 114, 122; Vda. De Catindig v. Heirs of Catalina Roque, 74 SCRA 83;
Montecillo v. Reynes, G.R. No. 138018, July 26, 2002.
533 Amado v. Salvador, G.R. No. 17140.1 , December 13, 2007, citing Marnelego v. Banco Filipino
Savings and Mortgage Bank, G.R. No. 161524, 27 January 2006, 480 SCRA 399, 408; Co v.
Court of Appeals, G.R. No. 123908, 9 February 1998, 286 SCRA 76, 85; Velasco v. Court of
Appeals, 151-A Phil. 868, 887 (1973).
534 Amado v. Salvador, G.R. No. 171401, .December 13, 2007, citing Toyota Shaw, Inc. v. Court
of Appeals, G.R. No, 1 1 6650, 23 May 1995, 244 SCRA 320, 328; R.F. Navarro and Co. v. Sugar
Producers Cooperative Marketing Association, 1 1 1 Phil. 820, 828 (1961).
'35 De Leon v. CA, G.R. No, 80965, June 6, 1990.
186

Exceptions a.

53 S

contract or bad

In cases specified by law.

Arroyo v. Berwin, 36 Phil. 386 (1917).

(Art. 1355)

151 SCRA233 (1987).

Liguez v. CA, 102 Phil. 577 (1957).
20 November 2003, 416 SCRA
539 Sps. Buenaventura v. Court of Appeals, G.R. No. 126376,
263; People's Air Cargo & Warehousing Co., Inc. v. CA, G.R. No. 1 17847, October 7, 1998;
Sps. Paguyo v. Astorga, G.R. No. 130982, September 16, 2005.
'' Vales v. Villa, 35 Phil. 769 (1916).

537 E. Razon Inc. vs. Philippine Ports Authority,

536

187

Under

. 1.

Art. 1381,

contracts which are entered into

Chapter 8

in behalf of wards or absentees are rescissible if

they suffer

Form of Contracts

lesion by more than one-fourth of the

value of the things which are the object of the

ii.

contracts.
Also, inadequacy of price may indicate an intent to

I. IN GENERAL

defraud creditors, which may render the contract

rescissible under Art.
b.

A. GENEJl, RULE: FORM NOT NECESSARY.

1381.

obligatory, in

provided all the essential. requisites for their validity are

If there has been fraud, mistake or undue influence.

(Art.
i.

present.

1355)

1.

Le.\ion or inadequacy of price may indicate, that the

consent (of the party suffering lesion) was' vitiated

Our contractual system upholds the spirit and intent of the

Contracts are

generally deemed perfected by mere consent. (Art.

renders the contract voidable.

2.

13 15)

Thus, the general rule is that the form (oral or written) is

irrelevant to the binding effect

Gross inadequacy of price does not affect a

inter partes

of a contract

that possesses the three validating elements of consent,

contract of sale, except as may indicate a defect in

subject matter, and causa.541

the consent, or that the parties really intended a

donation or some other act or contract (Art.

(Art. 1356)

contracting parties over the formalities.

by fraud, mistake or undue influence, which

ii.

Contracts shall be

whatever form they may have beetr entered into,

1470)

For example, the following contracts are consensual,

and are thus valid even if they are merely

i.

ii.

..

oral:

sale; 542
lease;543

in. contract fior services;

544

iv. partition;'" .

541

Dauden-Hernaez v. Delos Angeles, G.R. No. L-27010, April 30, 1969.

CA, G.R. No. 149322, November 28, 2008. See also Carbonell v. CA, G.R. No. L
29972, January 26, 1976; Delos Reyes v. CA, G.R. No. 129103, September 3, 1999.
54J See Pagurayan v. Reyes, G.R. No. 154577, July 23, 2008; Pasricha v. Don Luis Dison
Really, G.R. No. 136409, March 14, 2008: Chua Tee Dee v. CA, G.R. No. 135721, May 27,
2004.
.
544 DaudenHernaez v. Delos Angeles, G.R. No. L-27010, April 30, 1969.
545 Chavez v. lntennedlate Appellate Court, G.R. No. 68282. November 8, 1990, 191 SCRA 211,
216; Tan v. Lim, G.R. No. 128604, Seplember 25, 1998, 296 SCRA 455, 474-475: Hernandez v.
Anda!, 78 Phil. 196, 203 (1947).
s.:1 Yaneza v.

'

188

189

(5) Contract of' partnership when an immovable is

3.

contributed

However, the binding . effect o f oral contracts i s generally

limited to the contracting parties

public instrument (Art.

usually requires registration for a contract to be binding on

third persons, and an oral contract cannot be registered

unless it is reduced into a public document.546

B. EXCEPTIONS: WHEN FORM IS NECESSARY.

Article

the Code establishes only two exceptions, to wit:

1356

(7) Contract of antichresis,

of

(Art.

necessary for contracts that the law requires to be proved

by some writing (memorandum) of its terms, as in those

order to make them valid and enforceable.

covered by the old Statute of Frauds, now Article

following are examples:

a.
which the law

requires to be embodied in a public

b.

instrument in order "that the donation may be

valid," i.e., existing or binding.

(2) Donation of movables worth more than P5,000.00

which must be in writing, "otherwise the donation

(Art. 748);

Contracts to pay interest on

(4)

loans (mutuum) which

(Art.

Stipulation

limiting the liability of carrier

Their existence is not provable by mere oral testimony

or para! evidence.

The form required is for evidentiary purposes only.

Thus, the Statute of Frauds would not apply if:

i.

The contrct is wholly or partly executed, or

ii.

The parties permit a contract to be proved, without

any objection.547

Note: In the foregoing exception cases, the requirement of form

is absolute and indispensable. (Art. 1356) If the formal

must be ''expressly stipulated in writing"

1956); and

requirement has not been complied with, a party cannot

seek its enforcement or compel compliance with the formal

to a

degree less than extraordinary diligence, which

requirement

of the goods (Art.

with.

190

(Art. 1356), because the law does not

recognize any existing or enforceable contract to begin

must be in writing and signed by the shipper/owner

1744);

'" See Campillo v. CA, G.R. No. 56483, May 29, 1984.

1403(2)

of the Civil Code . .

These are called solemn or formal contracts. The

(3)

2134)

2. When Required by Law to Prove the Contract. Form is

requires that they be in some particular form (writing) in

shall be void"

wherein the amount of

principal and interest must be specified in writing.

Form is necessary for contracts for which the law itself

(Art. 749)

1773);

(6) Real estate mortgage (Art. 1 874); and

I. When Required B y Law for Validity o r Enforceability.

(!) Donation of immovable property,

there must be an inventory of the

property, signed by the parties, and attached to the

The law

(inter partes).

Domalagan v. Bolifer, 33 Phil. 471 (1915-1916); Swedish Match, AB v. CA, G.R. No. 128120,
October 20, 2004.

547

191

II.

c.

FORMAL REQUIREMENT
AS A MATTER OF CONVENIENCE

The power to administer property, or any other power

which has for its object an act appearing or which
should appear in a public document, or should

A. IN GENERAL:

[f the law requires a document or other special

prejudice a third person;

fonn, such as in the acts and contracts enumerated in Article

d. The cession of actions or rights proceeding from an act

1 358 (infra), the contracting parties may compel each other to

appearing in a public document.

observe that fonn, once the contract has been perfected. (Art.

1357)

2.

1.

2.

The foregoing requirement of a public document in Art.

This right may be exercised simultaneously with the action

1358

upon the contract. (Art.

enforceability. 549

1357)

This right presupposes the existence of a valid contract.548

is

only for

convenience,

not for

validity

or

. Thus, failure to follow the proper fonn (e.g., non

It is not available or cannot be exercised for contracts

appearance

where form is necessary for validity/enforceabil ty (i.e.,

invalidate the contract. The parties can simply compel

solemn contracts) or for proving the contracts (i.e.,

each other to observe that fonn, once the contract has

contracts covered by the Statute of Frauds). (Art.

been perfected.550

1356,

before

the

notary

public)

does

not

supra)
c. PRIVATE DOCUMENT (AT LEAST): Contracts Art.

provides that "all other contracts where the amount involved

B. PUBLIC DOCUMENT REQUIREMENT

1.

Under Art.

1358,

exceeds five hundred pesos must appear in writing, even a

private one. But sales of goods, chattels or things in action are

the following must appear in a pnblic

document:
a.

governed by Articles,

1403, No. 2 and 1405." (Art. 1358)

Acts and contracts which have for their object the

This does not mean that contracts involving more than

creation, transmission, modification or extinguishment

P500

of real rights over immovable property;

not enough that the law should require that the contract

are void or unenforceable if not in writing. It is

be in writing, as it does in Art.

governed by Articles

1403,

No. 2, and

1405,

1 358.

i.e.,

they must appear in writing (even a private

document) to be enforceable;
b . . The cession, repudiation or renunciation of hereditary
rights or of those of the conjugal partnership of gains;
54'

Penalosa v. Santos, 416 Phil. 12 (2001 ).

416 Phil. 12 (2001).
"' DaudenHemaez v. Delos Angeles, G.R. No. L-27010, Apnl 30, 1969.
55o Penalosa v. Santos,

Solis v. Barroso, 53 Phil. 912 (1928).

192

The law must

further prescribe that without the writing the contract is

not valid or not enforceable by action.'5 1

Sales of real property or of an interest therein are

548

1358

193

the contents of the written agreement."553

Chapter

written agreement to express the true intent and agreement

Reformation of Instruments

of the parties."

3.

simply confirms and perpetuates the real contract between

the parties. 554

A. NATURE: Reformation is a remedy (originally in equity),

whereby a written instrument is made or construed so as to

Reformation involves a determination of the true intent

express or conform to the real intention of the parties, where

of the parties. It involves a question of fact and not a

some mistake, fraud, inequitable conduct or accident has

mere question of law, and is different from mere

occurred or been committed. In granting reformation, the court

interpretation of the contract.555

is not making a new contract for the parties, but establishing

and perpetuating the real contract between the partie which,

B. PURPOSE: Equity orders the reformation of an instrument in

under the technical rules of law, could not be

. enforced but for
such reformation.552

Art. 1359 provides that when,

order that the true intention of the contracting parties may be

expressed. The rationale of the doctrine of reformation is that it
would be unjust and inequitable' to allow the enforcement of a

there having been a meeting of

written instrument which does not reflect or disclose the real

the minds of the parties to a contract, their true intention is not

in

the

meeting of the minds of the parties.556

instrument purporting to embody the

agreement, by reason of mistake, fraud, inequitable conduct or

C.

accident, one of the parties may ask for the reformation of the
instrument to the end that such true intention may be expressed.

1.

2.

There must have been a meeting of the minds of the parties

to the contract;

If mistake, fraud, inequitable conduct, or accident has

prevented a meeting of the minds of the parties, the. proper
of the contract.

REQUISITES557

1.
2.

remedy is not reformation of the instrument but annulment

In an action for reformation o f instrument, the court does

not attempt to make another contract'.for the parties, but

I. IN GENERAL

expressed

One of the

exceptions to the parol evidence rule is "the failure of the

The instrnment does not express the true intention of the

parties; and

(Art. 1359)

Reformation is an exception to theparol evidence rule, i.e.,

that "when the terms of an agreement have been reduced to

553

v. Arjona, G.R. No. 158901, March 9, 2004, 425 SCRA 57, 65; MultiVentures Capital
& Mgl Corp. v. Stalwart Mgt. Seivices Corp., G.R. No. 157439, July4, 2007.

Rule 130, Section 9. National lrngation Administration v. Gamit, G.R. No. 85869, November 6,
1992.
554 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992; Quiros v.
Arjona, G.R. No. 158901, March 9, 2004, 425 SCRA 57, 65; MulU-Ventures Capital & Mgl Corp.
v. Stalwart Mgt. Services Corp., G.R. No. 157439, July 4, 2007.
555 National Irrigation Administration v. Gamit, G. R. No. 85869, November 6, 1992.
556 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992.
557 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992; Tuazon v.
CA, G.R. No. 1 19794, October 3, 2000.

194

195

writing, it is considered as containing all the terms agreed

upon and there can be, between the parties and their
successors in interest, no evidence of such tenns other than
.
ss2 Quiros

The presumption is that an instrument sets out the true

(who did not understand the language in which the

agreement of the parties thereto558; thus, the.burden of

contract was written).561

proving otherwise is on the party who insists that the

contract should be reformed. 559

3.

2. Mistake By One Party; Concealment By the Other.

When one party was mistaken and the other knew or

The failure of the instrument to express the true intention

believed that the instrument did not state their real

of the parties is due to mistake, fraud, inequitable conduct

agreement, but concealed that fact from the fonner, the

or accident.

instrument may be reformed. (Art.

1363)

C. IGNORANCE, LACK OF SKILL, NEGLIGENCE OR BAD FAITH:

When through the ignorance, lack of skill, negligence or bad

II. SPECIFIC INSTANCES OF REFORMATION

faith on the part of the person drafting the instrument or of the

A. MUTUAL MISTAKE: When a mutual mistake of the parties

clerk or typist, the instrument does not . express the true

causes the failure of the instrument to disclose their real

agreement, said instrument may be reformed. (Art.

intention of the parties, the courts may order that the instrument

. be reformed.

1361)
I

B. MISTAKE BY ONE PARTY

D. SALE WHICH JS REALLY A MORTGAGE OR PLEDGE:

If two

parties agree upon the mortgage or pledge ofreal or personal

I.

property, but the instrument states that the property is sold

Mistake By One Party; Fraud or Inequitable Conduct

By the Other. If one party was mistaken and the other

absolutely or with a right of repurchase, reformation of the

acted fraudulently or inequitably in such a way that the

instrument is proper.

instrument does not show their true intention, the former

may ask for the reformation of the instrument. (Art.
a.

Example

1362)

I: When the parties agreed on a contract of .

