OBLIGATIONS AND

CONTRACTS
Text and Cases

By

MELENCIO S. STA. MARIA, JR.

Ll.B. with Honors Ateneo de Manila School of Law; Ll.M. Boston

University; Professor of Law in Obligations and Contracts Law,
Persons and Family Relations Law, and Public International Law
at the Ateneo De Manila School of Law; Bar Reviewer at the
Ateneo De Manila School of Law; Holder: 1994, 1996, 1997,
1998, 1999, 2000 Ateneo Law Alumni Foundation Professorial
Chair in Civil Law and the 1992 Sasakawa Professorial Chair in
International Law; 1993 United Nations Fellow at the United
Nations International Law Commission, Palais de Nation,
Geneva, Switzerland; Law Practitioner.

SECOND EDITION

2003

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 NOT TO US, O LORD, NOT TO US, BUT TO THY
NAME GIVE GLORY, FOR THE SAKE OF THY
STEADFAST LOVE AND THY
FAITHFULNESS!

PSALMS 115.1

THIS BOOK IS LOVINGLY DEDICATED TO MY MOTHER,

FLORENCIA STA. MARIA AND MY FAMILY: AMPARITA,
JOSEPH EMMANUEL, PATRICIA ANNE AND THERESE MARIAN

iii
 iv
ACKNOWLEDGMENT

This edition is my project for the Ateneo de Manila Law Alumni

Foundation Professorial Chair in Civil Law awarded to me for the years 1999
and 2000. This second edition was indeed long in coming. However, I have
incorporated the significant jurisprudence in Obligations and Contracts which
have affected the laws on the subject since 1997. I tried to maintain the
simplicity of this book without necessarily sacrificing its value as a research
material. The style is still the same as the first edition.
I wish to thank Fr. Joaquin G. Bernas of the Society of Jesus ( SJ) for his
continued support of my professorship at the Ateneo de Manila College of Law.
Also, my gratitude goes to Dean Cynthia Roxas-Del Castillo who was
principally the one who encouraged me to take a more serious and scholarly
approach to this complex field of law. I would not have even thought of coming
out with the first edition had it not for her confidence in making me teach
Obligations and Contracts in 1995. Likewise, to my former esteemed professor,
Dean Eduardo De Los Angeles, I extend my sincerest gratitude for inviting me,
way back in 1986, to teach at the Ateneo de Manila College of Law. I did not
realize then that his invitation would have a profound effect on my life today.
Aside from practicing law, teaching the law has indeed become a vocation.
For volunteering to assist me, I am grateful also to a group of talented
law students, namely:
1) Ribonnette Rodriguez and Maricris Ang, who, when I learned of
the unavailability of the encoded master file of the first edition,
painstakingly and continuously went over the original unedited
version of the first edition and made the necessary encodings to
tally with the finished version of that first edition. Their assistance
made the incorporations of the new matters in this second edition
much easier;
2) Evelyn Kho, Thelma Mundin, Eugene Kaw, Ma. Margarita
Mallari, Vanessa Valdez, and Cristina Salvatierra who assisted me
in the proofreading of this work.
 Finally, last but not the least, to my wife, Professor Amparita Sta. Maria
also of the Ateneo De Manila College of Law, who has continued to be my
principal critic in all my works, Iextend my dearest appreciation.

MELENCIO S. STA. MARIA, JR.

November 18, 2002

Quezon City

v
 PREFACE
For the First Edition

The objective of this volume is to give the reader a basic understanding

of the law on prescription, civil obligations, contracts, natural obligations,
estoppel, trusts, and quasi-contracts. In explaining them, I heavily relied on the
rulings of the Supreme Court. I chose cases for their value in exemplifying the
area of law under discussion, citing verbatim the relevant portions clarifying
particular articles. For me, there can be no better source of enlightenment other
than the opinions of the Supreme Court deciding actual relevant disputes on the
said subject matters. Excerpts from the report of the 1947 Code Commission
pointing out the reason for the modification or incorporation of certain
provisions have also been quoted. I also relied on some treatises of foreign
authorities as our law has been generally adopted from both the American and
Spanish systems. Whenever necessary, I made hypothetical illustrations of the
application of the law. I believe that a better understanding of the statute can
be achieved by simple examples devoid of any legalistic language.
The articles are discussed and explained continuously, whether lengthily
or briefly, without any heading and sub-heading. Thus, the only guides in this
book are the articles themselves. My purpose in doing this is twofold: first, to
provide the reader with an undivided view of the explanation of the particular
provision, and, second, for him to remember an important principle or rule, not
because of any heading or sub-heading, but precisely on the basis of the
particular provision dealing with it. Certainly, I am critically aware of the
limitations of this approach. Thus, I have been very careful in presenting the
discussions in the simplest form possible without sacrificing their exegetical
content. Important rules requiring important explanations have been given
proper emphasis at suitable length. I believe that this over-all style
appropriately serves the objective of this edition.
If there is any law designed to significantly unify and stabilize business,
commercial and legal concerns, it is the law on obligations and contracts. For
if one is to transact business with other people, he definitely has to make and
observe binding promises, predictable commitments, documentary formalities,
important conditions, limited periods and prompt payments. Breaches and
defaults also occur. All these entail legal consequences. There is, therefore, a
need for a basic understanding of the legal principles of obligations and
contracts. This work offers a helpful and fundamental starting point in
searching for the right solutions.
I wish to acknowledge, with my sincerest appreciation, the following for
the valuable assistance extended to me in the preparation of this book:

vi
 1) my alma mater, the ATENEO DE MANILA UNIVERSITY, for
awarding to me the Ateneo Law Alumni Foundation Professorial
Chair in Civil Law for school-years 1996-1997 and 1997-1998.
This volume is my project for the professorial chair;
2) my talented student, DOMINIQUE P. GALLEGO (Ateneo Law
Class of ‘98), for patiently proofreading the part of this text dealing
with the law on obligations; and
3) my secretary, MATILDE DOLINA, for partly assisting me in the
encoding and typing of this work.
Finally, I cannot end without expressing my profound gratitude to my
wife, ATTY. AMPARITA S. STA. MARIA, who is teaching Legal Research
and is currently the Thesis Director of the Juris Doctor (JD) Program at the
Ateneo de Manila University School of Law. She assisted me in my research
and patiently showed me how to maximize the use of my computer. Moreover,
her enduring support and perceptive suggestions have always been a source of
encouragement.

MELENCIO S. STA. MARIA, JR.

August 23, 1997

Quezon City, Metro Manila
CONTENTS

Title V. Prescription

Chapter 1. General Provisions........................................... 1

Chapter 2. Prescription of Ownership and Other
Real Rights ....................................................... 18
Chapter 3. Prescription of Actions..................................... 44

BOOK IV. OBLIGATIONS AND CONTRACTS

Title I. Obligations

vii
Chapter 1. General Provisions........................................... 68
Chapter 2. Nature and Effect of Obligations .................... 75
Chapter 3. Different Kinds of Obligations ........................ 103
Section 1. Pure and Conditional Obligations............. 103
Section 2. Obligations with a Period .......................... 132
Section 3. Alternative Obligations.............................. 141
Section 4. Joint and Solidary Obligations.................. 148
Section 5. Divisible and Indivisible Obligations........ 167
Section 6. Obligations with a Penal Clause ............... 170
Chapter 4. Extinguishment of Obligations ....................... 176
General Provisions........................................... 176
Section 1. Payment or Performance ........................... 179
Subsection 1. Application of Payments .......... 207
Subsection 2. Payment By Cession................. 212
Subsection 3. Tender of Payment and
Consignation ............................. 214
Section 2. Loss of the Thing Due ................................ 223
Section 3. Condonation or Remission of the Debt ..... 234
Section 4. Confusion or Merger of Rights .................. 239
Section 5. Compensation ............................................. 241
Section 6. Novation...................................................... 262
Title II. Contracts

Chapter 1. General Provisions........................................... 282

Chapter 2. Essential Requisites of Contracts................... 322
General Provisions........................................... 322
Section 1. Consent ....................................................... 323
Section 2. Object of Contracts ..................................... 360
Section 3. Cause of Contracts ..................................... 363
Chapter 3. Forms of Contracts .......................................... 372
Chapter 4. Reformation of Instruments............................ 379
Chapter 5. Interpretation of Contracts ............................. 388
Chapter 6. Rescissible Contracts....................................... 417
Chapter 7. Voidable Contracts........................................... 432
Chapter 8. Unenforceable Contracts ................................. 448

viii
Chapter 9. Void and Inexistent Contracts ........................ 471

Title III. Natural Obligations

Title IV. Estoppel

Title V. Trusts
Chapter 1. General Provisions........................................... 501
Chapter 2. Express Trusts ................................................. 505
Chapter 3. Implied Trusts.................................................. 507

Title XVII. Extra-Contractual Obligations

Chapter 1. Quasi-Contracts ............................................... 515
Section 1. Negotiorum Gestio ..................................... 517
Section 2. Solutio Indebiti ........................................... 527
Section 3. Other Quasi-Contracts............................... 539

ix
 xi
1

PRESCRIPTION
Chapter 1

GENERAL PROVISIONS

Article 1106. By prescription, one acquires ownership and other real rights
through the lapse of time in the manner and under the conditions laid down
by law.
In the same way, rights and actions are lost by prescription. (1930a)

In Sinaon vs. Sorongon1 where the Supreme Court ruled that, in certain cases,
an implied trust is subject to prescription, it stated that:
prescription is rightly regarded as a statute of repose whose object is to
suppress fraudulent and stale claims from springing up at great distances
of time and surprising the parties or their representatives when the facts
have become obscure from the lapse of time or the defective memory or
death or removal of witnesses.
In Morales vs. Court of First Instance of Misamis Occidental 2 where
prescription was not allowed to apply to obtain ownership over a particular
property due to the fact that the statutory period was not complied with, the
Supreme Court discussed the difference between acquisitive and extinctive
prescriptions, thus:
There are two kinds of prescription provided in the Civil Code. One is
acquisitive, i.e., the acquisition of a right by the lapse of time (Art. 1106,
par. 1). Other names for acquisitive prescription are adverse possession and
usucapcion. The other kind is extinctive prescription whereby rights and
actions are lost by the lapse of time (Arts. 1106, par. 2 and 1139). Another
name for extinctive prescription is limitation of action.

1
G.R. No. L-59879, May 13, 1985, 136 SCRA 407.
2
G.R. No. L-52278, May 29, 1980, 97 SCRA 872.
 1
art. 1106

The differences between acquisitive and extinctive prescriptions are well-

settled as follows:
“Prescription was a statute of limitations. Whereas, usucapcion expressly
‘vests the property’ and raised a new title in the occupant, prescription did
nothing more than bar the right of action. The concept most fundamental
to a system of title by possession is that the relationship between the
occupant and the land in terms of possession is capable of producing legal
consequences. In other words, it is the possessor who is the actor. Under
statute of limitations, however, one does not look at the act of the possessor
but at the neglect of the owner. In the former, the important feature is the
claimant in possession, and in the latter it is the owner out of possession
which controls.” (Mont-gomery, Prescriptive Acquisition of Land Titles,
XXVI, Philippine Law Journal, 353, 356-357 [1951])
Prescription however must be differentiated from the concept of laches which
is known as the doctrine of stale demands which “is based upon grounds of
public policy which requires, for the peace of society, and the discouragement
of stale claims.”3 The following are the requisites of laches:
(1) conduct on the part of the defendant, or of one under whom he claims,
giving rise to the situation of which com-plaint is made and for which the
complaint seeks a remedy; (2) delay in asserting the complainant’s rights,
the com-plainant having had knowledge or notice of the defendant’s
conduct and having been afforded an opportunity to institute a suit; (3) lack
of knowledge or notice on the part of the defendant that the complainant
would assert the right on which he bases his suit; and (4) injury or prejudice
to the defendant in the event relief is accorded to the complainant, or the
suit is not held barred.4
Laches is different from the statute of limitations. Prescription is
concerned with the fact of delay, whereas laches is concerned with the
effect of delay. Prescription is a matter of time; laches is principally a
question of inequity of permitting a claim to be enforced, this inequity
being founded on some change in the condition of the property or the
relation of the parties. Prescription is statutory; laches is not. Laches is
equity, whereas prescription applies at law. Prescription is based on fixed
time, laches is not.4

3
Tijam vs. Sibonghanoy, G.R. No. L-21450, April 15, 1968, 32 SCRA 29. 4Abraham vs. Recto-
Kasten, G.R. No. L-16741, January 31, 1962, 4 SCRA 298; Vergara vs. Vergara, G.R. No. L-
17524, May 18, 1962, 5 SCRA 53; Custodio vs. Casiano, G.R. No. L-18977, December 27, 1963,
9 SCRA 841; Go Chi Gun, et al. vs. Go Cho, et al., 96 Phil. 622.
4
Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., G.R. No. L-21601,
2 ObligatiOns and COntraCts
Text and Cases
. 1106

Laches applies independently of prescription, “so that laches has been

successfully interposed even if a shorter time had elapsed” 5 and the
prescriptive period has not yet expired. Laches can also bar the filing or
prosecution of a suit. In Z.E. Lotho, Inc. vs. Ice and Cold Storage,7 where
plaintiff made no genuine efforts to stop the defendant from selling ice within
his (plaintiff’s) franchise-area despite plaintiff’s knowledge since 1948 of the
said violative practice, and where all of plaintiff’s material records were
already lost by the time he filed the suit in 1957, thereby causing prejudice to
the defendant as such loss made it more difficult for defendant to controvert
the correctness of the damages sought by plaintiff, and where delay in the filing
of the case only in 1957 and the failure of the plaintiff to forewarn the
defendant as early as 1948 prevented the defendant from guarding against
further liability for damages or at least minimize the same. The Supreme Court
allowed the dismissal of the case on the ground of laches notwithstanding the
fact that the practices of the defendant might, if proven, have been an invasion
of plaintiff’s rights. The Supreme Court decided this case on the issue of laches,
despite complainant’s contention that the complaint was within the prescriptive
period of 10 years from 1948. The issue of prescription was corollarily and
independently touched by the Supreme Court which also ruled that the action
had prescribed as it should have been brought within four years from 1948 as
the cause of action dealt with an “injury to the rights of the plaintiff.”

Likewise in the case of Catholic Bishop of Balanga vs. Court of Appeals,6

where the alleged landowner questioned the donation of its representative to
the donee who, after such donation, possessed the property peacefully and
adversely for 49 years, the Supreme Court ruled that, although prescription
does not apply to registered property, “a registered landowner may lose his
right to recover the possession of his registered property by reason of laches.”7

Article 1107. Persons who are capable of acquiring property or rights by the
other legal modes may acquire the same by means of prescription.December 17,
1966, 18 SCRA 1040.

5
Z.E. Lotho, Inc. vs. Ice and Cold Storage Industries, G.R. No. L-16563, December 28 , 1961, 3
SCRA 744.
7Id.
6
G.R. No. 112549, November 14, 1996, 76 SCAD 148.
7
See also the following cases: Victoriano vs. Court of Appeals, 194 SCRA 19 (1991); Lola vs.
Court of Appeals, 145 SCRA 439 (1986); Golloy vs. Court of Appeals, 173 SCRA 26; Bergado
vs. Court of Appeals, 173 SCRA 500 (1989); Republic vs. Court of Appeals, 204 SCRA 160
(1991); Marcelino vs. Court of Appeals, 210 SCRA 444 (1992); De La Calzada-Cierras vs. Court
of Appeals, 212 SCRA 390 (1992); Claverias vs. Quingco, 207 SCRA 66 (1992).
art PresCriPtiOn 3
General Provisions
arts. 1107-1108

Minors and other incapacitated persons may acquire property or rights by

prescription, either personally or through their parents, guardians or legal
representatives. (1931a)

Prescription is a mode of acquiring property or rights. A person who is of

majority age and who is qualified to do all acts of civil life may acquire
property by prescription. The acquisition of a minor who personally acquires
property or rights without the assistance of his parents or guardian is
annullable or voidable. However, when such minor comes of age, he may
ratify the acquisition. If the acquisition of the minor is through his parents or
guardian, the acquisition is completely valid.

Emancipation takes place by the attainment of majority. Majority age

commences at the age of eighteen years.10 Emancipation shall terminate
parental authority over the person and property of the child who shall then be
qualified and responsible for all acts of civil life, save the exceptions
established by existing laws in special cases.11

Article 1108. Prescription, both acquisitive and extinctive, runs against:

(1) Minors and other incapacitated persons who have parents, guardians
or other legal representatives;
(2) Absentees who have administrators, either appointed by them before
their disappearance, or appointed by the courts;
(3) Persons living abroad, who have managers or administrators;
(4) Juridical persons, except the State and its subdivisions.
Persons who are disqualified from administering their
property have a right to claim damages from their legal representatives
whose negligence has been the cause of prescription. (1932a)

Prescription may run against minors and incapacitated persons who have
parents, guardians or other legal representatives. Thus, if A

Family Code of the Philippines, Executive Order No. 209, August 3, 1988, as amended by Republic
Act 6809, Article 234.
Id., Article 236.
G.R. No. 29759, May 18, 1989, 173 SCRA 436.
Republic vs. Hernaez, G.R. No. L-24137, January 1970, 31 SCRA 219; . 1108
4 ObligatiOns and COntraCts
Text and Cases
is insane, prescription does not run against him. However, if he has a legal
representative or a guardian who, under the law, is supposed to take care of his
affairs during his insanity, prescription will apply. In Vda. De Alberto vs. Court
of Appeals,12 an alleged illegitimate child, represented by his natural mother,
filed an action for acknowledgment and partition more than four years after the
agreement of partition of the surviving legitimate heirs was duly approved by
the court. The Supreme Court ruled that the action filed by the illegitimate child
should be dismissed on the ground of prescription considering that the
prescriptive period for assailing a partition made by heirs of a deceased
prescribes after four years from the time the partition was made. The Supreme
Court likewise said that under Article 1108(1) of the Civil Code, the
illegitimate child can not claim exemption from the effects of prescription. The
illegitimate child still has a living parent, his mother, who in fact filed the
complaint in the lower court for him, falls squarely under the said article.

Prescription does not run against absentees. A person who is absent cannot
manage his affairs as he can not go back to his domicile. However, if he leaves
an administrator or the court appoints an administrator for him, prescription
will run against him. If the absentee can go back to his domicile but he
intentionally does not want to return, prescription will lie against him.
Relevantly, according to Article 381 of the Civil Code:
Article 381. When a person disappears from his domicile, his whereabouts
being unknown, and without leaving an agent to administer his property,
the judge, at the instance of an interested party, a relative, or a friend, may
appoint a person to represent him in all that may be necessary.
This same rule shall be observed when under similar circumstances the power
conferred by the absentee has expired.
Prescription run against persons living abroad who have managers or
administrators. If they do not have any manager or administrator, prescription
will not run against them. However, it must be shown that they can not return
to their domicile within the period when prescription should have run.

Juridical persons are those endowed by law of the attributes of a natural person
and hence can acquire and lose properties and rights. The State and its
subdivisions however, acting in their sovereign capacity, cannot be the subject
of prescription.13 Hence, in

Republic vs. Grijaldo, G.R. No. L-20240, December 31, 1965, 15 SCRA 681; Republic a rt. 1108

Republic vs. Philippine National Bank,14 where the Armed Forces of the
Philippines as plaintiff filed a case for recovery of a sum of money which the
defendant-bank negligently paid to unauthorized persons. The lower court
art PresCriPtiOn 5
General Provisions
dismissed the suit on the ground that the action had already prescribed. The
Supreme Court ruled that:
since the statute of limitations does not run against the State and it is neither
alleged nor shown that plaintiff, in making the deposit of its funds in
question with the defendant, did so other than an instrumentality of the
Republic, the pleas of prescription cannot be maintained.
However, if the political subdivision is acting in its proprietary character,
prescription will lie against it. Likewise, if the instrumentality of the
government is not acting in a sovereign capacity, prescription will apply to
such entity. In National Development Company vs. Tobia,15 where the plaintiff
National Development Corporation, a government-owned and controlled
corporation, filed a collection case which was dismissed on the ground that the
claim had prescribed, the Supreme Court upheld the applicability of the rules
on prescription by stating:
x x x Plaintiff herein is neither the Government of the Republic nor a
branch or subdivision thereof. It is true that the plaintiff is an
instrumentality of such Government, but as this Court has held in the case
of Associacion Cooperative de Credito Agricola de Miagao vs. Monteclaro
(74 Phil. 281), “even the Agricultural and Industrial Bank, which is a
government-owned and controlled corporation and which has been created
to promote agriculture and industry on a larger scale than agricultural credit
cooperative associations, cannot be said to exercise a sovereign function.
It is, like all other corporations capitalized by the Government, a business
corporation,” and, as such, its causes of action are subject to the statute of
limitation. x x x

Article 1109. Prescription does not run between husband and wife, even
though there be a separation of property agreed upon in the marriage
settlements or by judicial decree.
Neither does prescription run between parents and

vs. Rodriguez, G.R. No. L-18967, January 31, 1966, 16 SCRA 53.
14
G.R. No. L-16485, January 30, 1965, 13 SCRA 24.
15
G.R. No. L-17467, April 23, 1963, 7 SCRA 692.
16
G.R. No. L-15088, January 31, 1961, 1 SCRA 384.
17
Executive Order No. 209 which took effect on August 3, 1988.
18
Id., Article 57.
. 1109

children, during the minority or insanity of the latter, and between guardian
and ward during the continuance of the guardianship. (n)
6 ObligatiOns and COntraCts
Text and Cases
Marriage is a special contract of permanent union between a man and a
woman. Generally, prescription does not apply to husband and wife unless the
law otherwise provides. This is true even though there be a separation of
property agreed upon in the marriage settlement or by judicial decree. Thus in
Pacio vs. Billion,16 where a husband made a donation to his first wife and that,
in order to resist the claim of the children of the said husband from his second
wife, the children of the first wife contended that, though the donation was
invalid, the first wife nevertheless acquired the same through acquisitive
prescription considering that the void donation constituted a title and that the
first wife possessed the property for about 29 years. The Supreme Court
rejected such contention on the ground that there was no proof of an adverse
possession on the part of the first wife. Moreover, under Article 1109 of the
1950 Civil Code “prescription by adverse possession cannot exist between
husband and wife.”

However, notwithstanding the provisions of the Civil Code, a law may validly
provide that prescription applies between husband and wife. Thus, the Family
Code of the Philippines17 provides that a case of legal separation between
husband and wife must be filed within 5 years from the occurrence of the
cause.18 For annulment, it is generally 5 years from the particular starting
point provided by law, such as from the marriage ceremony if the ground
is im-potency.19

No prescription lies between parent and child during the latter’s insanity or
minority. The natural bond of filiation is the basis of this rule. Moreover, while
the child is a minor, the parents are his natural guardians without the need of a
court appointment. If the daughter or son has attained the age of majority and
is not insane, prescription will apply. However, in special cases, the law may
provide for a prescriptive period between parent and child. Thus, the Family
Code of the Philippines provides that a husband may impugn the legitimacy of
the child of her wife on grounds provided by law within one year, two years or
three years from his knowledge of the birth of the child or its recording in the
civil registry, depending on the residence of the husband and the place of birth
of the child.20

Id., Article 47(5).

Id., Article 170.
Article 484 of the 1950 Civil Code.
G.R. No. L-48889, May 11, 1989, 161 SCRA 307.
arts. 1110-1112
art PresCriPtiOn 7
General Provisions
Due to the fiduciary relationship between the guardian and the ward,
prescription will not lie during the period of guardianship. This is to give
adequate remedy to the ward for the abuses of the guardian.

Article 1110. Prescription, acquisitive and extinctive, runs in favor of, or

against a married woman. (n)

Whether married or unmarried, prescription runs in favor of or against a

married woman.

Article 1111. Prescription obtained by a co-proprietor or a co-owner

shall benefit the others. (1933)

There is co-ownership whenever the ownership of an undivided thing or right

belongs to different persons.21 Prescription obtained by a co-proprietor or a co-
owner shall benefit the others. For example, A, B and C co-own a particular
land and, by virtue of such co-ownership they all reside in the same. If B
occupies, as a co-owner with A and C, a portion of land adjoining the co-owned
property, and he adversely and publicly holds such adjacent portion of land
continuously to the exclusion of all others who are not in the co-ownership for
the required period of time, there can be a valid acquisition not only in his favor
but also in favor of A and C even though they do not actually possess the said
portion.

Article 1112. Persons with capacity to alienate property may renounce

prescription already obtained, but not the right to prescribe in the future.
Prescription is deemed to have been tacitly renounced when the
renunciation results from acts which imply the abandonment of the right
acquired. (1935)

The case of Development Bank of the Philippines vs. Adil22 is an illustrative

case where the Supreme Court based its decision on, among others, Article
1112. The pertinent portions of the decision are as follows:
On February 10, 1940 spouses Patricio Confesor and Jovita Villafuerte
obtained an agricultural loan from the Agricultural and Industrial Bank
(AIB), now the Development Bank of the Philippines (DBP), in the sum of
P2,000.00, Philippine Currency,

G.R. No. L-36827, December 10, 1990, 192 SCRA 121.

G.R. No. L-17821, November 29, 1963, 9 SCRA 557; Mateo vs. Moreno, G.R. . 1112
8 ObligatiOns and COntraCts
Text and Cases
as evidenced by a promissory note of said date whereby they bound
themselves jointly and severally to pay the account in ten (10) equal yearly
amortizations. As the obligation remained outstanding and unpaid even
after the lapse of the aforesaid tenyear period, Confesor, who was by then
a member of the Congress of the Philippines, executed a second promissory
note on April 11, 1961 expressly acknowledging said loan and promising
to pay the same on or before June 15, 1961. The new promissory note reads
as follows —
“I hereby promise to pay the amount covered by my promissory note on
or before June 15, 1961. Upon my failure to do so, I hereby agree to the
foreclosure of my mortgage. It is understood that if I can secure a certificate
of indebtedness from the government of my back pay I will be allowed to
pay the amount out of it.”
Said spouses not having paid the obligation on the specified date, the DBP
filed a complaint dated September 11, 1970 in the City Court of Iloilo City
against the spouses for the payment of the loan.
The right to prescription may be waived or renounced. Article 1112 of Civil
Code provides:
“Art. 1112. Persons with capacity to alienate property may renounce
prescription already obtained, but not the right to prescribe in the future.
Prescription is deemed to have been tacitly renounced when the
renunciation results from acts which imply the abandonment of the right
acquired.”
There is no doubt that prescription has set in as to the first promissory note
of February 10, 1940. However, when respondent Confesor executed the
second promissory note on April 11, 1961 whereby he promised to pay the
amount covered by the previous promissory note on or before June 15,
1961, and upon failure to do so, agreed to the foreclosure of the mortgage,
said respondent thereby effectively and expressly renounced and waived
his right to the prescription of the action covering the first promissory note.
This Court had ruled in a similar case that —
“x x x when a debt is already barred by prescription, it cannot be enforced
by the creditor. But a new contract recognizing and assuming the
prescribed debt would be valid and enforceable x x x.”