III. WHEN REFORMATION IS NOT PROPER

A. GRATUITOUS ACTS: There shall be no reformation in the
following cases: (Art. 1366)

lease, but one of the parties SlllTeptitiously inserted

certain stipulations which were .noi agreed upon.560 '

b.

Example 2: When the parties agreed to a sale subject to

1.

repurchase, but the defendant did not include the

2.

"' BA Finance Corporation v. Intermediate Appellate Court, G.R. No. 76497, January 20, 1993,
217 SCRA 261, 277; MultlVentures Capital & Mgt. Corp. v. Stalwart Mgt. Services Corp., G.R.
. No. 157439, Ju 4, 2007.
"' Huibonhoa v. Court of Appeals, 378 Phil. 386, 407 (1999); Multi-Ventures Capital & Mgt.
Corp. v. Stalwart Mgt. Services Corp., G.R. No. 157439, July 4, 2007.
550 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992.

Simple <;ionations

imposed; and

condition of repurchase unbeknownst to the plaintiff

196

(Art. 1365; see also Arts. 1 602-1605)

inter vivas

wherein no c.ondition is

Wills.
Donations and wills are purely gratuitous dispositions

of property, so the law will not normally interfere with

561

Ong Chua v. Carr, 53 Phil. 975.

197

how the donor or testator wanted to dispose of his

The provisions of the Civil Code primarily apply to the

1.

reformation of instruments. (Art.

property.
Att.

789

provides that "when there is an imperfect

The principles of the general law on the reformation of

2.

instruments are adopted insofar as they are not in conflict

description, or when no person or property exactly

with the provisions of the Civil Code. (Art.

answers the description, mistakes and omissions

must be corrected,

if the

:B.

refers merely to errors or imperfections in the

description, not to the manner of disposition.562

B. PROCEDURE
I. D'eclaratory Relief. The procedure for the reformation of
instrument shall be governed by rules of court to be
promulgated by the Supreme Court. (Art.

Vorn AGREEMENTS: There shall be no reformation when the

real agreement is void

(Art. 1 366)

Real Party in Interest. Reformation may be ordered at the

2.

instance of either party or his successors in interest, if the

When one of the parties has brought an action to

mistake was mutual; otherwise, upon petition of the injured

enforce the instrument, he cannot subsequently ask for its

reformation. (Art.

1369)

Under the Rules of Court, the ruies on declaratory

relief apply to actions for reformation of instrument.564

Reformation would be useless if the actual agrement is

'
void and cannot be enforced.

C. ESTOPPEL:

1 360)

error appears from the

context of the will or from extrinsic evidence." This

1 360)

party, or his heirs and assigns.

1367)

(Art. 1368)

But a party who is sued on a contract may file a

counterclaim for its reformation. '63

3 . Prescription. The prescriptive period for reformation is

10 years (Art. 1 144), counted from the time the right of

If mistake, fraud, inequitable

intention (by overt acts) not to abide by the true agreement

D. NO MEETING OF MINDS:

action accrues, i.e., the time the other party manifests an

conduct, or accident has prevented a me.eting of the minds of

the parties, the proper remedy is not reformation of the

of the parties (not necessarily the time of execution of the

contract). 565

instrument but annulment of the contract.

IV. GOVERNING LAW AND RULES

A. GOVERNING LAW

'" IV Tolentino 556.

"' See Gojo v. Goyala, G.R. No. L-26768, October 30, 1 970 and Cebu Contractors Consortium
Co. v. CA, G.R. No. 107199, July 22, 2003.

"' Rule 63, Section 1 .

555 Tormon v. Cutanda, 1 1 9 Phil. 84 (1963); Veluz v . Veluz, 133 Phil .459 (1968); Naga
Telephone Co., Inc. v. CA, G.R. No. 107112, February 24, 1994, 230 SCRA 351; Pilipinas Shell
Pelroleum Corporation v. John Bordman Ltd. of lloilo, Inc., G.R. No. 1 59831, October 14, 2005,
473 SCRA 151; Multi-Realty Development Corp. v. akati Tuscany Condominium Corp., G.R.
No. 146726, June 16, 2006. See, however, RoselloBentirv. Leanda, G.R. No. 128991, Apnl 12,
2000 and Cebu Contractors Consortium Co. v. CA, G.R. No. 107199, July 22, 2003, .which
counted the prescriptive period from the time of execution of the contract

198

l99

parties, the literal meaning of its stipulations shall control.

Chapter

(Art. 1370)

10

Interpretation of Contracts

Where the language of a written contract is clear and

9
unambiguous, there is no room for construction.56
The contract must be taken to mean .that which, on its

I.

face, it purports to mean, unless some good reason can

IN GENERAL

be assigned to

show that the words

understood in a different sense.570

"Interpretation" is the act of making intelligible what was before

not understood, ambiguous, or not obvious. It is a method by which
the meaning of language is ascertained. The "interpretation" of a
contract is the determmation of the meaning attached to the words
written or spoken which make the contract. 566
Where the language of a written contract is clear and unambiguoi'.is'
'

. there is generally no room for construction or interpretation.567

Interpretation comes into play when the court finds, upon a
preliminary inquiry, that the contract is ambiguous, i.e., susceptible
of two or more reasonable alternative interpretations. Where the
written terms of the contract are n.ot ambiguous and can only be
read one way, the court will interpret the contract that way as a
matter of law. If the contract is determined to be ambiguous, then

2.

Intention Prevails.
over the former.

(Art. 1370)

B. DETERMINING THE INTENTION

1 . Contemporaneous and Subsequent Acts. In order to
judge the intentipn of the contracting parties,

their

contemporaneous and subsequent acts. shall be principally

considered. (Art.
a.

1371)

Note that by this principle, the court can look into

extrinsic

evidence, outside the four corners of the

written contract.
b.

PRINCIPLES. OF INTERPRETATION

If the words appear to be contrary to

the evident intention of the parties, the ltter shall prevail

the interpretation of the contract is left to the court, to resolve the

ambiguity in light of the evidence. '68

IT.

should be

This falls under the exception to the "parol evidence

rule." Under Rule

130,

Section

9,

when the terms of

an agreement have been reduced to writing, it is

generally considered as containing all the terms agreed

A. PRIMACY OF INTENTION

upon and there can be, between the parties and their

1 . Plain Meaning Rule. If the terms of a contract are clear

and leave no doubt upon the intention of the contracting

'" National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992.
'" Olivares v. Sarmiento, G.R. No. 158384, June 12, 2008, c1ling Heirs of the Late Spouses
Aurelio and Esperanza Balite v. Lim, G.R. No. 152168, 10 December 2004, 446 SCRA 56:
Tuazon v. Court of Appeals, 396 PM. 32 (2000)..
'"Abad v. Goldloop Properties, Inc., G.R. No. 168108, April 13, 2007.
200

successors-in-interest, no evidence of such terms other

than the contents of the written agreement.

569 Olivares v. Sarmiento, G.R. No. 158384, June 12, 2008, citing Heirs of the Late Spouses
Aurelio and Esperanza Bal:te v. Lim, G.R. No. 152168, 10 December 2004, 446 SCRA 56;
Tuazon v. Court of Appeals, 396 Phil. 32 (2000)..
"' Bautista v. CA, 379 Phil. 386, 399 (2000): Abad v. Goldloop Properties, Inc., G.R. No.
168108, April 13, 2007.

201

However, a party may present evidence to modify,

a contract, and shall fill the omission of stipulations which

explain or add to the terms of the written agreement if

are ordinarily established. (Art.

1 376)

he puts in issue in his pleading:

i.

ii.

An intrinsic

ambiguity, mistake or imperfection in

The interpretation of obscure words

C. CONTRA PROFERENTUM:

or stipulations in a contract shall not favor the party who

the written agreement;

caused the obscurity.

The failure of the written agreement to express the

1.

true intent and agreement of the parties thereto;

(Art. 1377)

Any ambiguity is to be taken

contra proferentum,

i.e.,

construed against the party who drafted the contract and

caused the ambiguity which could have been avoided by
the exercise of a little more care. 571

iii. The validity of the written agreement; or

iv. The existence of other terms agreed to by the

2.

parties or their successors-in-interest after the

Thus, any ambiguity, obscurity or doubt in a contract of

adhesion is construed or resolved strictly against the party

execution of the written agreement.

obscurity

2. Scope of Terms.

But where no such ambiguity,

who prepared it.'72

However general the terms of a contract

or

doubt

exists,

no

such

construction

is

warranted.573

may lie, they shall not be understood to comprehend things

that are distinct and cases that are different from those
upon which the parties intended to agree. (Art.

D. IMPOSSIBILITY OF SETTLING DOUBTS: When it is absolutely

impossible to settle doubts by the rules established in articles

1372)

3. Most Effectual Interpretation. If some stipulation of any

contract should admit of several meanings, it shall be

1 370-1377, the following rules apply (Art. 1378):

1.

If the doubts refer to

incidental circumstances

understood as bearing that import which is most adequate

to render it effectual.

(Art. 1373)

a.

Where contract is

gratuitous, the least transmission of

rights and interests shall prevail.

4. Holistic Interpretation.

(Art, 1 3 78)

The various stipulations of a

contract shall be interpreted together, attnbuting to the

doubtful ones that sense which may result from all of them
takenjointly.

(Art. 1 374)

5. Consistency with the Nature and Object.

Words which

may have different significations shall be understood in

that which is most in keeping with the nature and object of
the contract. (Art.

1375)

6. Usage or Custom.

The usage or custom of the place shall

be borne in mind in the interpretation of the ambiguities of

202

571 Orient Air Services and Hotel Representatives vs. Court of Appeals; 197 SCRA 645 [1991];
Nacu vs. Court of Appeals, 231 SCRA 237 [1994]; De Leon vs. Court of Appeals, 186 SCRA 345
[1990]; Equitable Banking Corporation vs. Intermediate Appellate Court, 161 SCRA 518 [1988];
Eastern Assurance and Surety Corp. vs. IAC, 179 SCRA 562 [1989]; Prudential Bank v. Alviar,
G.R. No. 150197, July 28, 2005.
512 Sps. Panlilio v. Citibank, NA, G.R. No. 156335, November 28, 2007, citing Bay View Hotel v.
Ker and Co., Ltd., G.R. No. L28237, Atigust 31, 1982, 116 SCRA 327, 334; Eastern Shipping
Lines Inc. v. Margartne.Verkaufs-Union GmbH, G.R. No. L31087, September 27, 1979, 93
SCRA 257, 262; Eastern Assurance and Surety Corp. v. Intermediate Appellate Court, G.R. No.
69450, November 22, 1989, 179 SCRA 561, 568; Orient Air Services and Hotel Representatives
v. Court of Appeals, G.R. No. 76931, May 29, 1991, 197 SCRA645, 655.
"' Sps. Panlilio v. Citibank, N.A., G.R. No. 156335, November 28, 2007.

203

b. Where contract is onerous, the doubt shall be settled in

favor of the greatest reciprocity of interests. (Art.

instrument, the intention of the parties is to be pursued.; and.

when a general and a particular provision are inconsistent,
the latter is paramount to the former. So a particular intent
will control a general one that is inconsistent with it. (Sec.
12)

1378)
'

A contract which may be interpreted as either a

sale with repurchase or a loan with mortgage
should be construed as the latter, as it involves the
.
.
.
.
greatest rec1proc1ty of mterests.574
2. If the doubts are cast upon the principal object of the
contract in such a way that it cannot be known what may
have been the intention or will of the parties - the contract
shall be null and void. (Art. 1378)

III. RULES OF COURT PROVISIONS

The principles of interpretation stated in the Rules of Court shall

likewise be observed in the construction of contracts. (Art. 1379)
Rule 130 provides for the following rules in the interpretation of
documents:

I. Interpretation of a writing according to its legal

meaning. The language of a writing is to be interpreted
according to the legal meaning it bears in the place of its
execution, unless the parties intended otherwise. (Sec. 10)

2. Instrument construed so as to give effect to all

provisions. In the construction of an instrument where
there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give effect
to all. (Sec. 1 1)
3. Interpretation according to intention; general and
particular provisions. In the construction of an
"' Olina vs. Medina, 13, Phil. 379; Labasan v. Lacuesta, G.R. No. L25931, October 30, 1978.
204

4. Interpretation according to circumstances. For the

proper construction of an instrument, the circumstances
under which it was made, including the situation of the
subject thereof and of the parties to it, may be shown, so
that the judge may be placed in the position of those whose
language he is to interpret. (Sec. 13)
5. Peculiar signification of terms. The terms of a writing are
presumed to have been used in their primary and general
acceptation, but evidence is admissible to show that they
have a local, technical, or otherwise peculiar signification,
and were so used and understood in the particular instance,
in which case the agreement must be construed
accordingly. (Sec. 14)
6. Written words control printed. When an instrument
consists partly of written words and partly of a printed
form, and the two are inconsistent, the former controls the
latter. (Sec. 15)
7.

Experts and interpreters to be used in explaining

certain writings. When the characters in which an
instrunient is written are difficult to be deciphered, or the
language is not understood by the court, the evidence of
persons skilled in deciphering the characters, or who
understand the language, is admissible to declare the
characters or the meaning of the language. (Sec. 16)

8. Of two constructions, whic.h preferred, When the terms

of an agreement have been intended in a different sense by
the different parties to it, that sense is to prevail against
either party in which he supposed the other understood it,
205

and when different constructions of a provision are

Chapter

otherwise equally proper, that is to be taken which is the

most favorable to the party in whose favor the provision

was made. (Sec.

11

Defective Contracts

17)

9. Construction in favor of natural right. When an

instrument is equally susceptible of two interpretations, one

is favor of natural right and the other against i the former

is to be adopted. (Sec.

18)

10. Interpretation according to usage. An instrument may be

construed according to usage, in order to determine its true

I.