No. L-21024, July 28, 1969, 28 SCRA 796.

art PresCriPtiOn 9
General Provisions
Thus, it has been held that —
“Where, therefore, a party acknowledges the correctness of a debt and
promises to pay it after the same has prescribed and with full knowledge of
the prescription he thereby waives the benefit of prescription.”
This is not a mere case of acknowledgment of a debt that has prescribed
but a new promise to pay the debt. The consideration of the new promissory
note is the pre-existing obligation under the first promissory note. The
statutory limitation bars the remedy but does not discharge the debt.
“A new express promise to pay a debt barred x x x take the case from the
operation of the statute of limitations as this proceeds upon the ground that
as a statutory limitation merely bars the remedy and does not discharge the
debt, there is something more than a mere moral obligation to support a
promise, to wit — a pre-existing debt which is a sufficient consideration
constitutes, in fact, a new cause of action.”
“x x x It is this new promise, either made in express terms or deduced from
an acknowledgment as a legal implication, which is to be regarded as
reanimating the old promise, or as imparting vitality to the remedy (which
by lapse of time had become extinct) and thus enabling the creditor to
recover upon his original contract.”

Article 1113. All things which are within the commerce of men are
susceptible of prescription, unless otherwise provided. Property of the State
or any of its subdivisions not patrimonial in character shall not be the object
of prescription. (1936a) In Director of Forest Administration vs. Fernandez,23
where an application was filed for the registration of a particular forest and
timber on the ground of prescription, the Supreme Court rejected such claim
and stated that:
it is axiomatic that forest lands of the public domain cannot be acquired by
prescription, its possession however long cannot ripen into private
ownership (Amunategui vs. Director of Forestry, 126 SCRA 69 [1983];
Bureau of Forestry vs. Court of Appeals, 153 SCRA 351 [1987]; Republic
vs. Court of Appeals, 154 SCRA 476 [1987]). Forest land cannot be owned
by private persons. It is not registerable whether the title is a Spanish title
or a torrens title (Director of Lands vs. Court of Appeals, 133 SCRA 701
[1984]; Republic vs. Court of Appeals, 135 SCRA 156 [1985]; Vallanta vs.
IAC, 151 SCRA 679 [1987]). A tax declaration secured over a land that is
forested does not vest ownership to the declarant (Republic vs. Court of
Appeals, 116 SCRA 505 [1982]).
. 1113

In Lovina vs. Moreno,24 it was likewise held that “the ownership of a navigable
stream or of its bed is not acquired by prescription.” However in Republic vs.
Court of Appeals,25 where a particular area adjacent to a bay, was at times
10 ObligatiOns and COntraCts art. 1113
Text and Cases
covered by water due to rain and not due to the rising of the tide, the Supreme
Court said that such area can be registered and can be subject to prescription,
thus:
Property, which includes parcels of land found in Philippine territory, is
either of public dominion or of private ownership. Public lands, or those of
public dominion, have been described as those which, under existing
legislation are not the subject of private ownership, and are reserved for
public purposes. The New Civil Code enumerates properties of public
dominion in Articles 420 and 502 thereof.
Article 240 provides:
“The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads, and
others of similar character;
(2) Those which belong to the State without being for public use, and are
intended for some public service or for the development of the national
wealth.”
Article 502 adds to the above enumeration, the following:
“(1) Rivers and their natural beds;
(2) Continuous or intermittent waters of springs and brooks running in their
natural beds and the beds themselves;
(3) Waters rising continuously or intermittently on lands of public dominion;
(4) Lakes and lagoons formed by Nature on public lands and their beds;
xxx xxx x x x”
The Director of Lands would like Us to believe that since a portion of the
land sought to be registered is covered with water four to five months a
year, the same is part of the lake bed of Laguna de Bay, or is at least, a
foreshore land, which brings it within the enumeration in Art. 502 of the
New Civil Code quoted above and therefore it cannot be the subject of
registration.

G.R. No. L-43105, August 31, 1984, 131 SCRA 532.

G.R. No. L-70615, October 28, 1986, 145 SCRA 268.
See Development Bank of the Philippines vs. Ozarraga, G.R. No. L-16631, September 20, 1965.
See also Alvero vs. Reas, G.R. No. L-28337, September 30, 1970, 35 SCRA 210;
The extent of a lake bed is defined in Art. 74 of the Law of Waters of 1866,
as follows:
“The natural bed or basin of lakes, ponds, or pools, is the ground covered
by their waters when at their highest ordinary depth.”
art PresCriPtiOn 11
General Provisions
The phrase “highest ordinary depth” in the above definition has been
interpreted in the case of Government of P.I. vs. Colegio de San Jose, as
the highest depth of the waters of Laguna de Bay during the dry season,
such depth being the “regular, common, natural, which occurs always or
most of the time during the year.” The foregoing interpretation was the
focal point in the Court of Appeals decision sought to be reviewed. We see
no reason to disturb the same.
Laguna de Bay is a lake. While the waters of a lake are also subject to the
same gravitational forces that cause the formation of tides in seas and
oceans, this phenomenon is not a regular daily occurrence in the case of
lakes. Thus, the alternation of high tides and low tides, which is an ordinary
occurrence, could hardly account for the rise in the water level of the
Laguna de Bay as observed four to five months a year during the rainy
season. Rather, it is the rains which bring about the inundation of a portion
of the land in question. Since the rise in the water level which causes the
submersion of the land occurs during a shorter period (four to five months
a year) than the level of the water at which the land is completely dry, the
latter should be considered as the “highest ordinary depth” of Laguna de
Bay. Therefore, the land sought to be registered is not part of the bed or
basin of Laguna de Bay. Neither can it be considered as foreshore land.
The Brief for the Petitioner Director of Lands cites an accurate definition
of a foreshore land, to wit:
“. . . that part of (the land) which is between high and low water and left dry
by the flux and reflux of the tides x x x”
“The strip of land that lies between the high and low water marks and that
is alternately wet and dry according to the flow of the tide.”
As aptly found by the Court a quo, the submersion in water of a portion of
the land in question is due to the rains “falling directly on or flowing into
Laguna de Bay from different sources.” Since the inundation of a portion
of the land is not due to “flux and reflux of tides” it cannot be considered a
foreshore land within the meaning of the authorities cited by petitioner
Director of Lands. The land sought to be registered not being part of the
bed or basin of Laguna de Bay, nor a foreshore land as claimed by the
Director of Lands, is not a property of public dominion. However, the
applicant must prove that he has a registerable
. 1113

title. This brings us to the second issue, which is whether or not applicant-private
respondent has registerable title to the land.
The purpose of land registration under the Torrens System is not the
acquisition of lands but only the registration of title which applicant already
possesses over the land. Registration under the Torrens Law was never
intended to be a means of acquiring ownership. Applicant in this case
asserts ownership over the parcel of land he seeks to register and traces the
roots of his title to a public instrument of sale (Exh. G) in favor of his father
12 ObligatiOns and COntraCts art. 1113
Text and Cases
from whom he inherited said land. In addition to this muniment of title, he
presents a tax declaration (Exhs. F, G, H, I) covering the land since 1918
and as well as tax receipts (Exhs. J, J-1, J-2, J-3, J-4, K, K-1, K-2, K-3)
dating back to 1948. While it is true that tax receipts are declarations of
ownership, they become strong evidence of ownership acquired by
prescription when accompanied by proof of actual possession of the
property. The Court of Appeals found that the applicant and his father, have
been in open, continuous, public, peaceful, exclusive and adverse
possession of the disputed land for more than thirty (30) years, which began
on April 19, 1909, when the land was acquired from a third person by
purchase. The record does not show any circumstance to note which is
sufficient enough to overthrow said findings of facts which is binding upon
Us. Since applicant has been in possession of the subject parcel of the land
in the concept of owner with just title and in good faith, his possession need
only last for ten years in order for ordinary acquisitive prescription to set
in. Applicant has more than satisfied this legal requirement. Hence, even if
the land sought to be registered is public land as claimed by the petitioners,
applicant remains to be entitled to a judicial confirmation of his imperfect
title, since he has also satisfied the requirements of the Public Land Act
(Commonwealth Act No. 141 as amended by Republic Act No. 1942). Sec.
48 of said Act enumerates as among the persons entitled to judicial
confirmation of imperfect title, the following:
“(a) x x x
(b) Those who, by themselves or through their predecessors-in-interest,
have been in the open, continuous, exclusive, and notorious possession and
occupation of agricultural lands of the public domain, under bona fide
claim of ownership, for at least thirty years immediately preceding the
filing of the application for confirmation of title. x x x”
The claim of private oppositors, petitioners in G.R. No. L-43190, that they
have reclaimed the land from the waters of Laguna de Bay and that they
have possessed the same for more than twenty (20) years does not improve
their position. In the first place, private persons cannot, by themselves
reclaim land from water bodies belonging to the public domain without
proper permission from government authorities. Moreover, even if such
reclamation had been authorized, the reclaimed land does not automatically
belong to the party reclaiming the same, as they may still be subject to the
terms of the authority earlier granted. Private oppositors-petitioners failed
to show proper authority for the alleged reclamation, therefore their
claimed title to the litigated parcel must fail. In addition to that, their
alleged possession can never ripen into ownership. This is due to the fact
that only possession acquired and enjoyed in the concept of owner can
serve as the root of a title acquired by prescription. As correctly found by
the appellate court, the private oppositorspetitioners entered into
possession of the land with the permission of, and as tenants of, the
applicant del Rio. The fact that some of them at one time or another, did
not pay rent cannot be considered in their favor. Their use of the land and
their non-payment of rentals thereon, were merely tolerated by the
applicant and they cannot affect the character of the latter’s possession
art PresCriPtiOn 13
General Provisions
which has already ripened into ownership at the time of the filing of this
application for registration.
The applicant private-respondent having satisfactorily established his
registerable title over the parcel of land described in his application, he is
clearly entitled to register the said land in his favor.
Article 1114. Creditors and all other persons interested in making the
prescription effective may avail themselves thereof notwithstanding the
express or tacit renunciation by the debtor or proprietor. (1937)

An illustration of this article is as follows: A is indebted to B in the amount of

P50,000. C guarantees the said indebtedness and waives his benefit of
excussion. This means that should A fail to pay B, B need not exhaust all
remedies against A for collection before he could demand payment from C, the
guarantor. In the event that the time within which to pay has already prescribed
but A nevertheless waives the prescription such that B can still collect from
him, and should A again fail to pay, thereby prompting B to demand payment
from C, the guarantor, the latter can resist payment by invoking that the
collection of the debt of A has already prescribed. C will not be prejudiced by
the act of A in waiving the prescription.

Article 1115. The provisions of the present Title are understood to be without
prejudice to what in this Code or in special laws is
established with respect to specific cases of
prescription. (1938)
 PresCriPtiOn 14General Provisions
arts. 1114-115

There are other provisions in the Civil Code which provide for prescriptive
periods in specific cases. For example, Article 1391 provides that the
prescriptive period for annulling a contract in case it is defective due to fraud
perpetuated by one of the parties is four years from the time the fraud is
discovered. This is true whether the contract is written or oral. Chapter Three
of the present Title however, provides that an action on a written contract
prescribes in 10 years and on an oral contract in 6 years. In this case, the
prescriptive period in Article 1391 will apply. Article 1391 provides for a
specific case on fraud. Other statutes likewise provide for certain prescriptive
periods. In case of conflict between the period provided in this Title and the
period provided in another portion of the Civil Code, the more specific
provision will prevail. However, if different statutes are involved providing for
different prescriptive periods, as well as the types of cause of action
contemplated by them are apparently conflicting, they do not exclude each
other from being availed of by the aggrieved parties. Thus, in Callanta vs.
Carnation Philippines, Inc.,26 the Supreme Court ruled that, while a claim for
money in labor cases prescribes in three years under the Labor Code, it will not
bar the aggrieved party from availing of the four-year prescriptive period for
“injury to the plaintiff” provided, under Article 1146 of the Civil Code, that the
claim also arises from illegal dismissal which results to an injury to the
plaintiff.

Article 1116. Prescription already running before the effectivity of this Code
shall be governed by laws previously in force; but if since the time this Code
took effect the entire period herein required for prescription should elapse,
the present Code shall be applicable, even though by the former laws a longer
period might be required. (1939)

The 1950 Civil Code took effect on August 30, 1950. Article 1116 is a
transitory provision and the rules are as follows:
1) If the prescriptive period provided under the old law has already lapsed
before the effectivity of the 1950 Civil Code, such prescriptive period shall
apply;27
2) If the prescriptive period under the old law is still running upon the
effectivity of the 1950 Civil Code which however provides for a different
period for the same situation, the 1950 Civil Code shall prevail provided
that such period counted from the effectivity of the 1950 Civil Code has
already lapsed, although

Ongsiaco vs. Dallo, G.R. No. L-27451, February 28, 1969, 27 SCRA 161; Joaquin vs. Cojuangco,
G.R. No. L-18060, July 25, 1967, 20 SCRA 769; Laurel-Manila vs. Galvan, . 1116
art PresCriPtiOn 15
General Provisions
under the old law the period has not yet lapsed. Thus, if under an old law
previous to the effectivity of the Civil Code in 1950, X has thirty years
within which to file a particular suit and by the time the 1950 Civil Code
takes effect his remaining time, pursuant to the period provided by the old
law, is only 12 years, he cannot file the case on the 12th or even on the 11th
year if the 1950 Civil Code provides only 10 years as prescriptive period
for exactly the same kind of case. This is so because by the 11th year or
12th year, the prescriptive period of 10 years counted from the effectivity
of the 1950 Civil Code has already lapsed;
3) If the prescriptive period under the old law is still running upon the
effectivity of the 1950 Civil Code and the remaining balance of such period
since the effectivity of the 1950 Civil Code is shorter than that provided in
the 1950 Civil Code for exactly the same situation, the old prescriptive
period will apply. Thus, in the example given in No. 2, if the balance of the
period which started under the old law is 12 years counted from the time
of the effectivity of the 1950 Civil Code and the latter provides for 15 years
as the prescriptive period for exactly the same case, the prescriptive period
under the old law will prevail.28

G.R. No. L-23507, May 24, 1967, 20 SCRA 198; Carillo vs. De Paz, L-22601, October 28 , 1966,
18 SCRA 467.
. 1116
16 ObligatiOns and COntraCts art
Text and Cases
18 ObligatiOns and COntraCts Text
and Cases

Chapter 2

PRESCRIPTION OF OWNERSHIP AND

OTHER REAL RIGHTS

Article 1117. Acquisitive prescription of dominion and other real rights may
be ordinary or extraordinary.
Ordinary acquisitive prescription requires possession of things in
good faith and with just title for the time
fixed by law. (1940a)

Acquisitive prescription may be ordinary or extraordinary. Ordinary

prescription requires uninterrupted possession for the required statutory period
of years in good faith and with a just title. Extraordinary prescription likewise
requires an uninterrupted possession for the statutory period of years but
without need of just title and good faith on the part of the possessor. Godinez
vs. Court of Appeals 8 is an example of the application of acquisitive
prescription, thus:
This case is about the acquisition of land by prescription. Felix Bergado
owned Lot 655 with an area of 11,001 square meters. It is located in Punta
Rizal, Barrio Gunob, Opon, now Lapu-lapu City. It was inherited by his
seven children named Tomas, Teodora, Ambrosia, Florencia, Aniceto,
Macario and Vicente.
Cadastral Judge Guillermo F. Pablo on January 31, 1929 ordered the
registration of Lot 655 in the names of the seven sets of transferees, to each
of whom he adjudicated a 1/6 share instead of 1/7. Because of that error
and other clerical errors, no decree was issued nor did the adjudicatees
obtain any Torrens title. The land remained unregistered.
Two-sevenths of Lot 655, pertaining to Macario Bergado and Vicente
Bergado, were transferred to Maximo Patalinhug

18

8
G.R. No. L-46768, March 18, 1985, 135 SCRA 351.
18 ObligatiOns and COntraCts
Text and Cases
. 1117

while the 5/7 share of the other five children were transferred in 1929 and
1930 to the spouses Domingo Magsumbol and Susana Magsumbol.
Lot 655 was subdivided on January 30, 1934 with the approval of the
Director of Lands, into Lot 655-A (5/7) and Lot 655-B (2/7). The Bergado
heirs ceased to have possession of any portion of Lot 655 which was
occupied by the Magsumbol spouses and Patalinhug.
In the guardianship proceeding for the children of Miguel Magsumbol,
who inherited Lot 655-A from Domingo, Sr., Judge Jose M. Mendoza
adjudicated to Domingo, Jr. on October 30, 1962 said lot with an area of
7,344 square meters. Domingo, Jr. then sold Lot 655-A on November 2,
1962, to the brothers Mamerto and Lorenzo Igot for P10,000 (Exh. D or 2).
The Igots continued the Magsumbols’ possession of Lot No. 655-A.
On May 10, 1967, or 38 years after Judge Pablo rendered his decision,
Judge Mendoza, the same judge who granted Lot 655A to Domingo
Magsambol, Jr., at the instance of some Bergado heirs, corrected the
clerical errors in Judge Pablo’s decision. As a result, a decree was issued
regarding this matter. Finally on December 19, 1967, OCT No. 8 was
issued for Lot 655. The land became registered land at last.
In 1970 the Igot brothers sued some Bergado heirs for the reconveyance
of Lot 655-A or 5/7 portion of Lot 655 which is covered by OCT No. 8.
The trial court upheld their claim. The appellate Court, through Justice
Gatmaitan, affirmed said decision.
In its decision, the court ruled that the Magsumbols had acquired Lot 655-
A by prescription under section 41 of the Code of Civil Procedure. The
right was in turn, transmitted to the Igots. The petitioners herein, or
defendants Godinez and Jayme, had only acquired a paper title in 1967
when they obtained OCT No. 8.
The petitioners filed an appeal contending that the Appellate Court erred
by not recognizing OCT No. 8 as indefeasible and by not considering the
action of the Igots as barred by res judicata.
The Supreme Court in its decision, held that the Appellate Court did not
err in dismissing the claim of the petitioners for Lot 655-A which has been
in the adverse, continuous, uninterrupted and notorious possession of the
Magsumbols and the Igots, in the concept of owner for more than half a
century. The laws as well as the canons of common sense favored the Igots.
Thus, OCT No. 8 did not nullify the sales made by the five Bergado children
to the Magsumbol spouses in 1929 and 1930.
art. 1118
art PresCriPtiOn 19
Prescription of Ownership and Other Real
Rights
Article 1118. Possession has to be in the concept of an owner, public,
peaceful and uninterrupted. (1941)

Possession must be in the concept of an owner. This means that the possessor
asserts dominion on the property to the exclusion of all others. It must be an
adverse possession.9 Thus, a mere lessee or a mere mortgagee does not hold
the property in the concept of an owner. Also, possession of cash dividends by
an agent on behalf of the owner, cannot be the subject of prescription, as there
is no holding of the property in concepto de dueño.10
Thus, mere possession with a juridical title, such as, to exemplify, by a
usufructuary, a trustee, a lessee, an agent or a pledgee, not being in the
concept of an owner, cannot ripen into ownership by acquisitive
prescription, unless the juridical relation is first expressly repudiated and
such repudiation has been communicated to the other party. Acts of
possessory character executed due to license or by mere tolerance of the
owner would likewise be inadequate. Possession, to constitute a foundation
of a prescriptive right, must be en concepto dueno, or, to use the common
law equivalent of the term, that possession should be adverse, if not, such
possessory acts, no matter how long, do not start the running of the period
of prescription.11
In Ramirez vs. Court of Appeals12 where it was proven that the possessor of
the property held the property by virtue of a contract of antichresis, the
Supreme Court ruled thus:
This court has on several occasions held that the antichretic creditor cannot
ordinarily acquire by prescription the land surrendered to him by the debtor
(Trillana vs. Manansala, et al., 96 Phil. 865; Valencia vs. Acala, 42 Phil.
177; Barreto vs. Barreto, 3 Phil. 234). The petitioners are not possessors in
the concept of owners. Thus, their possession cannot serve as a title for
acquiring dominion (See Art. 540, Civil Code).
In Republic vs. Court of Appeals,6 involving the possession of the United
States Navy of a particular property for recreational purposes only, the
Supreme Court rejected any contention for prescription to
. 1118

apply. The pertinent portions of the decision are as follows:

9
Cuayong vs. Benedicto, G.R. No. 9989, March 13, 1918, 37 Phil. 781.
10
Harden vs. Harden, G.R. No. L-22174, July 21, 1967, 20 SCRA 706.
11
Marcelo, et al. vs. Court of Appeals, G.R. No. 131803, April 14, 1999, 105 SCAD 561 , 305
SCRA 800.
12
G.R. No. L-38185, September 24, 1986, 144 SCRA 292.
20 ObligatiOns and COntraCts
Text and Cases
The finding of respondent court revealed that, during the interim of 57
years from November 26, 1902 to December 17, 1959 (when the U.S. Navy
possessed the area), the possessory rights of Baloy or his heirs were merely
suspended and not lost by prescription, is supported by Exhibit “U,” a
communication or letter No. 1108-63, dated June 24, 1963, which contains
an official statement regarding the position of the Republic of the
Philippines with regard to the status of the land in question. Said letter
recognizes the fact that Domingo Baloy and/or his heirs, have been in
continuous possession of said land since 1894 as attested by an
“Informacion Possessoria” Title, which was granted by the Spanish
Government. Hence, the disputed property is private land and this
possession was only interrupted only by the occupation of the land by the
U.S. Navy in 1945 for recreational purposes. However, the U.S. Navy
eventually abandoned the premises. The heirs of the late Domingo P.
Baloy, are presently in actual possession, and has been in possession since
the abandonment by the U.S. Navy. A new recreation area is presently
being used by the U.S. Navy personnel and such place is remote from the
land in question.
Clearly, the occupancy of the U.S. Navy was not in the concept of owner.
It partakes of the character of commodatum. It cannot therefore militate
against the title of Domingo Baloy and his successors-in-interest. One’s
ownership of a thing may be lost through prescription by reason of
another’s possession, provided that such possession is under a claim of
ownership, and not where the possession is only intended to be transient,
as in the case of the U.S. Navy’s occupation of the land concerned, in which
case the owner is not divested of his title, however, it cannot be exercised
in the meantime.
In Ramos vs. Court of Appeals,7 the Supreme Court likewise ruled that
acquisitive prescription has set in especially when the claimant has undertaken
acts clearly showing his claim of ownership, thus:
Even from the standpoint of acquisitive prescription, which seems to be
more decisive, it appears too clear that private respondents have acquired
title to the land in suit by virtue of possession in the concept of an owner.
It is of record that private respondents have been in continuous possession
of the litigated parcel of land since they bought the same in 1934. In
addition to that they have been paying the real estate taxes due thereon and
have declared said property in their name for taxation

G.R. No. L-46145, November 26, 1986, 146 SCRA 15.

G.R. No. L-52741, March 15, 1982, 112 SCRA 542.
art. 1118

purposes. As correctly ruled by the Appellate Court, that “while tax

declaration and tax receipts are not necessarily evidence of title, they are
considered as a strong evidence of possession for no one in his right mind
art PresCriPtiOn 21
Prescription of Ownership and Other Real
Rights
would be paying taxes year after year for a property that is not in his actual
possession.”
The records of the case further disclose that petitioner’s complaint for
reconveyance was filed in the lower court only on March 13, 1973, 39 years
after the registration of the deed of absolute sale in favor of private
respondents. The issuance of a certificate of title in their name exclusively
on May 12, 1934, from which latter date petitioner’s cause of action, if any,
is deemed to have commenced, since the registration of the aforesaid deed
of sale in the Office of the Registry of Deeds constitutes a constructive
notice to the whole world of its contents and all interests, legal and
equitable, included therein.
Since the prescriptive period in this case had already run since May 12,
1934 prior to the effectivity of the new Civil Code on August 30, 1950,
there can be no doubt that the former laws on prescription applies, pursuant
to Article 1116 of the Civil Code. Under Section 40 of the Code of Civil
Procedure formerly in force, adverse possession ripened into ownership
after the lapse of ten (10) years, good or bad faith of the possessor being
immaterial for purposes of acquisitive prescription. In the like manner, an
action to recover title or the possession of immovable property, prescribe
in the same period of 10 years. The instant case, not having been filed
within 10 years from the time the cause of action accrued on May 12, 1934,
have already prescribed in 1944 because the complaint was filed only on
March 13, 1973, about 39 years later. Consequently, the possession by the
private respondents over the litigated property ripened into full ownership
in 1944, ten years after May 12, 1934, when their possession which was
actual, open, public and continuous, under a claim of title exclusive of any
other right and adverse to all other claims, commenced.
Possession must be public. This means that there must be a notorious holding
of the property known to the community. It must not be of a surreptitious
character because it must be in the concept of an owner. It must likewise be
peaceful in that, for the period of years required by law for acquisitive
prescription to apply, there must be no valid interference from others claiming
or asserting their rights to the property. It must likewise be uninterrupted. This
is defined in the subsequent sections.

Article 1119. Acts of possessory character executed in virtue of license or by

mere tolerance of the owner shall not be
. 1119

available for the purposes of possession. (1942)

The fact that the possessor holds the property by virtue of the consent of the
owner shows that such possessor acknowledges that somebody else owns the
property. Possession by tolerance therefore does not imply an assertion of
ownership,8 and thus produces no effect with respect to possession or
22 ObligatiOns and COntraCts
Text and Cases
prescription.9 In Coronado vs. Court of Appeals,13 where the statutory period
for ordinary acquisitive prescription passed, the Supreme Court rejected the
application of prescription because the possession was merely one of tolerance.
Pertinently, the Supreme Court said:
As found by the respondent appellate court, Monterola never claimed
ownership over the property in question. As a matter of fact, one of the
deeds of donation executed by Monterola in favor of Leonida Coronado
acknowledged that the boundary owner of the property conveyed to her is
JUANA. This is precisely the reason why during the lifetime of the late
Dalmacio Monterola, JUANA had always been allowed to enter and reap
the benefits or the produce of the said property. It was only after the death
of said Monterola in 1970 that Leonida Coronado prohibited JUANA from
entering it (Ibid., p. 18).
Even assuming arguendo that Monterola was indeed in continuous
possession of the said property for over ten years since 1934, said
possession is insufficient to constitute the fundamental basis of the
prescription. Possession, under the Civil Code, to constitute the foundation
of a prescriptive right, must be possession under claim of title (en concepto
de dueño), or through the use of common law equivalent to the term, it
must be adverse. Acts of possessory character performed by one who holds
by mere tolerance of the owner are clearly not en concepto de dueño, and
such possessory acts, no matter how long so continued, do not start the
running of the period of pres-cription (Manila Electric Company v.
Intermediate Appellate Court, G.R. No. 71393, June 28, 1989).
In this case, Monterola, as found by the respondent appellate court as well
as the lower court, never categorically claimed ownership over the property
in question, much less his possession thereof en concepto de dueño.
Accordingly, he could not have acquired said property by acquisitive
prescription.