IN GENERAL
5
The Civil Code classifies defective contracts into four 75:

A. RESCISSIBLE CONTRACTS: They are the least infirm .contracts.

Though valid and possessing all the essential requisites of

character. (Sec. 19)

contracts, they may be set aside forhaving caused economic

damage to one of the contracting parties or to a third party.

B. VOIDABLE CONTRACTS: They are contracts where the consent

of one party is defective, either because of want of capacity to

give . consent, or because consent is vitiated by mistake,

violence, intimidation, undue influence, or fraud.

considered valid until annulled.

c.

They are

UNENFO)l.CEABLE CONTRACTS: They are contracts which

cannot be enforced (unless ratified) because of lack of

authority, or of the required writing, or because of incapacity of

both parties.

D. VOID CONTRACTS: They are the most infirm contracts. One or

more of _the essential requisites are absent, making them

absolute nullity and without any effect.

'" See J. Vilug's dissent in Equalorial Realty Development, Inc. v. Mayfair Theater, Inc., 370
SCRA 56, 90 (2001). See also Balane, Defective Contracts in Philippine Civil Law, Journal of the
IBP, Vol. 30, No. 2 (3rd and 4th Quarters 2004).
206

207

th plaintiff must show that he has no other recourse to

repair the damage he suffered).

II. RESCISSIBLE CONTRACTS

A. IN GENERAL
I.

c. Prescription for rescission under Art. \ 1 9 1 is 10 years

. for written contracts (Art. 1 144) or 6 years for oral
contracts (Art. 1 1 45), while prescription for rescission
under Art. 1381 is 4 years. (Art. 1389)

In terms of their efficaciousness, resCissible contracts are

regarded, among the four types of defective contracts, as

being the closest to perfectly executed contracts: A
rescissible contract contains all the requisites of a valid
contract and is considered legally binding, but by reason of
injury or damage to either of the contracting parties or to
third persons, such as creditors, it is susceptible to
rescission at the instance of the party who may be
prejudiced thereby.576

2. A rescissible contract is valid, binding and effective until it

is rescinded. The proper way by which it can be asailed is
by an action for rescission based on any of the causes
expressly specified by law.577
3. The rescission of rescissible contracts (under Art. 1381, et
seq.) should be distinguished from "rescission" or
"resolution" under Art. 1 1 9 1 .578
a.

Rescission under Art. 1 1 9 1 is a remedy for breach of

obligations, while rescission under Art. 1381 is a
remedy for the economic injury caused by a contract. .
Thus, rescission under Art. 1 191 may be filed only
by a contracting party; rescission under Art. 13 8 1
may be filed even by a third party.

b.

Rescission under Art. 1 191 is a principal action, while

rescission under Art. 1381 is subsidiary (in the latter,

B. CAUSES: Contracts validly agreed upon may be rescinded in

the cases established by law. (Art. 1380) Under Art. 1 3 8 1 , the
following contracts are rescissible:
I.

Lesion to Wards. Those contracts which are entered into

by guardians whenever the wards whom they represent
suffer lesion by more than one-fourth of the value of the
things which are the object thereof; (Art. 1381)

2. Lesion to Absentees. Those contracts agreed upon in

representation of absentees, if the latter suffer lesion by
more than one-fourth of the value of the things which are

the object thereof; (Art. 1381)

a. "Lesion" means the damage caused to the ward or

absentee due to the discrepancy between the
consideration received and the value of the things
alienated.
b. Rescission referred to in the first two items (contracts
by guardians, or for absentees) shall not take place
with respect to contracts approved by the courts. (Art.
1386)
c.

srs

See J. Vitug's dissent in Equatorial R,ealty Development, Inc. v. Mayfair Theater, Inc., 370
SCRA 56, 90 (2001 ).
577 See J. Vitug's dissent in Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 370
SCRA 56, 90 (2001).
.
'" Universal Food Corporation v. CA, 144 Phil. 1 (1970); lringan v. Court of Appeals, 418 Phil.
286, 296297 (2001); Rivera v. Del Rosario, G.R. No. 144934, January 15, 2004.
208

Court approval is required for acts of ownership (as

distinguished from mere acts of administration)
executed by guardians or representatives of absentees.
If court approval is lacking, the contract is
unenforceable for lack of authority (Art. 1403, par. 1 ),
even if lesion is not shown.
209

iv. Evidence
when the latter cannot in any other manner

collect the claims due them; (Art.

a.

The transfer of all or nearly all of his property by a

debtor, especially when he is insolvent or greatly
embarrassed financially.

entered into in fraud of creditors, when the donor did

vi. The fact that the transfer is made between father

sufficient property to pay all debts

and son, when there are present other of the above

contracted before the donation. (Art.

Alienations by

onerous title

circumstances.

1387)

are

also

presumed

vii. The failure of the vendee to take exclusive

fraudulent when made by persons against whom some

possession of all of the property.

judgment or writ of attachment has been issued. (Art.

1387)

4. Things Under Litigation.

property

alienated,

defendant without the knowledge and approval of the

and need not have been

litigants or of competent judicial authority; (Art.

obtained by the party seeking the rescission. (Art.

1387)

5 . By Provision of Law.

creditors

may

be proved

in any

other manner

to whose fulfillment the debtor could not be compelled

at the time they were effected, are also rescissible.

fraud in a sale579:

(Art.

The fact that the consideration of the conveyance is

1382)

For Art.

fictitious or is inadequate.
ii.

and (b)

the obligation paid was not yet due at the time of

the payment.

begun and while it is pending against him.

C. WHO MAY FILE:

iii. A sale upon credit by an insolvent debtor.

The action for rescission may be filed by the

following persons580:

560

210

1382 to apply, it is required that: (a) the

payment is made in a state of insolvency;

A transfer made by a debtor after suit has been

'" Oria v. McMicking, 21 Phil. 243 (1912).

All other contracts specially

Payments made in a state of insolvency for obligations

1387) The

following circumstances are considered badges of

i.

1381)

declared by law to be subject to rescission. (Art. 1381)

In addition to these presumptions, the design to defraud

recognized by the law of evidence. (Art.

Those contracts which refer to

things under litigation if they have been entered into by the

The decision or attachment need not refer to the

c.

complete

gratuitous title are presumed to have been

not res.erve

b.

v.

1381)

All contracts by virtue of which the debtor alienates

property by

or

insolvency.

3. Fraud of Creditors. Those contracts undertaken in fraud

of creditors

of large indebtedness

IV Tolentino 587.
2il

1 . The injured person (the ward or absentee suffering lesion;

the creditor defrauded; or the plaintiff in a case where the

(1) if the

transferee

acquired

the

property

gratuitously, he is obliged to surrender it

thing in litigation was alienated);

regardless of his good faith or bad faith.

2. The heirs of such person;

(2) if the

transferee

acquired

the

property

onerously (with consideration), he is obliged to

3. The creditors of such person (accion subrogatoria, by

virtue of Art. 1 177).

surrender it only if he acted in bad faith.

(Art.

1385)

D.

REQUISITES

f.

a.

Rescission must be for a cause provided by law. (Arts.

For persons under guardianship and for absentees,

1380, 1381)
b.

the period of four years shall not begin until the

Since rescission is a

subsidiary

termination of the farmer's incapacity, or until the

action, it can be

domicile of the latter is known. (Art. 1389)

instituted only when the party sufferin& damage has no

other legal means to obtain reparation for the same.

2. Requisites for Rescission of Contracts in Fraud of

Creditors (Accion Pauliana)581 -

(Art. 1383)
c.

d.

Rescission shall be only to the

cover the damages caused.

extent necessary
(Art. 1384)

to

a.

Rescission can be carried out only when he who

demands rescission can return whatever he may be
obliged to restore.

defendant entered into a transaction, the latter

could not have intended to defraud him.

(Art. 1385)

b.

That the debtor has made a

c.

That the creditor has

to lesion suffered by the ward or absentee.

Rescission shall not take place when the things which
are the object of the contract are legally in the

possession of third persons

faith. (Art. 1 3 85)

subsequent contract
conveying a patrimonial benefit to a third person;
no other legal remedy to

satisfy

his claim, but would benefit by rescission of the

conveyance to the third person;

who did not act in bd

In case of a fraudulent transfer by the debtor of his

581

Siguan v. Um, G.R. No. 134685, November 19, 1999; Khe Hong Cheng v. CA, G.R. No.
144169, March 28, 2001.

property,

2i2

That the plaintiff asking for rescission, has a credit

prior to the alienation, although demandable later;
If the plaintiff has no credit at the time the

This applies to contracts which are rescissible due

e.

The action to claim rescission must be commenced

withinfour years. (Art. 1389)

I. General Requisites -

2i3

i.

good faith, and (2) for a sufficient and valuable

consideration.'87

As a subsidiary remedy (Art. 1383), an accion

pauliana presupposes the following: I) a
judgment; 2) the issuance by the trial court of a
writ of execution for the satisfaction of the
judgment, and 3) the failure of the sheriff to
enforce and satisfy the judgment of the court. 582

e. That the third person who received the property

conveyed, if by onerous title, has been an accomplice

in thefraud.

ii. If a creditor seeks to rescind a transaction before

he has exhausted all the properties of the debtor,
the action to rescind may be dismissed as
premature. 583

For acontract to be rescinded for being in fraud of

creditors, both contracting parties must be shown
to have acted maliciously so as to prejudice the
creditors.588

If the debtor has other properties available, it

would be premature to even consider if the
subject transaction is ftaudulent.584

E. EFFECTS: Rescission creates the obligation to return the things

which were the object of the contract, together with their fruits,
and the price with its interest. (Art. 1385)

iii. Thus, the 4-year prescription period commences to

run only upon discovery by the judgment creditor
that the debtor no longer had any properties to
satisfy the debt.585 (The period is not reckoned
from the date of the rescissib!e transaction or the
registration thereof.)

I.

Consequently, it can be carried out 011ly when he who

demands rescission can return whatever he may be obliged
to restore. (Art. 1385)

2. Neither shall rescission take place when the things which

are the object of the contract are legally in the possession
ofthirdpersons who did not act in badfaith. (Art. 1385)

d. That the act being impugned isfraudulent;

i.

The creditor seeking rescission has the burden of

proving fraud, although he may rely on certain
disputable presumptions under Art. 1387
'
(supra).586

ii. To' overcome the presumption of fraud, it must be

established that the conveyance was made (I) in

'" Khe Hong Cheng v. CA, G.R. No. 144169, March 28. 2001.
"' Khe Hong Cheng v. CA, G.R. No. 144169, March 28. 2001.
"' Siguan v. Lim. G.R. No. 134685, November 19, 1 999.
"' Khe Hong Cheng v. CA, G.R. No. 144169, March 28, 2001.
'" Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006.
2i4

a. In this case, indemnity for damages )Jlay be demanded

from the person causing the loss. (Art. 1385)
b. If the buyer acted in good faith in purchasing a
property (particularly if he relied on a certificate of title
which has no adverse annotations), i.e., he did not
know of the seller's debts, the sale cannot be
rescinded.589

"' China Banking Corp. v. CA, G.R. No. 129644, September 7, 2001; MR Holdings v. Bajar,
G.R.No. 138104, April 1 1 , 2002.
"'Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21; 2006.
"' Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006.
215

3.

Whoever acquires in bad faith the things alienated in fraud

of creditors, shall

indemnify the latter for damages suffered

of the alienation, whenever, due to any
cause, it should be impossible for him to return them. (Art.
by

them on

b.

account

c.

1 388)

person by one who has been given

(Art. 1388)

legal representation,

2. Vitiated Consent.

A. IN GENERAL

binding, although they can be annulled because oi want

an aciion for that purpose

(Art. 1 390).

Before annulment,

they are effective and obligatory between parties.591

They can be confinned or ratified (Art.

1 . Direct Action. The validity of a voidable contracts may be

assailed only by a ''proper action in court" (Art. 1 390), i.e.,
through an action for that purpose.592

The validity of voidable contracts cannot be attacked

contract may be voidable even though there may have

collaterally (like voidable marriages593 or voidable

(Art. 1390)

judgments594).

Those where one of the parties is

incapable of giving consent to a contract; (Art.

which can be attacked collaterally.

2. Who May File.

a.

1391)

1327) is voidable.

590

MWSS v. CA, G.R. No. 1 26000, October 7, 1998.

591 MWSS v. CA, G.R. No. 126000, October 7, 1998.
216

The action for the annulment of contracts may be

instituted by all who are thereby obliged principally or

Thus, a contract executed by a senile or demented

person (who cannot enter into contracts under

This differentiates them from void

contracts (or marriages or judgments), the validity of

The following contracts are voidable or annullable

Lack of Capacity.

a.

C. ACTION FOR ANNULMENT

1 390).

been no damage to the contracting parties.

I.

Those where the consent is vitiated by

See discussion on these vices of consent supra.

of

Voidable contracts are valid and binding until set aside in

B. CAUSES :

unenforceable. (Art. 1403, par.

(Art. 1391)

Voidable or anullable contracts are existent, valid, and

4. A

or who has acted beyond his

mistake, violence, intimidation,_ undue influence or fraud.

capacity or vitiated consent of one of the parties.590

3.

no authority or

l ; Art. 1 3 1 7)

III. VOIDABLE CONTRACTS

2.

contract is

Lack of capacity is different from lack of authority. If

powers, the contract is

I.

the

the contract is entered into in the name of another

If there are two or more alienations, the first acquirer

. shall be liable first, and so on successively.

both parties lack capacity,

unenforceable. (Art. 1403, par. 3)

If

subsidiarity.

Art.

(Art. 1 397)

592 MWSSv.

CA, G.R. No. 1 26000, October7, 1998.

"' Vda. De Jacob v. CA, G.R. No. 135216, August 19, 1999.
594 Gomez v. Concepcion, 47 Phil. 717 (1925).
217

1.

Strangers to a contract cannot sue to annul and set

i.

. aside the same.

(Art. 1397)

contract of sale of a land to which he was not a

party ,595
n.

ii. Persons who exerted intimidation, violence, or

undue influence, or employed fraud, or caused
mistake cannot base their action upon these flaws

"Exception": There have been cases holding that a

of the contract. (Art. 1397)

stranger may sue for annulment when he is

3.. Prescription. The action for annuhnent shall be brought

within four years. (Art. 1391)

prejudiced in his rights with respect to one of the

contracting parties and can show detriment which

. would positively result to him from the contract in

6
which he has no intervention.59

This period shall begin:

Note, however, that the exception , giving

a.

strangers the standing to set aside a contract

cif!'a contract.

In cases of intimidation, violence or undue influence

from the time the defect of the consent ceases.

usually rests on a basis other than the

voidability

him (for being

For instance, 'a

A contract executed under the pressure of the

rescissible)591 ; a co-owner may

President/dictator may be annulled within four

6
years from his deposition. 00

set aside a sale made by another co-owner in

excess of his portion (for being void insofar as

affected

owner).'98
b.

the portion

of the

(Art.

1391)

creditor may set aside a contract defrauding

it

are capable cannot allege the

incapacity of those with whom they contracted.

Thus, a squatter or trespasser cannot annul the

Persons who

plaintiff

b.

In case of mistake or fraud

discovery of the same. (Art.
i.

The plaintiff must be the injured party or victim, and

not the party responsible for the defect. 599

from the time of the

1391)

Discovery

commences from the date of the

execution of the contract601 or, at the very least,

from the date of registration thereof with the

Register of Deeds, as registration is constructive
60
notice to the world. 2

"' Banez v. CA. G.R. No. L-30351, September 1 1 , 1974.

'" Teves v. People's Homesite and Housing Corporation, 23 SCRA 1141 (1968); Reyes v. CA,
G.R. No. 94214, December 1, 1992.
'" Guzman Bocaling & Co. v. Bonnevie, G.R. No. 86150, March 2, 1992; See Equatorial Realty
Development, !nc. v. Mayfair Theater, Inc., 264 SCRA 483, 500 (1996), J. Panganiban, separate
concurring.
"' Fernandez v. Fernandez, G.R. No. 143256, August 28, 2001.
"' Reyes v. CA, G.R. No. 94214, December 1, 1992; Samahan ng Magsasaka sa San Josep v.
Vallsno, G.R. No. 158314, June 3, 2004.
218

60o MWSS v. CA, G.R. No. 126000, October 7,

2001.

1998; Miailhe v. CA, G.R. No. 108991, March 20,

601 Sps. Dela Cruz v. Sps. Segovia, G.R. No. 149801, June 26, 2008.
602 MWSS v. CA, G.R. No. 126000, October 7, 1998, citing Pascua

vs. Florentino, 136 SCRA

208; Balbin vs. Medalla, 108 SCRA 666; Guerrero vs. CA, 126 SCRA 109; Marcopper vs.
Garcia, 143 SCRA 178; Ramos vs. CA, 112 SCRA 542. See also Government Service Insurance
System v. Santiago, G.R. No. 155206, 28 October 2003, 414 SCRA 563, 571, citing Philippine
Economic Zone Authority v, Fernandez, 411 Phn. 107, 1 1 9 (2001).
219

ii.

c.

a<lopt\on ol: tb.e act, OI acceptance an<i tetent\on ol:

605
benefits fl.owing thereftom.

If consent is totally absent, the contract is void and

hence imprescriptible.603
b.

Jn case of contracts entered into by minors or other

incapacitated persons - from the time the
guardianship ceases.

Examples of ratification:
i.

(Art. 1391)

voidable contract;''

D. RATIFICATION
ii.

1 . Concept. Voidable contracts are susceptible of ratification.

(Art. 1 390) Ratification extinguishes the action to annul a
voidable contract. (Art. 1 392)
a.

Acceptance and retention of benefits .under the

Use of the proceeds of the voidable contract;607

iii. Introduction by the seller of the buyer as the new

owner of the property .608

Ratification means that a person knowingly and

3. Who May Ratify.

voluntarily adopts or gives sanction to an unaut)iorized

or defective act, which would otherwise not be binding.

a.

on him.604

For voidable contracts due to

lack of capacity,

ratification may be effected by the incapacitated person

(upon gaining capacity) or by his guardian (during the

b.

ward' s incapacity). (Art.

Ratification requires that: (a) the ratifying party knows

of the reason which renders the contract voidable; and
(b) such reason has ceased. (Art.

b.

1393)

Fcir

voidable

1394)

contracts

due

to

vice of consent,

ratification may be effected by the person whose

consent was vitiated.

2. Manner. Ratification may be effected expressly or tacitly.

(Art. 1393)
. c.
a.

There is a tacit (or

implied)

Ratification does not require the conformity of the

contracting party who has no right to bring the action

ratification if; with

for amiulment. (Art.

knowledge of the reason which renders the contract

1395)

voidable and such reason having ceased, the person

who has a right to invoke it should execute an act

4. Effect of Ratification.

Ratification cleanses the contract

which necessarily implies an intention to waive his

from all its defects from the moment it was constituted.

right. (Art.

(Art.

1393)

1396)

Implied ratification may take various forms - like

silence or acquiescence, acts showing approval or
005

FiEstate Golf & Development, Inc. v. Navarro, G.R. No. 152575, June 29, 2007, citing Heirs
of Rosa Dumaliang v. Damiano Serban, G.R. No. 155133, 21 February 2007 and Baranda v.
Baianda, G.R. No. L-73275, 20 May 1987, 150 SCRA 59.
6"' MaglucotAw vs. Maglucot. 329 SCRA 78, 94 (2000).

Yasuma v. Heirs of De Villa, G.R. No. 150350, August 22, 2006.

MWSS vs. Court of Appeals, 297 SCRA 287, 307 (1998); Francisco v. Herrera, G.R. No.
139982, November 21, 2002.
607 Phil. Free Press Inc. v. CA, G.R. No. 132864, October 24, 2005.
606 Sps. Alfredo v. Sps. Borras, G.R. No. 144225. June 17, 2003.

220

221

603

606

Ratification retroacts to the time the contract was

except insofar as he has been benefited by the thing or

made.

price received by him. (Art.

E. EFFECT OF ANNULMENT

4. Inability to Make Restitution.

1.

I n General. The effect o f annulment of the contract i s to

a.

1399)

Due to Loss of the Thing Caused by Plaintiff. - The

wipe it out of existence, and to restore the parties, insofar

action for annulment of contracts shall be extinguished

as legally and equitably possible, to their original situation

when the thing which is the object thereof is lost

before the contract was entered into. If a voidable contract

through the fraud or fault of the person who has a right

is annulled, the restoration of what has been given is

to institute the proceedings.

proper.609

(Art. 1401)

If the right of action is based upon the incapacity

2. General Rule: Restitution. An obligation having been

of any one of the contracting parties, the loss of the

annulled, the contracting parties shall restore to each other

thing shall not be an obstacle to the success of the

the things which have been the subject matter of the

action, unless said loss took place through the

contract, with their fruits, and the price with its nterest,

fraud or fault of the plaintiff.

except in cases provided by law.

(Art. 1398)

b.
a.

In obligations to render service, the value thereof shall

be the basis for damages.

(Art. 1401)

Due to Loss of the Thing Caused by Defendant.

Whenever the person

obliged by the

decree of

annulment to return the thing can not do so because it

(Art. 1398)

has been lost through his fault, he shall returri the fruits
b.

As long as one of the contracting parties does not

received and the value of the thing at the time of the

loss, with interest from the same date. (Art. 1400)

restore what in virtue of the decree of annulment he is

bound to return, the other cannot be compelled to
comply with what is incumbent upon him.

(Art. 1402)

c.

Restatement of the Rule.

In case the thing which is

the object of the contract has been lost (regardless of

c.

The principle of unjust enrichment applies here. Thus,

the cause of voidability of the contract - whether due

if a lease is annulled, the lessee cannot demand the

to incapacity or vice of consent), the following rules

return of past rentals which correspond to the period

'
0
that he was in possession.of the property.61

apply:
i.

If loss is through the fraud or fault

of the plaintiff

(the party who has the right to institute the action)

3. Exception: Incapacity. When the defect of the contract

consists in the incapacity of one of the parties, the

- the action for annulment is

barred (Art. 1401);

incapacitated person is not obliged to make any restitution

ii.

If loss is through the fraud orfault ofthe defendant

the action is

'' Katipunan v. Katipunan, Jr., G.R. No. 132415, January 30, 2002; Villanueva v. Ctiiong, G.R.
No. 159889, June 5, 2008.
"' IV Tolentino 607608.
222

not barred; the defendant must pay

the value of the thing at the time of the loss (with

223

interest from the same date) as well as the fruits

received. (see Art.
iii. If loss is

defective act, which would otherwise not be binding on

him.613

1400);

not due to thefraud or fault of any party

not

a.

(such as by fortuitous event) - the action is

barred;

restitution may still be effected by paying

silence or acquiescence, acts showing approval or

adoption of the act, or acceptance and retention of

without interest (since the payer was not at fault).

benefits flowing therefrom.614

b.

UNENFORCEABLE CONTRACTS

Assail. Unenforceable contracts cannot be

assailed by third persons.

I . Concept. Unenforceable contracts

are those which cannot

4. Types.

be enforced in court (unless they are ratified) becatlse they

are entered into without or in excess of authority, or they

There

contracts (Art.

do not comply with the statute of frauds, or both of the

a.

contracting parties do not possess the required legal

are

(Art. 1408)

three

categories

of unenforceable

1403):

Those entered into in the name of another person by

one who has been given no authority or legal

capacity.611

representation, or who has acted beyond his powers;

Unenforceable contracts cannot serve as basis for a suit

b.

or action; the courts will refuse to enforce them and

dismiss the suit.

b.

.
.
'
15
Rat1'fi1catton 1 s generaIIy retroact1ve.6

3. Who May

A. IN GENERAL

a.

express or implied. (see Art. 1 3 1 7)

Implied ratification may take various forms - like

the value of the thing at the time of loss, but

IV.

Ratification may be

Those that do not comply with the Statute of Frauds;

and

'

c.

In a suit founded on an unenforceable contract, the

defendant can interpose its unenforceability as a
defense and ask for the dismissal of the suit.612 (The

Those where both parties are incapable of giving

consent to a contract.

These categories are further discussed below.

defendant's failure to set up this defense may be

deemed a waiver thereof and a ratification of the

. B. LACK OF AUTHORITY

contract.)

1.

2. Ratification. Unenforceable contracts may be ratified.

(Art. 1403) Ratification means that a person knowingly.and

Unauthorized

Contracts.

The

first

those entered into in the name of another person by one

613

Mercado v. Allied Banking Corp., G.R. No. 171460, July 27, 2007.
612 Rule 16, Section 1 (i).
224

of

unenforceable contracts are unauthorized contracts, or

voluntarily adopts or gives sanction to an unauthorized or

611

category

Ma9lucol-Aw vs. Maglucot, 329 SCRA 78, 94 (2000).

Koji Yasuma v. Heirs of De Villa, G.R. No. 150350, August 22, 2006.
'"De Jesus v. Daza, 77 Phil. 170 (1946).
014

225

who has been given no authority or legal representation, or

the party with whom he has contracted (Art.

who has acted beyond his pow,ers.

unless -

a.

'
Example

i.

1: If X sold the car of his friend Y, without

Example
house to

1 898),

ii. The other contracting party is aware of the limits

of the agent's power (in which case the contract is

2: If A was authorized by the owner of a

lease

The principal ratifies the contract (see Art.

or

the latter's authorization, the sale is unauthorized and

thus unenforceable
b.

1 897),

it out to third persons, but A

sold

void). (Art.

it

1 898)

instead, the sale is beyond A's powers and thus

unenforceable.
c.

C. STATUTE OF FRAUDS

The unauthorized sale by a co-owner of the entire co

owned property is unenforceable as to the pro-indiviso
shares of his co-owners who did not consent.61 6
I

Governing

Law. Unauthorized
Article 1 3 1 7 and the principles
Code. (Art. 1404)

2.

a.

Under Art.

contracts are governed by

I.

Noncompliance with the Statute o f Frauds.

The second

type of unenforceable contracts are those that do not

comply with the Statute of Frauds as set forth in Art.
a.

of agency under the Civil

1403.

The Statute of Frauds refers to the law which requires

certain contracts or transactions to be put in writing
and signed by the party charged thereby. Its purpose is
to prevent fraud and perjury in the enforcement of
obligations

1 3 17, no one may contract in the name of

depending for their evidence

unassisted memory of witnesses. 6 17

another without being authorized by the latter, or

on the

unless he has by law a right to represent him. A

contract entered into in the name of another by one
has acted beyond his powers, shall be

(Art.

unenforceable.

1 3 17)

Unless it is

ratified, expressly or impliedly, by the

1403), unless the other party fails to object (Art.

1405).

2. Contracts Covered by the Statute of Frauds. In the

person on whose behalf it has been executed,

following cases an agreement shall be unenforceable by

before it is revoked by the other contracting party.

action, unless the same, or some note or memorandum

(Art.
b.

Contracts covered by the Statute of Frauds cannot be

proven without the writing or through oral evidence

(Art.

b.

who has no authority or legal representation, or who

1317)

thereof, be in writing, and subscribed by the party charged,

or by his .agent:

Under the principles of agency, if the agent exceeds the

scope of his authority, the agent is personally liable to

"' Cabales v. CA, G.R. No. 162421, August 31, 2007.

226

617 Swedish Match, AB v. CA, G.R. No. 128120, October 20, 2004; Sps. Torcuator v. Sps.
Bernabe, G.R. No. 134219, June 8, 2005.

227

a.

b.

An agreement that by its terms is not to be performed

within a year from the making thereof; (Art. 1403, par.

A special promise to answer for the debt, default, or

miscarriage of another; (Art. 1403, par. 2, subpar. b)

2, subpar. a)

I.