Article 118 20. Possession is interrupted for the purposes of

Ordoñez vs. Court of Appeals, G.R. No. 84046, July 30, 1990, 188 SCRA 109. 9Manila
Electric Company vs. Intermediate Appellate Court, G.R. No. L-71393, June 28, 1989, 174 SCRA
313.
arts. 1120-1122

prescription, naturally or civilly. (1943)

Possession must be uninterrupted. This means that there must be continuity in

the holding of the property. An uninterrupted possession strengthens the
adverse right of the possessor. Possession can however be interrupted naturally
or civilly.

13
G.R. No. L-78778, December 3, 1990, 191 SCRA 814.
art PresCriPtiOn 23
Prescription of Ownership and Other Real
Rights
Article 1121. Possession is naturally interrupted when through any cause it
should cease for more than one year.
The old possession is not revived if a new possession should be exercised by
the same adverse claimant. (1944a)
Article 1122. If the natural interruption is for only one year or less, the time
elapsed shall be counted in favor of the prescription. (n)

For example, A is in possession of an unregistered property in the concept of

an owner in good faith and with a just title. The land is formerly owned by B.
The property is sold in a public auction to satisfy B’s indebtedness from the
government. A is the successful bidder. The document evidencing the title has
not yet been finished and registered with the Government. A however is
already in possession for a period of 4 years. Z appears and claims that the
property is his. Z requests A to vacate the premises so that he will not be
entangled in a possible suit. To avoid complications, A left the place. It turns
out however, that Z is a defrauder, and it is M who has previously bought the
property from B before A made his purchase. Upon learning that Z is a
defrauder, A returns to the property after two years. He stays there for another
7 years. M now claims the property and requests A to leave the place. A cannot
invoke acquisitive prescription. While he may have possession of the property
for a total period of 11 years, it is interrupted. When he left the property for
two years, his subsequent possession of seven years cannot be added to his
previous four years. In effect, the period which is material for purposes of
prescription is the subsequent 7 years. Obviously, said seven-year period have
not yet complied with the 10-year period required by law for ordinary
acquisitive prescription. However, if the interruption is not two years but only
one year or less, acquisitive prescription will have already set in, in favor of A
because the law clearly provides that if the natural interruption is for only one
year or less, the time elapsed shall be counted in favor of the prescription.

Article 1123. Civil interruption is produced by judicial

24 ObligatiOns and COntraCts
Text and Cases
arts. 1123-1124

summons to the possessor. (1945a)

Article 1124. Judicial summons shall be deemed not to have been issued and
shall not give rise to interruption: (1) If it should be void for lack of legal
solemnities;

(2) If the plaintiff should desist from the complaint or should allow the
proceedings to lapse;
(3) If the possessor should be absolved from the complaint.
In all these cases, the period of the interruption shall be counted for
the prescription. (1946a)

It is not the filing of the complaint in court which interrupts the possession. It
is interrupted upon receipt of the possessor of the judicial summons after the
filing of the complaint. When the possessor receives the judicial summons and
the copy of the complaint, it is only during that time that jurisdiction is acquired
by the court of the person of the possessor and it is at that time that possession
is interrupted.

However there are instances provided by law that judicial summons shall be
deemed not to have been issued, thereby not giving rise to interruption. The
first case is when the judicial summons is void for lack of legal solemnities.
Hence, if the judicial summons as well as the copy of the complaint have been
served by a person not authorized by the court, it shall be deemed as not issued,
thereby allowing the possession to run uninterrupted.

Second is when the plaintiff should desist from the complaint or should allow
the proceedings to lapse. Desistance from the complaint by the plaintiff means
voluntarily having the case dismissed, while allowing the proceeding to lapse
clearly manifests the lack of interest to prosecute the case. In both cases, the
possessor should not be prejudiced. There will be no interruption.

Third is when the possessor is absolved from the complaint. Absolution means
that the complaint have not been fully substantiated to support any adverse
claim by the complainant and therefore this should not prejudice the possessor
who must always be presumed to be in good faith.

Article 1125. Any express or tacit recognition which the possessor may make
of the owner’s right also interrupts possession. (1948)
art. 1125
 PresCriPtiOn 25
Prescription of Ownership and Other Real Rights
Express or tacit recognition interrupts the possession because possession must
always be in the concept of an owner to the exclusion of all others. Hence, one
cannot consider himself possessing a property adversely in the concept of an
owner if he recognizes somebody else as having a superior right as an owner.
Thus in Corpus vs. Padilla,14 the Supreme Court ruled that
one cannot recognize the right of another and at the same time claim
adverse possession which can ripen to ownership, thru acquisitive
prescription. For prescription to set in, the possession must be adverse,
continuous, public and to the exclusion of all.
Similarly, in Diñoso vs. Court of Appeals,15 where the seller and the buyer
executed a contract of sale in April 6, 1940 giving the seller the right to
repurchase the property on or before April 6, 1950 and where the buyer
immediately took possession of the property, the Supreme Court, in resolving
the issue of whether or not acquisitive prescription can be availed of by the
buyer, agreed with the Court of Appeals’ decision stating:
that the possession of petitioner Dinoso under the sale a retro did not
actually become hostile or adverse until the expiration of the redemption
period, since until then he recognized the superior right of the vendor to
oust him, and his claim of ownership was not absolute. Authorities are to
the effect that —
“Where the sale is subject to the owner’s right of redemption,
the purchaser’s possession has been held in subordination to
the title of the owner prior to the expiration of the redemption
period, although it may become hostile thereafter.” (2 C.J.S.
P. 664, Sec. 113; Morse vs. Seibold, 35 N.W. 471).
It was incumbent upon the petitioner to show when his vendor’s right of
redemption expired, and that he had held adversely for ten years thereafter.
In truth, his own deed (Exhibit “1”) recites that Feria’s right of repurchase
would expire only on
6 April 1950, so that the present suit for recovery have begun, in 1952 , well
within the prescriptive period.
Article 1126. Against a title recorded in the Registry of Property, ordinary
prescription of ownership or real rights shall not take place to the prejudice
of a third person, except in virtue of another title also recorded; and the time
shall begin

art. 1126

14
G.R. Nos. L-18099 and L-18136, July 31, 1962, 5 SCRA 814.
15
G.R. No. L-17738, April 22, 1963, 7 SCRA 666.
26 ObligatiOns and COntraCts
Text and Cases
to run from the recording of the latter.
As to lands registered under the Land Registration Act, the provisions of that
special law shall govern. (1949a)

In Dimayuga vs. Court of Appeals,16 where the deceased spouses acquired a

thirteen-hectare homestead, registered under the Torrens System in 1928. The
illegitimate children claimed one-half of the same on the ground that they
acquired it by acquisitive prescription having been in the property since 1948,
the Supreme Court rejected such contention by stating:
That contention is devoid of merit. It may be morally plausible but it is
legally indefensible. No portion of the homestead, a registered land, may
be acquired by prescription. “No title to registered land in derogation to
that of the registered owner shall be acquired by prescription or adverse
possession.” (Sec. 46, Act No. 496; Sec. 47, Property Registration Decree,
P.D. No. 1529; Art. 1126, Civil Code)
In Reyes vs. Court of Appeals,17 where the registered property was acquired
through a forged document by the petitioner, and where such petitioner claimed
acquisitive prescription against the heirs of the original owners, the Supreme
Court said:
Moreover, this Court agrees with the private respondents that there can be
no acquisitive prescription considering that the parcel of land in dispute is
titled property, i.e., titled in the name of the late Bernardino Reyes, the
father of both the petitioner Florentino and the private respondents. This
fact, petitioners do not deny. Hence, even if they allege adverse possession
that would ripen into ownership due to acquisitive prescription, their title
cannot defeat the real rights of private respondents who stepped into the
shoes, as it were, of their father as successors-in-interest. As it is,
petitioners cannot even claim adverse possession as they admit that the
private respondents likewise resided and continue to reside on the subject
property.
However, although prescription will not apply to registered property, the
doctrine of laches is applicable. Laches is the rule of in effectivity of stale
demands. In Catholic Bishop of Balanga vs. Court of Appeals, 15 where the
petitioner donated registered property to a person who, including his
successors-in-interest, took possession of the same adversely, continuously,
publicly and peacefully for forty-
art. 1126

16
G.R. No. L-148433, April 30, 1984, 129 SCRA 110.
17
G.R. No. L-110207, July 11, 1996, 72 SCAD 126, 258 SCRA 651.
 PresCriPtiOn 27
Prescription of Ownership and Other Real Rights
nine (49) years, and where, thereafter, the petitioner filed a case to recover the
property contending that the donation is invalid, the Supreme Court, despite
the fact the property was registered, rejected the assertion of imprescriptibility
of registered property and decided against the petitioner on the ground that it
was guilty of laches. The Supreme Court pertinently ruled:
The time honored rule (on laches) anchored on public policy is that relief
will be denied to a litigant whose claim or demand has become “stale” or
who has acquiesced for an unreasonable length of time, or who has not
been vigilant or who has slept on his right either by negligence, folly or
inattention. In other words, public policy requires, for the peace of society,
the discouragement of claims grown stale for non-assertion; thus laches is
an impediment to the assertion or enforcement of a right which has become,
under the circumstances, inequitable or unfair to permit. xxx xxx xxx
In this case, the petitioner filed its complaint in court only after forty-nine
(49) years had lapsed since the donation in its behalf of the subject property
to private respondent’s predecessor-in-interest. There is nary an
explanation for the long delay in the filing by petitioner of the complaint in
the case at bench, and that inaction for an unreasonable and unexplained
length of time constitutes laches. As such, petitioner cannot claim nullity
of the donation as an excuse to avoid the consequences of its own
unjustified inaction and as a basis for the assertion of a right on which they
had slept for so long.
xxx xxx xxx
Finally, we agree with the respondent Court of Appeals that, while
petitioner is admittedly still the registered owner of the donated property,
and jurisprudence is settled as to the imprescriptibility and indefeasibility
of a Torrens Title, there is equally an abundance of cases in the annals of
our jurisprudence where we categorically ruled that a registered landowner
may lose his right to recover the possession of his registered property by
reason of laches.

Article 1127. The good faith of the possessor consists in the reasonable belief
that the person from whom he received the thing was the owner thereof, and
could transmit his ownership. (1950a)

G.R. No. 112549, November 14, 1996, 76 SCAD 148.

28 ObligatiOns and COntraCts
Text and Cases
. 1127-1128

Article 1128. The conditions of good faith required for possession in Articles
526, 527, 528 and 529 of this Code are likewise necessary for the
determination of good faith in the prescription of ownership and other real
rights. (1951)

The following provisions of the 1950 Civil Code on possession shall likewise
be necessary in determining good faith on matters of prescription:
Article 526. He is deemed a possessor in good faith who is not aware that
there exists in his title or mode of acquisition any flaw which invalidates
it.
He is deemed a possessor in bad faith who possesses in any case contrary to the
foregoing.
Mistake upon a doubtful or difficult question of law may be the basis of good
faith.
Article 527. Good faith is always presumed, and upon him who alleges bad
faith on the part of a possessor rests the burden of proof.
Article 528. Possession acquired in good faith does not lose this character
except in the case and from the moment facts exist which show that the
possessor is not unaware that he possesses the thing improperly or
wrongfully.
Article 529. It is presumed that possession continues to be enjoyed in the
same character in which it was acquired, until the contrary is proved.
In Negrete vs. Court of First Instance of Marinduque, 18 where a person
claimed a particular property by virtue of ordinary acquisitive prescription of
ten years based on a deed of sale which he knew involved a different property,
the Supreme Court rejected the same on the ground that, aside from the period
required by law, there must also be good faith and just title in the possession
which was not present in the case, thus:
The crucial issue therefore is whether the deed of sale executed by Tito
Oriendo on August 30, 1954 in favor of the late Igmedio Maderazo could
be considered as a valid basis for good faith and as a just title, in order to
justify the acquisition of the disputed parcel of about 9 hectares by ordinary
prescription thru adverse possession of only 10 years.
The law defines a possessor in good faith as one who is

18
G.R. No. L-31267, November 24, 1972, 48 SCRA 113.
arts PresCriPtiOn 29
Prescription of Ownership and Other Real
Rights
arts. 1127-1128

not aware of any flaw in his title or mode of acquisition; and conversely,
one who is aware of such flaw is a possessor in bad faith (Art. 526, Civil
Code of the Philippines).
WE ruled that “the essence of the bona fides or good faith, therefore, lies
in the honest belief in the validity of one’s right, ignorance of a superior
claim, and absence of intention to overreach another.”
A deed of sale, to constitute a just title and to generate good faith for the
ordinary acquisitive prescription of ten (10) years, should refer to the same
parcel of land, which is adversely possessed. In the case at bar, the deed of
sale in favor of the deceased Igmedio Maderazo covers a parcel of land
patently different from the disputed land owned by plaintiff-appellant as to
area, location, and boundary owners.
xxx xxx xxx
Hence, defendant-appellee Catalino Maderazo, along with his late father
Igmedio Maderazo, could not claim good faith in occupying said land of
plaintiff-appellant on the basis of the said instrument of sale. If said
appellee’s position were to be sustained, it would be easy for anyone to
acquire ownership of an untitled land belonging to another person by
adverse possession of only ten (10) years on the basis of a document of sale
covering a distinct parcel executed by a person who is a stranger to the
land. This could not have been intended by the legislature; because forged
deeds of conveyance could be conveniently interposed to oust the true
owner from a land by adverse possession of only ten (10) years. To spawn
such a monstrosity in the law was never contemplated by the statute, which
is designed to engender social quietude.
In Reyes vs. Court of Appeals (Ninth Division),19 the Supreme

Court ruled that knowingly using a forged document to base one’s just title for
purposes of acquisitive prescription is an act of bad faith, thus:
With respect to the second assignment of error, petitioners contend that
even assuming that there was forgery, they have become absolute owners
of the subject property by virtue of acquisitive prescription citing Articles
1117 and 1134 of the Civil Code as follows:
“Art. 1117. Acquisitive prescription of dominion and other real rights may be
ordinary or extraordinary.
Ordinary acquisitive prescription requires possession of things in good faith and
with just title for the time fixed by law.

19
G.R. No. L-110207, July 11, 1996, 72 SCAD 126, 258 SCRA 651.
30 ObligatiOns and COntraCts
Text and Cases
. 1127-1128

xxx xxx xxx

Art. 1134. Ownership and other real rights over immovable property are
acquired by ordinary prescription through possession of ten years.
By virtue of said articles, they claim that they have been possessors of the
contested parcel of land in good faith, for ten years and with a just title for
the period required by law.
This Court is not impressed with this argument. Petitioners cannot justify
their ownership and possession of the subject parcel of land since they
could not meet the requisites provided by the provisions they have cited.
Regarding the requirement of good faith, the first paragraph of Article 526
states, thus:
“He is deemed a possessor in good faith who is not aware that there exists
in his title or mode of acquisition any flaw which invalidates it.”
From the above-cited provision, petitioners could not have been possessors
in good faith of the subject parcel of land considering the finding that at the
very inception they forged the Deed of Extrajudicial Partition and
Settlement which they claim to be the basis for their just title.
Having forged the Deed and simulated the signatures of private
respondents, petitioners, in fact, are in bad faith. The forged Deed
containing private respondents’ simulated signatures is a nullity and cannot
serve as a just title.
Moreover, this Court agrees with the private respondents that there can be
no acquisitive prescription considering that the parcel of land in dispute is
titled property, i.e., titled in the name of the late Bernardino Reyes, the
father of both petitioner Florentino and the private respondents. This fact,
the petitioners do not deny. Hence, even if they allege adverse possession
that should ripen into ownership due to acquisitive prescription, their title
cannot defeat the real rights of the private respondents who stepped into
the shoes, as it were, of their father as successors-in-interest. As it is,
petitioners cannot even claim adverse possession as they have admitted that
the private respondents likewise resided and continue to reside on the
subject property.
Good faith cannot likewise be invoked if the claimant has actual or
constructive notice of the legal and valid rights of possession of another during
the prescriptive period. Thus in Magtira vs. Court of Appeals,18 the Supreme
Court allowed prescription because the claimant had constructive notice of the
possession of another, thus:
Additionally, acquisitive prescription operates to bar any
arts. 1129-1131
arts PresCriPtiOn 31
Prescription of Ownership and Other Real
Rights
action by SOFIA. From the date of the filing of the Affidavit for
Consolidation of Ownership by ZACARIAS with the Register of Deeds on
August 23, 1945 up to the date of the filing of the complaint by SOFIA on
June 18, 1956, or for almost eleven (11) years, ZACARIAS enjoyed an
uninterrupted, adverse, public and peaceful possession of the litigated
property in the concept of owner, which under Article 1134 of the Civil
Code ripened into ownership by ordinary prescription through possession
of at least ten years. Contrary to SOFIA’s claim, the period of prescription
should be reckoned not merely from the time when she allegedly came to
know of the claim of ownership of ZACARIAS during the cadastral survey
in 1955, but from the date of registration of the Affidavit for Consolidation
with the Register of Deeds because registration of an instrument in the
Office of the Register of Deeds constitutes constructive notice to the whole
world.

Article 1129. For the purposes of prescription, there is just title when the
adverse claimant came into possession of the property through one of the
modes recognized by law for the acquisition of ownership or other real rights,
but the grantor was not the owner or could not transmit any right. (n)

Article 1130. The title for prescription must be true and valid. (1953)

Article 1131. For the purposes of prescription, just title must be proved; it is
never presumed. (1954a)
In Doliendo vs. Biarnesa,19 where a person bought property in a valid public
auction , took and continued possession of the property thereafter for more than
ten years, and where, prior to the sale made in the public auction, there was a
first purchaser of the property previous to the death of the original owner, the
Supreme Court ruled that the person who bought the property at the public
auction already acquired the property by acquisitive prescription as he was able
to show by concrete evidence the holding of such public auction from which
he based his just title. Pertinently, the Supreme Court said:
Counsel for the plaintiff contended that since he had purchased the land in
question prior to the alleged sale at public auction, the commissioner had
no lawful authority to include it in the list of property of the vendor which
could be subjected to the payment of his debts, and that the sale, therefore,
was invalid and of no effect; also insisted that a prescriptive title could not

G.R. No. L-27547, March 31, 1980, 96 SCRA 680.

. 1129-1131
32 ObligatiOns and COntraCts
Text and Cases
be based on such transaction because the title for prescription must be valid and
true.
We think that this contention is based on a misconception of the scope and
effect of the provisions of the code as applied to “ordinary prescription.” It
is evident that by a “true and valid title” in this connection we are not to
understand “a title which of itself is sufficient to transfer the ownership
without the neces-sity of the lapse of the prescriptive period;” and we
accept the opinion of a learned Spanish law writer who holds that the
“titulo verdadero y valido” as used in this article of the code prescribes a
“titulo colorado” and not merely “putative,” a “titulo colorado” being
one “which a person has when he buys a thing, in good faith, from one
whom he believes to be the owner,” and a “titulo putativo” being one
“which is supposed to have preceded the acquisition of a thing, although in
fact it did not, as might happen when one is in possession of a thing in the
belief that it had been bequeathed to him.” (Viso, Derecho Civil, Parte
Segunda, page 541).
Hence, even should it be prove that the land in question was not lawfully
included in the list of property subject to the payment of debts, x x x still
the defendant’s title by prescription must be sustained, since it is clear that
the sale at public auction did in fact take place, that the transaction was in
good faith, and that the defendant bought the land from one whom he
believed to have the right to sell.
In Solis vs. Court of Appeals,20 where the Supreme Court, in rejecting the
contention of the petitioners that a donacion propter nuptias was not sufficient
to create or establish the just title of the possessors of the land as donees, ruled:
This contention of the petitioners is not meritorious. Suffice it to state that
even a void donation may be the basis of a claim of ownership which may
ripen into title by prescription (Pensador vs. Pensador, 47 Phil. 959, 961).
It is the essence of the statute of limitations that, whether the party has a
right to the possession or not, if he entered under the claim of such right
and remained in possession for the period (ten years) named in the statute
of limitations, the right of action of the plaintiff who has the better title is
barred by that adverse possession. The right given by the statute of
limitations does not depend upon, and has no necessary connection, (with)
the validity of the claim under which the possession is held. x x x. (Vda.
De Lima vs. Tio, L-27181, April 30, 1970, citing Conspecto vs. Fruto, 129
US 182 [1889]). The “just title” required for acquisitive prescription to set
in is not “titulo verdadero y valido” — or such title which by itself
is sufficient to transfer ownership without necessity of letting the 19G.R. No. L-
2765, December 27, 1906, 7 Phil. 232.
G.R. Nos. 46753-54, August 25, 1989, 176 SCRA 678.
G.R. No. L-23232, June 17, 1970, 33 SCRA 479.
art. 1132
arts PresCriPtiOn 33
Prescription of Ownership and Other Real
Rights
prescriptive period elapse but only “titulo colorado” — or such title where,
although there was a mode of transferring ownership, still something is
wrong because the grantor is not the owner (See Doliendo vs. Biarnesa, 7
Phil. 232).

Article 1132. The ownership of movables prescribes through uninterrupted

possession for four years in good faith.
The ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition.
With regard to the right of the owner to recover personal property lost or of
which he has been illegally deprived, as well as with respect to movables
acquired in a public sale, fair, or market, or from a merchant’s store the
provisions of Articles 559 and 1505 of this Code shall be observed. (1955a )

The period for ordinary acquisitive prescription for movables is four years
coupled with good faith. Possession must likewise be in the concept of an
owner, adverse, public and uninterrupted. For extraordinary prescription, a
period of eight years is required without need of any other condition. In Dira
vs. Tanega,21 where an active partner conducted himself as the absolute owner
of the printing equipment of the partnership after the delinquent partner ignored
the demand to pay his obligations, and where such active partner also assumed
ownership of the shares of stock pledged by the delinquent partner in
connection with his obligations, and where such delinquent partner filed a case
for accounting of the partnership only after 14 years from the time the active
partner conducted himself as owner of the shares and equipment of the
partnership, the Supreme Court rejected the claim of the delinquent partner that
a trust relationship existed between him and the active partner by stating that
the latter had already acquired the movables by acquisitive prescription, to wit:
x x x In bad faith or in good faith, after eight years of actual adverse
possession, appellee acquired clear ownership of appellant’s share by
acquisitive prescription. According to Art. 1132 of the Civil Code, “The
ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition.” So,
appellee became the undisputed owner of appellant’s share since 1955 or
six years before this action was filed and since said year, the allegation of
trusteeship had already lost any basis whatsoever. x x x

G.R. No. 90356, March 18, 1991, 195 SCRA 355.

34 ObligatiOns and COntraCts
Text and Cases
art. 1132

The law likewise provides that, with regard to the right of the owner to recover
personal property lost or of which he has been illegally deprived, as well as
with respect to movables acquired in a public sale, fair or market, or from a
merchant’s store the provisions of Articles 559 and 1505 of this Code shall be
observed.
Article 559. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable or has
been unlawfully deprived thereof, may recover it from the person in
possession of the same.
If the possessor of a movable lost or of which the owner has been
unlawfully deprived, has acquired it in good faith at a public sale, the owner
cannot obtain its return without reimbursing the price paid therefor.
Article 1505. Subject to the provisions of this Title, where goods are sold
by a person who is not the owner thereof, and who does not sell them under
authority or with the consent of the owner, the buyer acquires no better title
to the goods than the seller had, unless the owner of the goods is by his
conduct precluded from denying the seller’s authority to sell.
Nothing in this Title, however, shall affect:
(1) The provisions of any factors’ acts, recording laws, or any other
provisions of law enabling the apparent owner of goods to dispose
of them as if he were the true owner thereof;
(2) The validity of any contract of sale under statutory power of sale or
under the order of a court of competent jurisdiction;
(3) Purchases made in a merchant’s store, or in fairs, or markets, in
accordance with the Code of Commerce and special laws.

Article 1133. Movables possessed through a crime can never be acquired

through prescription by the offender. (1956a)
No one must benefit from an evil act. Hence, if A stole B’s car, A cannot
acquire title to it even if the prescriptive period have already lapsed and even
if B did not make a demand for the return of the car. This is true in ordinary
and extraordinary prescriptions. In Tan vs. Court of Appeals,22 where the
petitioner claimed that, through bad faith and fraud, he was led to assign his
shares of stocks in 1977 to three corporate entities, and where the case to
reconvey the same was filed only in 1987, the Supreme Court ruled that the
action was barred by prescription by stating, among others, that Article 1133
did not apply, thus:
x x x Where, however, the thing was acquired through a
arts. 1133-1134
 PresCriPtiOn 35
Prescription of Ownership and Other Real Rights
crime, the offender can not acquire ownership by prescription under Article 1133,
which we quote:
Art. 1133. Movables possessed through a crime can never be acquired
through prescription by the offender.
Please note that under the above Article, the benefits of prescription are
denied to the offender; nonetheless, if the thing was in the meanwhile
passed to a subsequent holder, pres-cription begins to run (four or eight
years, depending on the existence of good faith) x x x.
It is difficult to say, in this regard, that the petitioners’ action is after all,
imprescriptible pursuant to the provisions of Article 1133 of the Civil
Code, governing actions to recover loss by means of a crime. For one thing,
the complaint was not brought upon this theory. For another, there is
nothing there that suggests that the loss of the shares was indeed made
possible by a criminal act, other than simple bad faith and probably abuse
of right.

Article 1134. Ownership and other rights over immovable property are
acquired by ordinary prescription through possession of ten years. (1957a)

Only 10 years of possession by the adverse claimant are needed for ordinary
acquisitive prescription. The possession, however, must be by virtue of a just
and valid title, in the concept of an owner, uninterrupted, adverse, and public.