The statute of frauds applies if the agreement is;

its own terms,

not to be perfonned within

This applies to the obligation of the defendant as a

'

guarantor of a third party. If the obligation is the

by

principal debt of the defendant (e.g., supplier

1 year.

provided lumber to the defendant for his account,

It does not apply if the agreement is merely silent

and not for the account of the

on the time ofperfonnance.618

ii.

The statute of frauds applies if the agreement is not

to be perfonned

on both sides

within

1 year. It

c.

does not apply if the agreement is to be fully

perfonned

on one side within 1 year.619

An agreement made in consideration of marriage,

other than a mutual promise to marry; (Art.

2, subpar. c)

iii. The statute of frauds applies only to executory

a.

contracts. It does not apply to contracts w ich had

already been executed (whether fully or partially,

Thus, it does not apply to a contract of sale

b.

which had been partially executed by the

parties, with the transfer of the possession of

Thus, the father of the groom-to-be may not sue

the father of the bride-to-be on an oral agreement

5
A mutual promise to marry is not enforceable, 62
even if written.

However, a breach thereof may

give rise to liability for damages if attended with

6
bad faith, 62 or an action to recover money or

the property to the buyer and the partial

payments of the purchase price thereof.621

b.

1403, par.

that the fonner would improve the latter's house in

4
consideration of the marriage of their children.62

and whether on one or both sides).620

a.

defendant's

contractor who took delivery of the lumber), the

23
Statute of Frauds does not apply . 6

property advanced on account of the promise.627

If a contract has been totally or partially

d.

enable the defendant to keep the benefits

An agreement for the sale ofgoods, chattels or things

in action, at a price not less than five hundred pesos.
(Art. 1403, par. 2, subpar. d)

and at the same time, evade the obligations

i.

perfonned, the exclusion of parol evidence

would promote fraud or bad faith, for it would

already derived by him from the transaction,
assumed or contracted by him thereby.622

The Statute of Frauds does not apply (no writing

required) if:

623

618

Arroyo v. Azur, 76 Phil. 493 (1946).

619 Philippine National Bank v. Philippine Vegetable Oil Co., 49 Phil. 857 (1927).
620 Ciemeno v. Lobregat, G.R. No. 137845, September 9, 2004.
621 Clemeno v. Lobregat, G.R. No. 137845, September 9, 2004.
"' Swedish Match, AB v, CA, G.R. No. 128120, October 20, 2004.
228

Reiss v. Memije, 15 Phil. 350 (1910).

Cabague v. Auxilio, 92 Phil. 294 (1952). See lso Domalagan v. Bolifer, 33 Phil. 471 (1916).
625
De Jesus v. Syqula, 58 Phil. 866 (1933).
'" Garcia v. Del Rosario, 33 Phil. 189; Cabague v. Auxilio, 92 Phil. 294 (1952); Baksh v. CA,
G.R. No. 97336, February 19, 1993.
6" De Jesus v. Syquia, 58 Phil. 866 (1933).
624

229

a.

the buyer accepts and receives part of such

iii. In a sale of land through an agent, the authority of

goods and chattels, or the evidences, or some

the agent should be in writing; otherwise, the sale

of them, of such things in action, or

b.

shall be void.

the buyer pays at the time some part of the

purchase money.

(Art. 1403, par. 2,

f.

subpar. d)

ii. When a sale is made by auction and entry is made

by the auctioneer in his

credit of a third person is actually a stranger to the.

the sale, of the amount and kind of property sold,

contract between that third person and the person

terms of sale, price, names of the purchasers and

who relies on the representation. Thus, the liability

person on whose account the sale is made, it is a

d)

of the person who makes the representation is

1403, par. 2, subpar.

actually not ex
Thus,

contractu

but arising from

tort.

has been said that this category of

contracts

was

improperly

included.631

signature of the party charged is not required.

3. Requirement of Note or Memorandum. If a contract is

covered by the Statute of Frauds under Art. 1403, par. 2,

An agreement of the leasing for a longer period. than

one year, or for the sale of real property or of an

"the same, or some note or memorandum thereof, [must]

interest therein; (Art. 1403, par. 2, subpar. e)

1.

it

unenforceable

Note that in such an exceptional situiion, the

e.

A representation as to. the credit of a third person.

(Art. 1403, par. 2, subpar. f)
This person who makes a representation as to the

sales book, at the time of

sufficient memorandum: (Art.

(Art. 1 784)

be in writing, and subscribed by the party charged."

However, for a note or memorandum to satisfy the Statute

A right of first refusal is different from a contract

of sale of real property, and is not covered by the

of Frauds, it must be complete in itself and cannot rest

partly in writing nd partly ii;i parol (oral) evidence.632

statute of frauds.628

a.

ii. The statute of frauds does not apply to a partition,

The note or memorandum must contain the names of

the parties, the terms and conditions of the contract,

which does not involve the transfer of property but

and a description of the property sufficient to render it

merely a confirmation of title.629 Thus, an oral

capable of identification. Such note or memorandum

pai1ition is valid.630

must contain the essential elements of the contract

expressed with certainty that may be ascertained from
the note or memorandum itself, or some other writing
to which it refers or within which it is connected,
.
.
1 '
633
without resortmg to paro ev1dence.

828

Rosencor Development Corporation v. lnqulng, G.R. No. 140479, 8 March 2001, 354 SCRA
119; Barbosa v. Hernandez, G.R. No. 133564, July 10, 2007.
829 PadaKilario v. CA, G.R. No. 134329, January 19, 2000; Vda. de
Reyes v, Court of Appeals
199 SCRA 646, 657 (1991), citing Thunga Chui v. Que Bentec, 2 Phil. 561, 563-564 (1903)
and
Barcelona, et al. v. Barcelona and Court of Appeals, 100 Phil. 251, 255 (1956).
"' Tan v.lim, G.R. No. 128004, September 25, 1998.
,

230

"' IV Reyes & Puna 254.

Swedish Match, AB v. CA, G.R. No. 128120, October20, 2004.
'" Swedish Match, AB v. CA, G.R. No. 128120, October 20, 2004.

'32

231

Thus, a note which does not indicate the price and

the mode of payment is insufficient.634
b.

5 . Ratification. Contracts infringing the Statute of Frauds are

ratified by:

The note or memorandum need not be contained in a

single document, nor, when contained in two or more

a.

papers, need each paper be sufficient as to contents and

evidence to prove the same (Art.

signature to satisfy the statute. Two or more writings

properly

connected

may be

considered together,

b.

matters missing or uncertain in one may be supplied or

rendered certain by another, and their sufficiency will

signature. 635

sufficient

wi'iting

Unenforceable contracts under the Statute of Frauds should

to

not be confused with contracts which require a public

evidence the agreement for purposes of complying

document under Arts.

with the statute of frauds.636

4. Evidence.

1405)

6. Distinguished from the Public Documents Requirement.

The exchange of correspondence between the

constitute

The acceptance of benefit under them. (Art.

buildings on the leased property

. is a ratification of
6
the contract. 38

requirements of the statute as to contents and as to

may

1405), or

In an oral lease, construction by the lessee of

depend on whether, taken together, they meet the

parties

The failure to object to the presentation of oral

contracts are perfectly

1357 and 1358. The latter group of

enforceable

either because they

comply with the Statute of Frauds (e.g., there is a written

Where the Statute of Frauds is applicable,

note or memorandum, albeit in private document), or

"evidence . . . of the agreement cannot be received without

because they are not covere!i by the Statute of Frauds at all.

the writing, or a secondary evidence of its contents." (Art.

The parties may just need them to appear in a public

1403, par. 2). In other words, parol or oral evidence is

document for convenience or for registration purposes, in

barred.

which case they may simply compel each other to execute

the corresponding public document

But the other party should promptly object to the

presentation of oral evidence; failure to do so would be

When a contract is enforceable under the Statute of

a waiver of such objection and a ratification of the

contract. (Art.

Frauds, and a public document is necessary for its

registration in the Registry of Deeds, the parties may

1405)

avail themselves of the right under Art._

1357, i.e.,

Cross-examination regarding the contract may be

compel each other to execute a public document. (Art.

deemed

1406)

a waiver of the objection to parol

evidence.637

634 Swedish Match, AB v. CA, G.R. No. 128120, October 20, 2004.
"' Limketkai Sons Milling, Inc. v. CA, G.R. No. 1 1 8509, December 1, 1995.
636 City of Cebu v. Heirs of Rubi, 306 SCRA 408 (1999).
"'Abrenica vs. Gonda, 34 Phil. 739 (1916); Taloslg vs. Vda. de Nieba, 43 SCRA 472 (1972);
Limkelkai Sons Milling, Inc. v. CA, G.R. No. 1 18509, December 1, 1995.
232

'" Sps. Camara v. Sps. Maiabao, G.R. No. 154650, July 31, 2003.
.

233

b.

D. lNCAPACITY OF BOTH PARTIES

1 . Incapacity of Both Parties.

The third

unenforceable contracts are those where

type

of

both parties

are

an essential element is lacking (as opposed to contracts

where the elements are present, but illegal). 641

. incapable of giving consent to a contract.

2. Ratification.
1409).

If only one of the contracting parties is incapacitated,

the contract is voidable. (Art. 1391)

guardian, as the case may be, of the capacitated parties.

be ratified (Art

of the inexistence of a contract does not prescribe. (Art.

1410)

If the contract is ratified by the parent/guardian of one

of the contracting parties, the effect is to make the

b.

cannot

4. lmprescriptible. The action or defense for.the declaration

(Art. 1407)

contract

A void contract

3 . Waiver. The right to set up the defense of illegality of a

contract cannot be waived. (Art. 1409)

2. Ratification. Ratification may be made by the parent or

a.

Technically, "inexistent" contracts are those in which

voidable

5. Who can Invoke. The right to set up the nullity of a void

("as if only one of the parti'es were

or non-existent contract is not limited to the parties; it is

incapacitated"). (Art. 1407)

extended to

If the contract is ratified by the parent/guardian of both

contract, whenever juridical effects founded thereon are

42
asserted against him. 6

("the contract shall be validated from the

But the defense of illegality of contract is not available

contracting parties, the effect is to make the contract

valid

inception"). (Art. 1407)

third persons who are directly affected by the

to third persons whose interests are not directly

affected. (Art. 1421)

B. DISTINGUISHED FROM OTHER DEFECTIVE CONTRACTS

V. VOID AND INEXISTENT CONTRACTS

A.

IN GENERAL

1. Rescissible Contracts.

1 . Concept. A void or inexistent contract is one which. has no

a.

Rescissible contracts

valid and binding until

force and effect from the very beginning. Hence, it is as if

rescinded, as all the essential elements are present; they

it has never been entered into.639

are rescissible only because of an economic injury

suffered by another person.

a.

It produces no civil effect and does not create, modify

Void contracts -void from the beginning because one

of the essential elements is lacking.

or extinguish a juridical relation.640

'" Francisco v. Herrera, G.R. No. 139982, November 21, 2002.

"' Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007.
234

641

. 642

See Gonzales vs. Trinidad, 67 Phil. 682 (1939).

Arsenal v. IAC, 227 Phil. 36 (1986).
235

b.

Rescissib/e contracts

y by the

persons injured thereby.

Void contracts

- can be attacked by any person

directly affected.
c.

Rescissible contracts

Void contracts

can be attacked onl

- rescission prescribes in four

years.

Void contracts - the action for declaration ofnullity is

imprescriptible.

e.

a.

can

be

attacked

directly

or

b.

Unenforceable contracts - can be assailed only by the

Void contracts

c.

- can be assailed by any person

Unenforceable

contracts

the

defense

of

unenforceability must be set up or the objeciion to

parol evidence must

Void contracts -void from the beginning becauseone

be raised in timely manner,

of the essential elements is Jacking.

otherwise they are waived. .

Voidable contracts - can be attacked only by persons

be waived.

Void contracts - defense of nullity or illegality cannot

obliged thereby, either principally or subsidiarily.

-

can be attacked by any person

Voidable contracts

- annulment prescribes in four

directly affected.

years.

Void contracts - the action for declaration of nullity is

imprescriptible.
d.

- may be valid, although

directly affected.

Voidable contracts - valid and binding until annulled;

Unenforceable contracts

Void contracts -void from the beginning because one

essential elements.

c.

Voidable contracts - can be ratified.

Void contracts .,-- cannot be ratified.

parties to the contract.

they are voidable because of a defect in one of the

Void contracts

or

of the essential elements is lacking.

2. Voidable Contracts. 643

b.

directly

they may not be enforced or proved (unless ratified).

collaterally.

a.

attacked

2. Unenforceable Contracts.

action for rescission).

Void contracts

can be

coJlateraJly.

Rescissib/e contracts - can be attacked directly (in an

d.

d.

Unenforceable contracts - can be ratified.

Void contracts - cannot be ratified.

C. TYPES OF. VOID OR INEXISTENT CONTRACTS:

In general,

void or inexistence contracts are those where one of the

essential requisites of a valid contract (consent, object and
cause) is totaJly absent. The absence may be in a legal sense,
e.g., a cause may be actuaJly present but if it is illegal or

Voidable contracts - can be

action for annulment).

attacked directly (in an

'

immoral, it may be considered legally absent.

More specifically, Art.

1409 provides that the following

contracts are inexistent and void from the beginning -

'" See Leonardo v. CA, G.R. No. 125485, September 13, 2004.
236

2'37

1 . Those whose cause, object or purpose is contrary to law,

morals, good customs, public order or public policy;
a.

The cause for a contract is presumed lawful.

a.

A personwho has leased his property to another person

b.

Note that things having a potential existence may be

(Art.

1354)
b.

Examples of unlawful cause.

i.

The termination of marital relations is an unlawful

consideration which renders the contract void.644

ii.