Article 1135. In case the adverse claimant possesses by mistake an area

greater, or less, than that expressed in his title, prescription shall be based
on the possession. (n)

The extent of property subject to the prescription shall be the one actually
possessed or held by the claimant regardless of the size indicated or described
in the title. For instance, it has been ruled that
when one sells or buys real property — a piece of land, for example — one
sells or buys the property as he sees it, in its actual setting and in its physical
metes and bounds, and not by the mere lot number assigned to it in the
certificate of title.23

Article 1136. Possession in wartime, when the civil courts are not open, shall
not be counted in favor of the adverse claimant. (n)

During wartime where the civil courts are closed, there is no 23Atilano vs. Atilano,
G.R. No. L-22487, May 21, 1969, 28 SCRA 231. way by which any person claiming title
over a certain property can
arts. 1135-1137
36 ObligatiOns and COntraCts
Text and Cases
file a case to recover the same from the person in adverse possession of the
property. Hence, the possession of the adverse claimant during that time shall
not be counted. However, it must be observed that the civil courts must be
closed. Therefore, even if there is war but the civil courts are functioning, the
possession of the adverse claimant may be counted in his favor.

Article 1137. Ownership and other real rights over immovables also
prescribe through uninterrupted adverse possession thereof for thirty years,
without need of title or of good faith. (1959a)

In Parcotilo vs. Parcotilo 20 where a person had adverse possession of a

particular land by virtue of an invalid will for thirty years, the Supreme Court
ruled that extraordinary prescription had set in thus:
We agree with the trial court that even if the document Exh. “1-a” was not
executed with all the requisites of a valid will or of a valid donation mortis
causa the said document supplied the basis for the claim of ownership by
the defendant Demetrio Parcotilo of the two parcels of land in question
after the death of the spouses. The ownership by Demetrio Parcotilo,
coupled with his open, continuous and adverse possession for a period of
thirtyeight years had ripened into a title by prescription (Pensader vs.
Pensader, 47 Phil. 959, 961) x x x.
Even the provisions of Article 1137 of the New Civil Code on
extraordinary prescription through uninterrupted adverse possession for
thirty years, regardless of whether there was title or good faith, uphold the
right of the defendant Pablo Parcotilo as owner through adverse possession
in this present case.
In the case of Heirs of Celso Amarante vs. Court of Appeals21 where it was
shown that, even previous to the war, a person occupied a particular alienable
public land where he planted various coconut trees, mango trees and bamboo
trees and that his grandchildren and descendants continued occupying the place
until the trees were already 70 years of age, the Supreme Court ruled that
acquisitive prescription had already set in, to wit:
We should consider next the character of the rights held by petitioners in
respect of Lot 1236. The testimony of Celso Amarante showed that in 1974,
the coconut trees planted by petitioners and their predecessors-in-interest
were already

20
G.R. No. L-17249, November 28, 1964, 12 SCRA 435.
21
G.R. No. L-76386, May 21, 1990, 185 SCRA 585.
 PresCriPtiOn 37
Prescription of Ownership and Other Real Rights
. 1137

approximately seventy (70) years of age. The mango trees had trunks with
circumferences of about three (3) arm lengths; indicating once more that
those trees were old. Thus, it was clearly shown that Malonis Infiel had
begun occupying Lot No. 1236 a very long time ago. When the possession
of Malonis Infiel of the land is tacked on to that of petitioners, there is no
question that that possession exceeded thirty (30) years which is the period
for extraordinary prescription provided for in Article 1137 of the Civil
Code.
More importantly, there is Section 48(b) of Commonwealth Act No. 141,
as amended by Republic Act No. 1942, otherwise known as the Public
Land Act, which provides as follows:
“Section 48. The following described citizens of Philippines
occupying lands of public domain or claiming to own any
such land or an interest therein, but whose titles have not been
perfected or completed, may apply to the Court of First
Instance of the province where the land is located for con-
firmation of their claims and the issuance of a certi-ficate of
title thereof, under the Land Registration Act, to wit: x x x
xxx xxx
(b) Those who by themselves or through their predecessors
in interest have been in open, continuous, exclusive and
notorious possession and occupation of agricultural lands of
the public domain, under a bona fide claim of acquisition of
ownership, for at least thirty years immediately preceding the
filing of the application for confirmation of the title except
when prevented by war or force majeure. These shall be
conclusively presumed to have per-formed all the conditions
essential to a Government grant, and shall be entitled to a
certificate of title under the provisions of this Chapter.”
There is no question that petitioners, at the time they were forcibly driven
off the Sitio Campulay parcel of land, had through their possession and that
of their predecessors-in-interest have complied with the requirements of
long continued (at least 30 years), bona fide, open, exclusive and notorious
possession and occupation of Lot 1236 which was of course, originally
agricultural land of the public domain. As such, they have become owners
of Lot 1236 even before formal confirmation of their title under Section
48(b) of the Public Land Act. In Director of Lands vs. Intermediate
Appellate Court, et al., the Supreme Court, in overruling the earlier case of
Manila Electric Company vs. Castro

G.R. No. L-76564, May 25, 1990, 185 SCRA 693.

art. 1137
38 ObligatiOns and COntraCts art
Text and Cases
Bartolome, et al., said:
“Nothing can more clearly demonstrate the logical
inevitability of considering possession of public land which
is of the character and duration prescribed by statute as the
equivalent of an express grant from the State than the dictum
of the statute itself that the possessor(s) ‘x x x shall be
conclusively presumed to have performed all the conditions
essential to a Government grant and shall be entitled to a
certificate of title x x x.’ No proof being admissible to
overcome a conclusive presumption, confirmation
proceedings would, in truth, be little more than a formality,
at the most limited to ascertaining whe-ther the possession
claimed is of the required character and length of time; and
registration there-under would not confer title, but simply
recognize a title already vested. The proceedings would not
originally convert the land from public to private land, but
only confirm such a conversion already effected by operation
of law from the moment the required period of possession
became complete. As was so well put in Cariño, ‘x x x
(T)here are indi-cations that registration was expected from
all, but none sufficient to show that, for want of it, ownership
actually gained would be lost. The effect of the proof,
wherever made, was not to confer title, but simply to
establish it, as already conferred by the decree, if not by
earlier law.
xxx xxx xxx
The court, in the light of the foregoing, is of the view, and so
holds, that the majority ruling in Meralco must be
reconsidered and no longer deemed to be binding precedent.
The correct rule, as enunciated in the line of cases already
referred to, is that alienable public land held by a possessor,
personally or through his predecessors-in-interest, openly
continuously for the prescribed statutory period (30 years
under The Public Land Act, as amended) is converted to
private property by the mere lapse or completion of said
period, ipso jure.”

Article 1138. In the computation of time necessary for prescription the

following rules shall be observed:
(1) The present possessor may complete the period necessary for
prescription by tacking his possession to that of his grantor or predecessor
in interest;
. 1138
 PresCriPtiOn 39
Prescription of Ownership and Other Real Rights
(2) It is presumed that the present possessor who was also the possessor
at a previous time, has continued to be in possession during the intervening
time, unless there is proof to the contrary;
(3) The first day shall be excluded and
the last day included. (1960a)

The first rule provides that the present possessor may complete the period
necessary for prescription by tacking his possession to that of his grantor or
predecessor in interest. The words “grantor” and “predecessor in interest”
connote a transfer in a manner provided by law of property from one person to
another. Thus, if A donated to B a property which was previously in the
possession of B for 8 years, A can make use of the said 8 years for purposes of
prescription. Hence, if A already was in possession of the property for three
years, the period of his possession may be considered to have been for 11 years
already. For purposes of ordinary acquisitive prescription, he has already
complied with the statutory period. Also, in South City Homes, Inc. vs.
Republic,26 where a possessor of a strip of land designated as Lot No. 5005
claimed the same despite the fact that such land was not transferred to him
when he bought two adjacent lands, Lot No. 2381 and Lot No. 2386-A, and
where he claimed that his possession should be tacked in with the possession
of the previous possessors, the Supreme Court rejected such contention and
said:
But the more telling consideration, as the Court sees it, is this. By the
testimony of the two witnesses, the petitioner obviously meant to tack the
possession of the two lots by the previous owners to its own possession.
There was no need for this because the petitioner acquired ownership of
Lot No. 2381 by assignment and Lot No. 2386-A by purchase; and such
ownership includes the right of possession. The petitioner is not claiming
prescriptive rights to these two lots, which have previously been registered
in the name of the transferors. The lot he is claiming by prescription is Lot
No. 5005, which he did not acquire from the owner of the two other lots,
or from any previous private registered owner of the lot, as there was none.
Neither of the owners of Lots No. 2381 nor 2386-A, in their respective
deeds, transferred Lot No. 5005 to the petitioner; as already explained, Lot
No. 5005 was not part of either of the two lots. The petitioner merely
occupied the disputed strip of land believing it to be included in the two
lots it had acquired from Koo Jun Eng and the Garcia spouses. However,
even if it be conceded that the previous owners of the other two lots
possessed the
art. 1138

disputed lot, their possession cannot be tacked to the possession of the

petitioner. The simple reason is that the possession of the said lot was not
40 ObligatiOns and COntraCts art
Text and Cases
and could not have been transferred to the petitioner when it acquired Lots
Nos. 2381 and 2386-A because these two lots did not include the third lot.
Article 1138 of the Civil Code provides that —
(1) The present possessor may complete the period necessary
for prescription by tacking his possession to that of his
grantor or predecessor-ininterest. x x x
However, tacking possession is allowed only when there is a privity of
contract or relationship between the previous and present possessors. In the
absence of such privity, the possession of the new occupant should be
counted only from the time it actually began and cannot be lengthened by
connecting it with the possession of the former possessors. Thus, it has
been held:
The deed, in itself, creates no privity as to land outside it
calls. Nor is privity created by the bare taking of possession
of land previously occupied by the grantor. It is therefore the
rule, although sharply limited, that a deed does not of itself
create privity between the grantor and the grantee as to land
not described in the deed but occupied by the grantor in
connection therewith, although the grantee enters into
possession of the land not described and uses it in connection
with that conveyed.
Where a grantor conveys a specific piece of property, the
grantee may not tack onto the period of his holding an
additional piece of property the period of his grantor’s
occupancy thereof to make up the statutory period. His
grantor did not convey such property or his interest therein,
and there is no privity.
It is said, in Hanlon vs. Ten Hove, supra, that this rule is not
harsh, the court using the following language: “If A
purchases and by adverse possession obtains title to an
adjoining 40 acres, it would hardly be contended that a
conveyance by him of the 40 acquired by deed, would carry
with it the title to the 40 acres acquired by adverse
possession. So if A acquires by deed 40 acres and obtains an
adjoining strip 2 rods wide or some interest in it, his
conveyance of the 40 acquired by deed does not carry with it
his
. 1138

interest in the adjoining strip. If the sole defense here was that
of adverse possession, we would be obliged to hold that it
have not been made out.”
It should also be noted that, according to Article 1135 of the Civil Code:
 PresCriPtiOn 41
Prescription of Ownership and Other Real Rights
In case the adverse claimant possesses by mistake an area
greater or less, than that expressed in this title, prescription
shall be based on the possession.
This possession, following the above-quoted rulings, should be limited
only to that of the successor-in-interest; and in the case of the herein
petitioner, it should begin from 1981 when it acquired the two adjacent lots
and occupied as well the lot in question thinking it to be part of the other
two.
It follows that when the application for registration of the lot in the name
of the petitioner was filed in 1983, the applicant have been in the possession
of the property for less than three years. This was far too short of the
prescriptive period required for acquisition of immovable property, which
is ten years if the possession is in good faith and thirty years if in bad faith,
or if the land is public.
The second rule provides the presumption that the present possessor who was
also the possessor at a previous time, have continued to be in possession during
the intervening time, unless there is proof to the contrary. A presumption
proceeds from a set of facts. For the presumption provided in this rule to exist,
there must be a prior showing of the fact that the person presently possessing
the property was also the one in possession of the same property before the
intervening time. Hence, if a person was in possession of the property in 1997
and it was shown that he was also in possession of the property in 1988, it shall
be presumed that he was in possession from 1989 to 1996. However, this
presumption can be destroyed if evidence can be adduced to show that he was
not in possession during the interval.

The third rule provides that the first day shall be excluded and the last day
included. For example, if a person possessed the property on January 1, 1980
up to January 15, 1990, the counting of the prescriptive period shall start on
January 2, 1980 up to January 15 , 1990.
art. 1138 PresCriPtiOn 43
Prescription of Ownership and Other
Real Rights
art PresCriPtiOn 43
Prescription of Actions
44 ObligatiOns and COntraCts Text
and Cases

Chapter 3

PRESCRIPTION OF ACTIONS

Article 1139. Actions prescribe by the mere lapse of time fixed by law.
(1961)

The law fixes the time within which an action may be filed. If the period
prescribed by law lapses, the action cannot be filed anymore. The set of
provisions dealing with prescription of actions is known as the Statute of
Limitations.