An agreement to stifle the prosecution of a person

the object of the contract of sale.

the thing sold at the

a.

b.

shares to a government crony with the motive of

Examples:

(i) public office650 and political rights; (ii)

purely personal rights; such as those arising from

obtaining a government contract, the motive was

family

deemed the (illegal) cause.646

relations;

dominion,

and

(iii)

properties

such town plaza,651

of public

airport lands and

buildings, 652 forest lands,'53 roads and highways,654

iv. Where a man donated land to a woman with the

foreshore land,'55 watershed,'56 snbmerged lands.657

motive of getting her to agree to have sexual

relations with him, the motive was deemed the

5. Those which contemplate an impossible service;

(illegal) cause. 647

Impossible things or services cannot be the object of

2. Those which are absolutely simulated or fictitious;

contracts.

(Art. 1348) Example: It

is impossible for a

lessor to undertake the maintenance of the public

An absolutely simulated or fictitious contract is void

(Art. 1 346), because consent is totally absent. The
parties do not intend to be bound at all. (Art. 1345)

238

Things "outside the commerce of man" are those

ownership. 649

iii. Where the owner of a company transferred his

De Leon v. CA, G.R. No. 80965, June 5, 1990.

"' Arroyo v. Berwin, 36 Phil. 386 (1917).
646 E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA 233 (1987).
," Liguez v. CA, 102 Phil. 577 (1957).

time it is delivered. (Art. 1459)

which are . not susceptible of appropriation or private

and the due administration ofjustice.645

644

What is

4. Those whose object is outside the commerce of men;

valuable consideration, is contrary to public policy

the transaction;

(Art. 1461)

necessary is that the vendor can transfer ownership of

charged with a crime, for a pecuniary or other

3 . Those whose cause o r object did not exist at the time of

cannot lease it again to a third party while the original

lease was still valid and subsisting.648

648 Bercero v. Capitol

# '

Dev'\ Corp., G.R. No. 154765, March 29, 2007.

"' See Land Bank v. Republic, G.R. No. 150824, February 4, 2008 and Republic v. CA, G.R.
No. 126316, June 25, 2004.
650 Collantes v. CA, G.R. No. 169604, March 6, 2007, ,
55' Municipality of Cavite v. Rojas, 30 Phil. 602 (1915); Espiritu v. Municipal Council, 102 Phil .
866 (1958).
552 Manila International Airport Authority v. CA, G.R. No. 155650, July 20, 2006.
'" Land Bank v. Republic, G.R. No. 150824, February 4, 2008.
"' Vlllarico v. Sarmiento, G,R. No. 136438, November 1 1 , 2004.
555 Republic v. CA, G.R. No. 126316, June 25, 2004.
556 Santa Rosa Realty Dev'! Corp. v. CA, G.R. No. 112526, October 12, 2001.
557 Chavez v. Public Estates Authority, G.R. No. 133250, May 6, 2003 and November 1 1 , 2003,
239

the parties are in pari

drainage system; he can only maintain the private pipes

'8
or drainage of the leased premises. 6

delicto, no

affirmative relief of any

kind will be given to one against the other.661

In case of pari

6. Those where the intention of the parties relative to the

principal object of the contract cannot be ascertained;

delicto, the defendant is in a better position

because the court refuses to give judicial relief to the

plaintiff.

However, the court's refusal to lend aid to the

Nullity results if the uncertainty refers to the principal

plaintiff is not intended to benefit the defendant.

object

intended to deter illegality.662

of the contract, in such a way that it cannot be

It is

known what may have been the intention or will of the

parties. (Art. 1378) If the uncertainty refers merely to

incidental circumstances, the

Exceptions:

contract is valid; the

rules in Art. 1378 apply to resolve the uncertainty.

a.

7. Those expressly prohibited or declared void by law.

Example:

The law

contracts uponfuture

Note:

generally

generally

inheritance. (Art. 1347)

The pari delicto rule does not apply to inexistent

contracts, i. e., contracts which are void because of the
absence of an essential element (as opposed to
contracts which are void because of illegality of the

rohibits

cause or subject matter).663

Example:

A contract which is the direct result of a previous

(Art. 1422)

The pari

delicto

rule does not apply to

absolutely simulated contracts or (o contracts

illegal contract, is also void and inexistent.

without consideration (even if they may have been

entered for an illegal motive or purpose664).

D. RULES ON RECOVERY
b.

1. General Rule.

Parties to a void agreement cannot expect

the aid of the law; the courts leave them as they are,
in pari delicto or "in equal

because they are deemed

The pari delicto rule does not apply ,if it would violate
public policy.665
a.

Example

1: A squatter who had been ousted by a

fault."6" Each must bear the consequences of his own

fellow squatter is not barred from filing an

acts.660

ej ectment suit on .the ground that they are both

squatters and in pari

delicto.

To deny a squatter

No action arises from an illegal contract; no suit can be

maintained for its specific performance, or to recover the
property agreed to be sold or delivered, or the money
agreed to be paid, or damages for its violation; and where

661

Guevent Industrial Dev'! Corp. v. Phil. Lexus Amusement Corp., G.R. No. 159279,j July 1 1 ,
2006.
65' Bercero v. Capitol D,ev't Corp., G.R. No. 154765, March 29, 2007; Hulst v. P.R. Builders, Inc.,
G.R. No. 156364, September 3, 2007.
660 Bercero v. Capitol Dev't Corp., G.R. No. 154765, March 29, 2007.

Silagan v. Intermediate Appellate Court, 196 SCRA 774, 765 (1991); Acabal v. Acabal, G.R.
No. 148376, March 31, 2005; Bercero v. Capitol Dev't Corp., G.R. No. 154765, March 29, 2007;
Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007.
662 Acabal v. Acabal, G.R. No. 146376, March 31, 2005.
"' Gonzales vs. Trinidad, 67 Phil. 682 (1939); Vasquez v. Porta, 98 Phil. 490 (1956); Madina v.
CA, G.R. No. 109355, October 29, 1999
664 Gonzales vs. Trinidad, 67 Phil. 662 (1939); Vasquez v. Porta, 96 Phil. 490 (1956).
6" Silagan v. IAC, 274 Phil. 182 (1991); Acierto v. De las Santos, 95 Phil. 887, 889 (1954).

240

241

656

the right to sue for ejectment would invite mayhem

and lawlessness.666
b. Example 2: The pari delicto rule does not apply to
disbarment proceedings, as they are intended to
protect the public and the courts.667

2. lllegal Cause or Object. When the nullity proceeds from

the illegality of the canse or object of the contract, the

following rules apply:
a.

If the act constitutes a criminal offense:

i.

c. The law permits the return of that which may have

been given under a void contract to:

i.

actid. ,,

The innocent party (Arts. 141 1-1412);

Moreover, the provisions of the Revised Penal

Code relative to the disposal of effects or
instruments of a crime shall be applicable to
the things or the price of the contract. (Art.

ii. The debtor who pays usurious interest (Art. 1413);

iii. The party repudiating the void contract before the
illegal purpose is accomplished or before damage
is caused to a third person.and if public interest is
'
subserved by allowing recovery (Art. 1414);

141 1)
ii. When only one of the parties is guilty - they shall

have no action against each other, and the guilty

party shall be prosecuted. However, the innocent
party may claim what he has given, and shall not
be bound to comply with his promise. (Art. 1 4 1 1)

iv. The incapacitated party if the interest of justice so

demands (Art. 1415);
v. The party for whose protection the prohibition by
law is intended, if the agreement is not illegal per
se but merely prohibited and if public policy would
be enhanced by permitting recovery (Art. 1416);
and
vi. The party for whose benefit the law has been
intended such as in price ceiling laws (Art. 1417)
and labor laws (Arts. 1418-1419).
The foregoing instances are further discussed
below.

When both parties are in pari delicto - they shall

have no action against each other, and both shall be
prosecuted. (Art. 1411) "In pari de/icto non oritur

b. If the act does not constitute a criminal offense:

i.

When both parties' are at fault - neither may

recover what he has given by virtue of the contract,
or demand the performance of the other's
undertaking. (Art. 1412)

ii.. When only one of the parties is at fault

(1) The
party at fault cannot recover what he has given by
reason of the contract, or ask for the fulfillment of
what has been promised him. (2) The party who is
aot at fault may demand the return of what he has
given without any obligation to comply with his
promise. (Art. 1412)
-

"' Pajuyo v. CA, G.R. No. 146364, June 3, 2004.

"' Mortel v. Aspiras, 100 Phil. 586, 592 (1956).
242

143

The rule bars the party from pleading the

illegality of the contract either as a cause of action
or as a defense. Where the plaintiff can establish a
cause of action without exposing its illegality, the
vice does not affect his right to recover. 668

Notes:

Thus, e.g., where a married man donated a

land to his paramour, who was minor at the
time, the paramour may later seek recovery of
the land on the strength of a donation regular
on its face. To defeat its effect, the donor (or
his heirs) may plead and prove that the same is
illegal. But if the donor is the guilty party or is
equally guilty with the donee, he is barred
.
9
from settmg up sueh 1 11egal'tty.66

E.g., where the father falsified a deed of

donation to her daughter (making it appear that
the donation was made jointly with his wife,
who was actually deceased, to avoid
inheritance taxes and costs of publication), the
father/donor and the daughter/donee are in pari
de/icto. The father/donor cannot be allowed to
file an action for annulment of the donation.670

3 . Illegal Purpose. When money i s paid or property delivered

for an illegal purpose, the contract may be repudiated by
one of the parties before the purpose has been
accomplished, or before any damage has been caused to a
third person.
In such case, the courts may, if the public interest will

thus be subserved, allow the party repudiating the

contract to recover the money or property. (Art. 1414)

"' Uguez v. CA, 1 02 Phil. 577 (1957). See, however, Tala Realty Services Corp. v. Banco
Filipino Savings and Mortgage Bank. G.R. No. 137533, November 22, 2002.
'" Liguez v. CA, 102 Phil. 577 (1957).
010 Ramirez v. Ramirez, G.R. No. 165088, March 17, 2006.
244

a. Thus, an alien who enters into a contract to buy a

land but rescinds the same before transfer of title
may be allowed to recover the purchase price he
paid (but not damages).671
b. In an agreement where the mother-in-law agreed to
transfer certain properties to her daughter-in-law in
consideration of the termination of marital
relations with her son, the court allowed the
mother-in-law to recover the properties since the
agreement was repudiated before the purpose has
been accomplished:612

4. Illegal Contract by an Incapacitated Person. Where one

of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice . so
demands, allow recovery of money or property delivered
by the incapacitated person. (Art. 1415)
5. Prohibited Contracts. When the agreement is not illegal
per se but is merely prohibited, and the prohibition by the
law is designated for the protection of the plaintiff, he may,
if public policy is thereby enhanced, recover what he has
paid or delivered. (Art. 1416)
6. Excess Interest or Price. ,
a.

Interest paid in excess of the interest allowed by the

usury laws may be recovered by the debtor, with
interest .thereon from the date of the payment. (Art.
1413)
Circular No. 905 of the Central Bank, adopted on
December 22, J 982, has expressly removed the
interest ceilings prescribed by the Usury Law.

671 Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007.
'" De Leon v. CA, G.R. No. 60965, June 6, 1990.

245

Thus, the U sucy Law is now "legally inexistent" or

"ineffective."673
b. When the price of any article or comnodity is
determined by statute, or by authority of Jaw, any
. person paying any amount in excess of the maximum
price allowed may recover such excess. (Art. 1417)
7. Overwork or Underpayment.
a. When the Jaw fixes, or authorizes the fixing of the
maximum number of hours of labor, and a contract is
entered into whereby a laborer undertakes to work
longer than the maximum thus fixed, he may demand
additional compensation for service rendered _):ieyond
the time limit. (Art. 1418)
b. When the iaw sets, or authorizes the setting of a
minimum wage for laborers, and a contract is agreed
upon by which a laborer accepts a 19wer wage, .he shall
be entitled to recover the deficiency. (Art. 1419)
.

E. SEPARABILITY OF ILLEGAL TERMS: In case of a divisible

contract, if the illegal terms can be separated from the. legal
ones, the latter may be enforced. (Art. 1420)

Chapter 1 2

Natural Obligations
I. IN GENERAL

A. DISTINCTION BETWEEN CIVIL AND NATURAL OBLIGATIONS

Obligations are civil or natural. Civil obligations give a right of
action to compel their performance. (Art. 1423)

Natural obligations, not being based on positive Jaw but on

equity and natural law, do not grant a right of action to enforce

their performance, but , after voluntary fulfillment by the
obligor, they authorize the retention of what has been delivered
or rendered by reason thereof. (Art. 1423)

B. RATIONALE
The law recognizes certain instances wherein there is a moral,
but not a lega duty to perform or pay. If the obligor performs
or pays, out of his honor or conscience, he will not be
permitted to change his mind and recover what he has paid.
The law requires him to abide by his honor or conscience. 674
C. VOLUNTARINESS
I.

"' Medel v. CA, G.R. No. 131622, November27, 1998.

246

"Voluntary performance" means that the obligor performs

an obligation with the knowledge that he cannot be legally
compelled to do so. If the payment is made by mistake
(i.e., the obligor thought that the obligation is civil), the
payor may recover under the principle of so/utio indebiti.
(Art. 21 54)

"' Report of the Code Commission, pp. 58-59.

247

2.

a contract without the consent of the parent or guardian,

A natural obligation does not arise if performance is not

voluntarily pays a sum of' money or delivers a fungible

voluntary but was compelled by coercive processes (such

thing i.n fulfillment of the obligation, there-shall be no right

as by writ of execution).675

to recover the same from the obligee who has spent or

consumed it in good faith. (Art.

II.

EXAMPLES OF NATURAL OBLIGATIONS

Note that under current law, the age of majority is

18
years old. (Art. 234, FC, as amended by RA 6809)
Thus, Arts. 1426 and 1427 may be deemed inoperative.

A. PRESCRIBED OBLIGATIONS
I.

Performance of Prescribed Obligations. When a right to

sue upon a civil obligation has lapsed by' extinctive

C. VOLUNTARY PERFORMANCE BY DEFENDANT

prescription, the obliger who voluntarily performs the

Payment by Defendant Despite Failure of Action

Against Him. When, after an action to enforce a civil

contract cannot recover what he has delivered or the value

of the service he has rendered.

2. Reimbursement

Obligations.

of

(Art. 1424)

Payments

for

obligation has failed, the defendant voluntarily performs

the obligation, he cannot demand the return of what he has

Precribed

delivered or the payment of the value of the service he has

When without the knowledge or aginst the

rendered. (Art.

will of the debtor, a third person pays a debt which the

obliger is not legally bound to pay because the action
thereon has prescribed, but the debtor later voluntarily .
reimburses the third person, the obliger cannot recover
what he has paid.

(Art. 1425)

D. VOLUNTARY PERFORMANCE BY HEIR

I.

Payment By Heir In Excess of His Inheritance. When a

testate or intestate heir voluntarily pays a debt of the

received by will or by the law of intestacy from the estate

1 . Return b y "Minor" of Thing or Price Received. When a

minor between eighteen and twenty-one years of age who
has entered into a contract without the consent of the parent
or guardian, after the annuhnent of the contract voluntarily
returns the whole thing or price received, notwithstanding
the fact that he has not been benefited thereby, there is no
right to demand the thing or price thus returned. (Art.

1426)

Performance by

1428)

decedent exceeding the value of the property which he

B. OBLIGATIONS OF A "MINOR"

2.

1427)

of the deceased, the payment is valid and cannot be

rescinded by the payer. (Art.' 1429)

2. Payment of Legacy Under a Defective Will. When a will

is declared void because it has not been executed in

accordance with the formalities required by law, but one of

the intestate heirs, after the settlement of the debts of the
deceased, pays a legacy in compliance with a clause in the
defective will, the payment is effective and irrevocable.

"Minor."

When a minor between

. (Art.

1430)

eighteen and twenty-one years of age, who has entered into

"' Manila Surety & Fidelity Co. v. Lim, 106 Phil. 771 (1959).
248

249

Chapter

b. Reliance by Party Invoking Estoppel - the other

person in fact relies, and relies reasonably or
justifiably, upon that communication;

13

Estoppel

The party invoking the doctrine must have been

misled to his prejudice. This is the most important
element of equitable estoppel.679

I. IN GENERAL

c. Prejudice to Party Invoking Estoppel - the other

person would be harmed materially if the actor is later
permitted to assert any claim inconsistent with his
earlier conduct; and

A. CONCEPT

I . Through estoppel an admission or representation is

rendered conclusive upon the person making it, and cannot

be denied or disproved as against the person relying
thereon. (Art. 143 1 )

d. Knowledge of Party Estopped - the actor knows,

expects or foresees that the other person would act
upon the information given or that a reasonable person
in the actor's position would expect or foresee such
action.

2 . A party may not go back ou his own acts and

representations to the prejudice of the other party who
relied upon them. 676

In the law of evidence, whenever a party has, by his

own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing
true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 677

3. The elements of estoppel are: 678

a. Representation by Estopped Party - the actor who
usually must have knowledge, notice or suspicion of
the true facts, communicates something to another in a
misleading way, either by wprds, conduct or silence;

616

4. Estoppel cannot be predicated on an illegal act. As between

the parties to a contract, validity cannot be given to it by
estoppel if it is prohibited by law or is against public
policy.680
B. KINDS OF ESTOPPEL: Estoppel may be in pais or by deed.
(Art. 1433) Jurisprudence also recognizes estoppel by !aches.
I.

Estoppel in pais or equitable estoppel - arises when

one, by his acts, representations or admissions or by his
silence when he ought to speak out, intentionally or
through culpable negligence, induces another to believe
certain facts to exist and such other party rightfully relies

Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990);
Caltex v. CA, G.R. No. 97753, August 10, 1992.
m Rules of Court, Rule_131, Sec. 2(a). Caltex v. CA, G.R. No. 97753, August 10, 1992.
"' British American Tobacco v. Camacho, G.R. No. 163583, August 20, 2008, citing Philippine
Bank of Communications v. Court of Appeals, 352 Phil. 1, 9 (1998).

679 Philippine Savings Bank v. Chowklng Food Corp., G.R. No. 177526, July 4, 2008, citing Vega
v. San Caos Milling Company Limited, G.R. No. 21549, October 22, 1924.
680 United Coconut Planters Bankv. Beluso, G.R. No. ,159912, August 17, 2007 citing Eugenio v.
Perdido, 97 Phil. 41, 44 (1955); Auyong Hian v. Court of Tax Appeals, G.R. No. L-26782, 12
September 1974, 59 SCRA 110, 133-134.

250

251

 and acts on such belief so that he will be prejudiced if the

reasonable time, warranting a presumption that the

former is permitted to deny the existence of such facts.681

2. Estoppel by deed or by record

party entitled to assert it either has abandoned it or

declined to assert it. 687
.

occurs when a party to

a deed and. his privies are precluded from denying any

b.

material fact stated in the said deed as against the other

2
party and his privies. 68
a.

i.

When a person has entered into a solemn engagement

which he has asserted therein.683 Thus, e.g., in a deed

ii.

property, the mortgagee cannot subsequently assert

4
title. to the same.68

right on which he bases his suit; and

object certain, such deeds cannot be the basis . of

6

iv. Injury or prejudice to the defendant in the event

estoppel. 68

relief is accorded to the complainant.

a person who failed or neglected to

C. PARTIES ESTOPPED

assert a right for an unreasonable and unexplained length

of time is presumed to have abandoned or otherwise

I.

He cannot later on seek to

enforce the same, to the prejudice of the other party, who

has no notice or knowledge that the former would assert

officers.689

former state.

However, this principle does not apply if it will cause

In other words, estoppel by !aches arises from the

injustice.690

negligence or omission to assert a right within a

252

(Art. 1439)

is not bound by the mistakes or errors of its agents or

latter cannot, without injury or prejudice, be restored to his

'" Ganzon v. Honorable Court of Appeals, 385 SCRA 399, 411-412 (2002).
'" Sps. Chien v. Sta. Lucia Realty & Dev't Inc., G.R. No. 162090, January 31, 2007.
'"Lopez v. CA, G.R. No. 127627, March 5, 2003.
''"' Sps. Del Campo v. CA, G.R. No. 108228, February 1 , 2001
ees Lopez v. CA, G.R. No. 127827, March 5, 2003.
"' Lopez v. CA, G.R No. 127627, March 5, 2003.

Estoppel i s effective only as between the parties thereto or

their successors in interest.

2. Estoppel generally does not lie against the State. The State

such rights and whose condition has so changed that the

a.

knowledge of the defendant's conduct and after he

defendant that the complainant would assert the

special power of attorney were void due to lack of an

declined to assert such right.

Delay in asserting 'complainant's right after he had

iii. Lack of knowledge or notice on the part of the

estoppel. 685 Thus, where an extra-judicial partition and

whom he claims, giving rise to the sitnation

has an opportnnity to sue;

A void deed, however, may not be the basi of, an

3 . Estoppel by /aches

Conduct on the part of defendant or one under

complained of;

by deed, he shall not be permitted to deny any matter

of mortgage which states that the mortgagor owns the

b.

The essential elements 'of !aches are688:

&17 Philippine .National Construction Corporation v. National Labor

Relations CommiSslon, 366
Phfl. 678 (1999), citing Tijam v. Sibonghanoy,
131 Phil. 556 (1968) and Medija v. Patcho, 210
.
Phil. 509 (1983).
'" Sps. Domingo v. Roces, G.R. No. 147468, Aprfl 9, 2003.
"' Cudia v. CA, G.R. No. 110315, January 16, 1996; Republic v. CA, G.R. No. 126316, June 25,
2004; Administrative Code of 1967 (E.O. No. 292), Sec. 11 of Book I of Chapter 3.
690 Uy v. Commission of Audit, G.R. No. 130685, March 21, 2000.

253

landlord and tenant between them.693 The tenant can assert

D. GOVERNING LAW:

title against his landlord if he acquired t11e property

The principles of estoppel are adopted

after

fue commencement of their lease.

insofar as they are not in conflict with the provisions of the

Civil Code, the Code of Commerce, the Rules of Court and
special laws.

2.

(Art. 1432)

Lessees are estopped to deny their landlord's title, or to

'

assert a better title not only in themselves, but also in some

third person, while they remain in possession of the leased

premises and until they surrender possession

II. EXAMPLES OF ESTOPPEL

A. SELLER ACQUIRES TITLE TO THING SOLD:

When a person

who is not the owner of a thing sells or alienates and delivers it,

D. OWNER MISLEADS BUYER OF lMMOVABLE:

contract

and later the seller or grantor acquires title thereto, such title
passes by operation of law to the buyer or grantee.

1.

third

persons

concerning

When in a
immovable

ownership or real right over , the real estate, the latter is

precluded from asserting his legal title or interest therein,

but he later acquired the remaining

provided aU these requisites are present:

validates the entire transaction and

title to the whole thing passes to the buyer.691

2.

between

property, one of them is misled by a person with re.spec! to the

(Art. 1434)

Thus, e.g., if. at the time of the sale, the seller ownyd only

1/3 of the thing sold,

2/3, such acquisition

to the

landlord. 694

I.

There must be fraudulent representation or wrongful

2.

The party precluded must intend that the other should act

concealment of facts known to fue party estopped;

In one case, it was held ihat if at the time of the sale, the
seller was not yet the owner of the thing sold, but he later

upon the facts as misrepresented;

inherits it, the title passes by operation of Jaw to the

buyer.692 However, this appears contrary to the prohibition
against contracts uponfature

inheritance. (Art. 1347)

B. AGENT OF SELLER ACQUIRES TITLE TO THING SOLD:

3.
If ,a

person in representation of another sells or alienates a thing, the

4.

The party defrauded must have acted in accordance with

the misrepresentation.

former cannot subsequently set up his own title as against the

buyer or grantee.

The party misled must have been unaware of the true facts;
and .

(Art. 1437)

(Art. 1435)
E. OWNER MISLEADS PLEDGEE:

C. LESSEE OR BAILEE: A lessee or a bailee is estopped from

purpose of making any transfer of it, cannot, if he received the

asserting title to the thing leased or received, as against the

lessor or bailor.

(Art. 1436)
693

I.

One who has allowed another

to assume apparent ownership of personal property for the

The tenant i s not permitted to deny the title of his landlord

at the time of the commencement of the relations

"' Estoque v. Pajimula, G.R. No. L24419, July 15, 1968.

Pisuena v. Heirs of Unating, G.R. No. 132803; August 31, 1999.

692

254

of

Rules of Court, Rule 131, Sec. 2(b).

Julag-ay v. Estate of Buenaventura, Sr., G.R. No. 149788, May 31, 2006, citing VSC
Commercial Enterprises, Inc. v. Court of Appeals, Oscar Estopace and Jose Silapan, G.R. No.
121159, December 16, 2002, 394 SCRA 74; Geminian'o v. Court of Appeals, G.R. No. 120303,
July 24, 1996, 259 SCRA 344, 351, citing Borre v. Court of Appeals, 158 SCRA 560, 566;
Manuel v. Court of Appeals, G.R. No. 95469, July 25, 1991, 199 SCRA 603, 607; Munarv. Court
of Appeals, G.R. No. 100740, November 25, 1994, 238 SCRA372, 380.
694

255

sum for which a pledge has been constituted, set up his own
title to defeat the pledge of the property, made by the other to a
pledgee who received the same in good faith and for value.
(Art. 1438)

Chapter 1 4

Trusts
I.

GENERAL PROVISIONS
A. DEFINITION: A trust is a legal relationship with respect to
property, between one person having an equitable ownership of
property and another person owning the legal title to such
property, in which the equitable ownership of the former
entitles him to the performance of certain duties and the
exercise of certain powers by the latter.695
1 . Note that in a trust relation, there is a separation of the
legal title and equitable ownership of the property. Legal
title is vested in one party (the trustee) while equitable
ownership is vested in another (the beneficiary).696

2. Note also that in a trust relation, equitable duties are

imposed on the holder of the legal title (the trustee). These
duties consist mainly of dealing with the trust property for
the benefit of the equitable owner (beneficiary).697

B. PARTIES TO A TRUST
I.

Trustor

the person who establishes a trust. (Art. 1440)

the person in whom confidence is reposed as

regards property for the benefit of another person. (Art.
1440)

2. Trustee

'" Caneza v. Rojas, G.R. No. 148788, November 23, 2007, citing Tigno v. Court of Appeals, 345
Phil. 486, 497 (1997) and Morales v. Court of Appeals, 274 SCRA 282 (1997).
"' Caneza v. Rojas, G.R. No. 148788, November 23, 2007
697 Tala Really Services Corp. v. Banco Filipino Savings & Mortgage Bank, 392 SCRA 506
(2002), citing Huang v. CA, 236 SCRA 420 (1994).
256

257

3. Beneficiary

been created.

the person for whose benefit the trust has

(Art. 1440) He is also called cestui que trust.

of Commerce, the Rules of Court and special laws are adopted.

(A1t.

1442)

The trustor and the beneficiary may be a single person.

II. EXPRESS TRUSTS
C.

ELEMENTS OF A TRUST :

trust

res,

The elements of a trust are:

(1)

the

or the property held in trust which must be duly

identified and definite; and the three parties, namely,

trustor; (3) trustee; and

(4) beneficiarY.698

(2)

D. KINDS OF TRUST: Trnsts are either express or implied.

I.

Express trusts are created by the intention of the trustor or

of the parties. (Art. 1441)

2. Implied trusts
1441) Implied

A. CONCEPT: Express trusts are created by the intention of the

trustor or of the parties.

I.

come into being by operation of l w. (Art.

infra).

E. LAWFUL PURPOSE: A trust will not be created or enforced ifit

is violative of the law or for the purpose of evading the law.699

property sold pursuant to

government housing programs701 or land distribution
programs.

in

acquiring

702

F. GOVERNING LAW:

The principles of the general law of trusts,

insofar as they are not in conflict with the Civil Code, the Code

Express trusts are created by the direct and positive acts of

Express trusts concerning an

interest must be in writing to

immovable

or any

be enforceable. They cannotbe

proved by parol or oral evidence. (Art.

1443)

However, in one case, the Court allowed oral testimony to

prove the existence of a trust, which had been partially

prohibited or disqualified from acquiring or holding real

restrictions

(Art. 1444)

the parties, by some writing or deed or will, or by words

B. PROOF:

This usually happens when the beneficiary is legally

property, and uses the trustee as a "dummy." Examples are

prohibitions against land ownership by aliens,700 or

express trust, it being sufficient that a trust is clearly

evincing an intention to create a trust.703

trusts are either resulting or constructive

trusts (see discussion

No particular words are required for the creation of an

intended.

2.

(Art. 1441)

performed.704
C. ACCEPTANCE

I.

By Trustee

No trust shall fail because the trustee

appointed declines the designation, unless the contrary

should appear in the instrument constituting the trust.

(Art.

1445)
2. By

Beneficiary

Acceptance by the beneficiary is

necessary. Nevertheless, if the trust imposes no onerous

'" Caneza v. Rojas, G.R. No. 148788, November 23, 2007.

'" Kiel vs. Estate of P.S. Sabert, 46 Phil. 193 (1924); Ramos v, CA, 232 SCRA 348 (1994); Tala
Realty Servics Corp. v. Banco Filipino Savings & Mortgage Bank, 392 SCRA 506 (2002)
100 Heirs of Yap v. CA, G.R. No. 133047, August 17, 1999.
101
Ramos v. CA, 232SCRA 348 (1994); Pigao v. Rabanillo, G.R. No. 150712, May2, 2006.
102 Saltiga de Romero v. CA, G.R. No. 109307, November 25, 1999.

'' Ramos v. Ramos, 61 SCRA 284 (1974); Estate of Grimm v. Estate of Parsons, G.R. No.
159810, October9, 2006, 504 SCRA 67, 81.
7"' Ringor v. Ringor, G.R. No. 147863, August 13, 20d4, 436 SCRA 4% 496.

258

259

c. KINDS OF IMPLIED TRUST: Implied trusts are : either resulting

or constructive trusts -

condition upon the beneficiary, his acceptance shall be

presumed, if there is no proof to the contrary. (Art.

1446)

D. PRESCRIPTION: In . express trusts, a trustee cannot, by

1 . Resulting trusts are based on the doctrine that valuable

prescription, acquire ownership over property entrusted to him

consideration, and not legal title, determines the equitable

title or interest to a property, and are presumed always to

until and unless he repudiates the trust.705

have been contemplated by the parties.709

1. This is because the possession of a trustee is not adverse706

a.

(at least until repudiated).

purchased by X but the consideration or purchase price

is paid by Y for the purpose of having the beneficial

2. In case of repudiation, the action prescribes in 10 years

interest over it.

from repudiation. 707

b.

Specific examples of resulting trusts may be found in

Arts.

Ill. IMPLIED TRUSTS

,.

Thus, e.g., there is a resulting trust when a property is

1448, 1449, 1451, 14S 2 and 1453 (infra). 110

2. Constructive trust is created, not by any word evincing a

A. CONCEPT: Implied trusts are created by operation of law. (Art.

1441) They come into being even in the absence of an express

direct intention to create a trust, but by operation of law in

order to satisfy the demands of justice and to prevent unjust

intent by the parties to create a trust.

enrichment. It is raised by equity in respect of property,

which has been acquired by fraud, or where although

B. PROOF: An implied trust may be proved by .oral evidence.

(Art. 1457)
This rule applies whether the implied trust.

acquired originally without fraud, it is against equity that it

711

should be retained by the person holding it.

concerns movables or immovables.

a.

However, the evidence must be trustworthy and received

E.g., when a trustee reg'isters the trust property in his

name by fraud or mistake, there is constructive trust.712

by the courts with extreme caution, and should not be made

to rest on loose, equivocal or indefinite declarations.708

b.

In express or resulting tiust, when the trustee dies, the

trust relations (being personal to the trustee) are
terminated. If the property is retained by the trustee's

705

Palma vs. Cristobal, 77 Phil. 712; Manalang vs. Canlas, 94 Phil. 776; Cristobal vs. Gomez, 50
Phil. 810; Sevilla vs. de los Angeles, 97 Phil. 875; Marabils vs. Quito, 100 Phil. 64; Bancairen
vs. Diones, 98 Phil. 122, 126; Juan vs: Zuniga, 62 O.G. 1351; 4 SCRA 1221; Jacinto vs. Jacinto,
L-17957, May 31, 1962. See Tamayo vs. callejo, 147 Phil. 31, 37; Canezo v. Rojas, G.R. No.
148788, November 23, 2007.
1oe Diaz vs. Gorricho and Aguado, 103 Phil. 261, 266; Laguna vs. Levantino, 71 Phil. 566;
Sumira vs. Vistan, 74 Phil . .138; Golfeo vs. Court of Appeals, 63 O.G. 4895, 12 SCRA 199;
Caladiao vs. Santos, 63 0.G. 1956, 10 SCRA 691.
101 Diaz v. Gorricho, 54 O.G. p. 8429; Escay v. CA, G.R. No. L-37504, December 18, 1974, 61
SCRA 369, 388; Secuya v. De Selma, G.R. No. 136021, February 22, 2000, 326 SCRA 244,
.
254.
100 Canazo v. Rojas, G.R. No. 148788, November 23, 2007.

Morales v. CA, G.R. No. 117228, June 19, . 1997, 274 SCRA 282; Aznar Brothers Realty
Company v. Aying, G.R. No. 144773, 16 May 2005, 458 SCRA 496; Lopez v. CA, G.R. No.
'
157784, December 16, 2008.
710 Lopez v. CA, G.R. No. 157784, December 16, 2008.
711
Morales v. CA, G.R. No. 1 1 7228, June 19, 1997, 274 SCRA 282; Aznar Brothers Realty
Company v. Aying, G.R. No. 144773, 16 May 2005, 458 SCRA 496; Lopez v. CA, G.R. No.
157784, December 16, 2008.
712 Lopez v. CA, G.R. No. 157784, December 16, 2008.

260

261

709

heirs (who actually have no right to do so), a

constructive trust is created.713
c.

An action for reconveyance based on constructive trust

b.

Constructive trusts are illustrated iu Arts.

1455 and 145.6 (infra).114

prescribes in ten years (Art. l

of the issuance of the certificate of title over the

property.7 19 Such registration/ issuance is constructive

notice that the registrant claims the property as his.720

D. PRESCRIPTION
I.

But if the person claiming to be the owner thereof

In Resulting Trusts - the trustee cannot, by prescription,

acquire ownership over the property entrusted to him until

is in actual possession of the property, the right to

and unless he repudiates the trust. 715

seek reconveyance, which in effect seeks

to quiet

title to the property, does not prescribe.121

This rule is similar to that in express trusts, and is

based on .the principle that the trustee's possession is

The one who is in actual possession of the land

claiming to be its owner may wait until his

not adverse.
2. In Constructive Trusts

possession is disturbed or his title is attacked

prescription may run or

before taking steps to vindicate his right 722

supervene even if the trustee does not repudiate the

relationship.716
a.

144[b]), which begins to

run from the date of registration of the deed or the date

1450, 1454,

c.

This is because in constructive trust, no fiduciary

enforcement

may be barred by

E. EXAMPLES

The holding of a

(Art.

constructive trust is for the trustee liirnself, and

118

therefore, at all times adverse.

713

its

OF RESULTING TRUSTS: The following

enumeration of examples of resulting trusts is not exhaustive724

The so-called trustee

neither accepts any trust nor intends holding the

property for the beneficiary.

constructive,

/aches. 723

relation actually exists and the trustee does not

recognize the trust at all.717

Note, however, that whether the trust is resnlting or

I.

1447) -

Beneficiary Pays the Purchase Price

"purchase money resulting trust"125).

(also known as

There is an implied

Canezo v. Rojas, G.R. No. 148788, November 23, 2007.

Lopez v. CA, G.R. No. 157784, December 16, 2008.
715 Heirs of Candelarta vs. Romero, 109 Phil. 500, 502-3; Martinez vs. Grano, 42 Phil. 35;
Buencamino vs. Matias, 63 0.G. 11033, 16 SCRA 849; Canezo v. Rojas, G.R. No. 148788,
November 23, 2007.
'" Canezo v. Rojas, G.R. No. 148788, November 23, 2007, citing Buan Vda. de Esconde v.
Court of Appeals, 323 Phil. 81, 89 ( 19961.
111 Alzona vs. Capunitan, G.R. No. L-10228, February 28, 1962, 4 SCRA 450; Gerona vs. de
Guzman, G.R. No. L19060, May 29, 1964, 1 1 SCRA 153; Clartdad vs. Henares, 97 Phil. 973;
Gonzales vs. Jimenez, L-19073, January 30, 1965, 13 SCRA 80; Bonaga vs. Soler, 112 Phil.
651; J. M. Tuason & Co., vs. Magdangal, G.R. No. L-15539, January 30, 1962, 4 SCRA 84.
11 Canezo v. Rojas, G.R. No. 148788, November 23, 2007, citing Aznar Brothers Realty
Companyv. Aying, G.R. No. 144773, May 16, 2005, 458 SCRA496, 508.

Belcodero v. CA, G.R. No. 89667, October 20, 1993.

Lopez v. CA, G.R. No. 157784, December 16, 2008.
111 Heirs of Jose Olviga vs. Court of Appeals, G.R. No. 104813, October 21, 1993, 227 SCRA
330; Vda. de Cabrera v. CA, G.R. No. 108547, 3 February 1997, 267 SCRA 339; Mendizabal v.
Apao, G.R. No. 143185. February 20, 2006.
m Heirs of Jose Olviga vs. Court of Appeals, G.R. No. 104813, October 21, 1993, 227 SCRA
330; Vda. de Cabrera v. CA, G.R. No. 108547, 3 February 1997, 267 SCRA 339; Mendizabal v.
Apao, G.R. No. 143185. February 20, 2006.
"' Ramos v. Ramos, 61 SCRA 284, 300 (1974); Vda. De Esconde v. CA, G.R. No. 103635.
.
February 1, 1996.
724 See Cuenco v. Vda. De Manguerra, G.R. No. 149844, October 13, 2004.
12s Morales v. CA, G.R. No. 117228, June 19, 1997.

' 262

263

7"

12o

trust when property is sold, and the legal estate is granted

to one party but the price is paid by another for the purpose
of having the beneficial interest of the property. (Art. 1448)

F. EXAMPLES OF CONSTRUCTIVE TRUSTS:

The following

enumeration of examples of resulting trusts is not exhaustive

(Art. 1447) -

The supposed "buyer" who receives title is the trustee,

while the person who pays the price is the beneficiary.

(Art: 1448)

1 . Conveyance as Security for Purchase Price. If the price

of a sale of property is loaned or paid by cine person for the

benefit of another and the conveyance is made to the lender

lfowever, if the person to whom the title is

or payor to secure the payment of the debt, a trust arises by

conveyed is a child (legitimate or illegitimate) of

operation of law in favor of the person to whom the money

the one paying the price of the sale, no trust is

is loaned or for whom it is paid. The latter may redeem the

implied by law, it being disputably presumed that

property and compel a conveyance thereof to him. (Art.

there is a gift in favor of the child. (Art. 1448)

1450)

2. Donee Has no Beneficial Interest. There is also an

implied trust when a donation is made to a pers n but it

2. Conveyance as Security for Obligation. If an absolute

conveyance of property is made in order to secure the

appears that although the legal estate is transmitted to the

performance of an obligation of the granter toward the

donee, he nevertheless is either. to have no beneficial

grantee, a trnst by virtue of law is established. If the

interest or only a part thereof. (Art. 1449)

fulfillment of the obligation is offered by the granter when

it becomes due, he. may demand the reconveyance of the

3 . Inherited Property Titled in Trustee;s Name. When land

property to him.

(Art. 1454)

passes by succession to any person and he causes the legal

title to be put in the name of another, a trusris established

3 . Purchase Using Trust Funds. When any trustee, guardian

by implication of law for the benefit of the true owner.

or other person holding a fiduciary relationship uses trnst

(Art. 1451)

funds for the purchase

of property and causes the

conveyance to be made to him or to a third person,

4 . Co-purchased PropertyTitled in Trustee's Name. Iftwo

.

or more persons agree to purchase property and by

common consent the legal title is taken in the name of' one

a trust

is established by operation of law in favor of the person to

whom the funds belong. (Art. 1455)

of them for the benefit of all, a trust is created by force of

4. AcquisitiOn Through Mistake or Fraud. If property is

law in favor of the others in proportion to the interest" of

acquired through mistake or fraud, the person obtaining it

each.

(Art. 1452)

is, by force o.f law, considered a trustee of an implied trust

for the benefit of the person from whom the property

5. Property Conveyed to Trustee For Another. When

comes. (Art. 1456)

property is conveyed to a person in reliance upon his

declared intention to hold it for, or transfer it to another or
the granter, there is an implied trust in favor of the person
whose benefit is contemplated. (Art. 1453)

264

265

a.

Example

b.

Example 2:

J : X borrowed the certificate of title from Y,

tricked Y into sig1.1ing a deed of transfer and obtained a

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transfer certificate ohitle in his (X's) name. 7
The overseer of a property transferred the
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tax declaration in his name using a fake quitclaim.

"' Rodrigo v. Ancilla, G.R. No. 139897, June 26, 2006.

Sps. Bejoc v. Cabreros, G.R. No. 145849, July22, 2005.

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