Article 1140. Actions to recover movables shall prescribe eight years from
the time the possession thereof is lost, unless the possessor has acquired the
ownership by prescription for a less period, according to Article 1132, and
without prejudice to the provisions of Articles 559, 1505, and 1133. (1962a)

For example, a person can recover lost personal or movable property which he
claims belong to him within a period of eight years. However, if all the
requisites of an ordinary acquisitive prescription of movable property are
present, the possessor of the same becomes the owner of the movable property
after only four years uninterrupted possession in good faith. In Tan vs. Court
of Appeals,22 where the petitioner claimed that, through bad faith and fraud, he
was led to assign his shares of stocks in 1977 to three corporate entities and
where the case to reconvey the same was filed only in 1987, the Supreme Court
ruled that the action had already prescribed, thus:
The next question is whether or not any action for reconveyance has
nevertheless prescribed, on the bases of provisions governing
reconveyance.
The rule anent prescription on recovery of movables (shares of stock in
this case) is expressed in Article 1140 of the Civil Code, which we quote:

44

22
G.R. No. 90356, March 18, 1991, 195 SCRA 355.
. 1140

“Art. 1140. Actions to recover movables shall prescribe eight years from
the time the possession thereof is lost, unless the possessor had acquired
the ownership by prescription for a less period, according to Article 1132,
and without prejudice to the provisions of Articles 559, 1505 and 1133.”
As it provides, Article 1140 is subject to the provisions of Articles 1132
and 1133 of the Code, governing acquisitive prescription, in relation to
Articles 559 and 1505 thereof. Under Article 1132.
“Art. 1132. The ownership of movables prescribes through uninterrupted
possession for four years in good faith.
The ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition.
With regard to the right of the owner to recover personal property lost or
of which he has been illegally deprived, as well as with respect to movables
acquired in a public sale, fair, or market, or from a merchant’s store the
provisions of Articles 559 and 1505 of this Code shall be observed.”
Acquisitive prescription sets in after uninterrupted possession of four
years, provided there is good faith, and upon the lapse of eight years, if bad
faith is present. Where, however, the thing was acquired through a crime,
the offender cannot acquire ownership by prescription under Article 1133,
which we quote:
“Art. 1133. Movables possessed through a crime can never be acquired
through prescription by the offender.”
Please note that under the above Article, the benefits of prescription are
denied to the offender; nonetheless, if the thing has meanwhile passed to a
subsequent holder, prescription begins to run (four or eight years,
depending on the existence of good faith).
For purposes of extinctive prescription vis-a-vis movables, we therefore
understand the periods to be:
1. Four years, if the possessor is in good faith;
2. Eight years in all other cases, except where the loss was due to a
crime in which case, the offender cannot acquire the movable by
prescription, and an action to recover it from him is imprescriptible.
It is evident, for purposes of the complaint in question, that the petitioners had
at most eight years within which to pursue a
art PresCriPtiOn 45
Prescription of Actions
art. 1140

reconveyance, reckoned from the loss of the shares in 1977, when the
petitioner Vicente Tan executed the various agreements in which he
conveyed the same in favor of the Executive Consultants, Inc., Orobel
Property Management, Inc., and Antolum Trading Corporation.
We are hard put to say, in this regard, that the petitioners’ action is after
all, imprescriptible pursuant to the provisions of Article 1133 of the Civil
Code, governing actions to recover loss by means of a crime. For one thing,
the complaint was not brought upon this theory. For another, there is
nothing there that suggests that the loss of the shares was indeed made
possible by a criminal act, other than simple bad faith and probably abuse
of right.
In Dira vs. Tanega,23 where a partner took possession of the shares of a co-
partner who refused to pay his obligations and participate in the partnership
prompting the possessing-partner to conduct himself publicly, openly, and
adversely as the absolute owner from 1947 up to 1961 of the shares pledged by
the delinquent partner and of the assets of the partnership, and where the
delinquent partner contended that a trust relationship was created between him
and the other partner, the Supreme Court ruled that such delinquent partner can
no longer file a case to claim the shares because such action had already
prescribed. The Supreme Court pertinently ruled:
x x x In bad faith or in good faith, after eight years of actual adverse
possession, appellee acquired clear ownership of appellant’s share by
acquisitive prescription. According to Article 1132 of the Civil Code, “the
ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition.” So,
appellee became undisputed owner of appellant’s share since 1955 or six
years before this action was filed and since said year the allegation of
trusteeship had already lost any basis whatsoever. Under Article 1140 of
the same Code, “Actions to recover movables shall prescribe eight years
from the time the possession thereof is lost, unless the possessor has
acquired the ownership by prescription for a less period” or for an equal
period, in which latter case, the right to sue prescribes together with the
title.
The action shall likewise be without prejudice to the provisions of Articles
559, 1505, and 1133. These articles provide:
Article 559. The possession of movable property acquired in good faith is
equivalent to title. Nevertheless, one who has

23
G.R. No. L-23232, June 17, 1979, 33 SCRA 479.
46 ObligatiOns and COntraCts
Text and Cases
. 1141

lost any movable or has been unlawfully deprived thereof, may recover it from
the person in possession of the same.
If the possessor of a movable lost or of which the owner has been
unlawfully deprived, has acquired it in good faith at a public sale, the owner
cannot obtain its return without reimbursing the price paid therefor.
Article 1505. Subject to the provisions of this Title, where goods are sold
by a person who is not the owner thereof, and who does not sell them under
authority or with the consent of the owner, the buyer acquires no better title
to the goods than the seller had, unless the owner of the goods is by his
conduct precluded from denying the seller’s authority to sell.
Nothing in this Title, however, shall affect:
(1) The provisions of any factors’ acts, recording laws, or any other
provisions of law enabling the apparent owner of goods to dispose
of them as if he were the true owner thereof;
(2) The validity of any contract of sale under statutory power of sale or
under the order of a court of competent jurisdiction;
(3) Purchases made in a merchant’s store, or in fairs, or markets, in
accordance with the Code of Commerce and special laws.
Article 1133. Movables possessed through a crime can never be acquired
through prescription by the offender.

Article 1141. Real actions over immovables prescribe after thirty years.
This provision is without prejudice to what is established for the acquisition
of ownership and other real rights by prescription. (1963)

The prescriptive period in connection with immovables is thirty years.

However if within the thirty-year period, all the requisites for ordinary
acquisitive prescription are already present in favor of the possessor, then the
possessor shall be considered the owner of the property after 10 years of
uninterrupted, adverse, public possession of the property in the concept of an
owner in good faith. In extraordinary acquisitive prescription, if the immovable
property is adversely in the possession of the possessor for thirty years, the
right to sue prescribes with the acquisition of the title.
arts. 1142-1143

Article 1142. A mortgage action prescribes after ten years. (1964a)

art PresCriPtiOn 47
Prescription of Actions
A mortgage is an accessory contract. It is constituted to secure a debt so that
if the debtor fails to pay the principal obligation, the creditor can foreclose on
the mortgage by selling the same in a public sale or bidding and the proceeds
thereof are used to pay off the principal debt and interest if any. If there is any
deficiency, the creditor can still go against the principal debtor to collect such
deficiency. In Development Bank of the Philippines vs. Tomeldan24 where the
creditor, after extra-judicially foreclosing the property of the debtor on
September 15, 1967, filed on March 14, 1977 a civil case to claim the
deficiency, the Supreme Court rejected the contention that the action had
prescribed considering that the prescriptive period was 10 years from the time
the cause of action accrued which was on September 16, 1967, to wit:

A suit for the recovery of the deficiency after the foreclosure of a mortgage
is in the nature of a mortgage action because its purpose is precisely to
enforce the mortgage contract.
Such being the case, Article 1142 of the Civil Code is likewise applicable to the
instant case. Said provision reads: “Art.
1142 . A mortgage action prescribes after ten years.”

Article 1143. The following rights, among others

specified elsewhere in this Code, are not extinguished by
prescription: (1) To demand a right of way, regulated in Article 649;

(2) To bring an action to abate a public or private nuisance. (n)

Aside from the right to demand a right of way regulated in Article 649 and the
right to bring an action to abate a public or private nuisance, there are certain
actions which do not prescribe such as an action to declare a contract null and
void,4 an action to quiet title initiated by the person having possession of the
property,5 and an action to partition a property among co-heirs.6 Prescription
does not supervene when the trust is merely an implied one7 unless expressly
. 1144

repudiated by the trustee.

Article 1144. The following actions must be brought within ten years from
the time the right of action accrues:

24
G.R. No. 51269, November 17, 1980, 101 SCRA 741; See also Caltex vs. Intermediate Appellate
Court, G.R. No. 74730, August 25, 1989, 176 SCRA 741. 4Bonanga vs. Soler, G.R. No. L-15717,
June 30, 1961, 2 SCRA 755; Ras vs. Sua,
G.R. No. L-23303, September 25, 1968, 25 SCRA 153; Garanciang vs. Garanciang,
G.R. No. L-22351, May 21, 1969, 28 SCRA 229.
48 ObligatiOns and COntraCts
Text and Cases
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment. (n)

For a contract to fall under this article, the agreement must be in writing. For
example, a purchaser of a real estate evidenced by a written contract of sale
may file a case for delivery of the property to him. Barring the applicability of
laches, the purchaser has ten years within which to file the case for delivery.
The cause of action on a written contract accrues when a breach or violation
thereof occurs.8

In Espanol vs. Philippine Veterans Administration 9 where the pension of a

veteran’s widow, which was received by her pursuant to Republic Act No. 65,
was cancelled on November 1, 1951 by the Philippine Veterans Administration
(PVA) on the basis of a doubtful administrative policy which however was
struck down as invalid on June 27, 1973 by the Supreme Court in another case,
and where the said widow, on February 25, 1974 filed a complaint against the
PVA for the collection of the said pension, the Supreme Court rejected the
contention of the PVA that the action had prescribed by thus ruling:
The contention of appellant PVA that the action of appellee Maria U.
Espanol to compel the restoration of her monthly pension and that of her
children, effective from the date of cancellation on November 1, 1951, has
already prescribed, inasmuch as the same was filed more that 10 years from
the date of cancellation, is without merit.
Article 1144 of the New Civil Code provides that actions based on an
obligation created by law shall be brought within 10 years from the time
the right of action accrues. It is important to reckon the date, when the right
of action accrues, as the same is the beginning for counting the 10-year
prescriptive period.

Gallar vs. Husain, G.R. No. L-20954, May 24 1967, 20 SCRA 186.
Gerona vs. De Guzman, G.R. No. L-19060, May 26, 1964, 11 SCRA 153.
Bueno vs. Reyes, G.R. No. L-22587, April 28, 1969, 27 SCRA 1179.
Lim Tay vs. Court of Appeals, G.R. No. 126891, August 5, 1998, 97 SCAD 103, 293 SCRA 634.
G.R. No. L-44616, June 29, 1985, 137 SCRA 314.
art PresCriPtiOn 49
Prescription of Actions
. 1144

The right of action accrues when there exists a cause of action, which
consists of three elements, namely: a) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created; b) an
obligation on the part of such defendant to respect such right; and c) an act
or omission on the part of such defendant violative of the right of the
plaintiff. x x x It is only when the last element occurs or takes place that it
can be said in law that a cause of action has arisen. x x x
The appellee cannot be said to have a cause of action, in compelling the
appellant to continue paying her monthly pension on November 1, 1951,
because appellant’s act of cancellation, being pursuant to an administrative
policy, cannot be considered a violation of appellee’s right to receive her
monthly pension. x x x x
It is only when this Court declared invalid the questioned administrative
policy in the Del Mar vs. Philippine Veterans Administration, x x x,
promulgated on June 27, 1973, can the appellee be said to have a cause of
action to compel appellant to resume her monthly pension; because it is at
that point in time, when the presumption of legality of the questioned
administrative policy had been rebutted and thus it can be said with
certainty that appellant’s act was in violation of appellee’s right to receive
her monthly pension.
The 10-year prescriptive period, therefore, should be counted from June
27, 1973 when the case of Del Mar vs. The Philippine Veterans
Administration, x x x, was promulgated, and not from November 1, 1951,
the date of the cancellation by appellant of appellee’s pension. The action
of appellee, which was brought on February 25, 1974, is therefore well
within the 10- year prescriptive period.
In Huang vs. Court of Appeals,25 the Supreme Court ruled that an implied trust,
whether a constructive or resulting trust, is normally not subject to prescription.
However, if the trustee openly and adversely repudiates the trust, it is only from
that time when prescription can set in. The Supreme Court said:
The prescriptive period is ten (10) years from the repu-
diation of the trust. It is ten (10) years because just as a resulting trust is an
offspring of the law, so is the corresponding obligation to convey the
property and the title thereto to the true owner. In this context, and vis-a-
vis prescription, Art. 1144 of the New Civil Code, which is the law
applicable provides: “The following actions must be brought within 10
years from the time the right of action accrues: (a) Upon a written contract;
(b) Upon obligations

25
G.R. No. L-108525, September 13, 1994, 55 SCAD 289, 236 SCRA 420.
50 ObligatiOns and COntraCts art
Text and Cases
. 1145

created by law; (c) Upon a judgment.”

Thus, the reckoning point is repudiation of the trust by the trustee because
from that moment his possession becomes adverse, which in the present
case gave rise to a cause of action by Dolores against the Huang spouses.
However, before the period of prescription may start, it must be shown that:
(a) the trustee has performed unequivocal acts of repudiation amounting to
an ouster of the cestui que trust; (b) such positive acts of repudiation have
been made known to the cestui que trust; and (c) the evidence thereon is
clear and conclusive.

Article 1145. The following actions must be commenced within six years:
(1) Upon an oral contract;
(2) Upon a quasi-contract. (n)

An action based on an oral contract must be commenced within six years from
the time the cause of action accrues. For example, A orally borrowed P2,000
from B to be paid on June 1, 1997 and B failed to pay on such date despite
demand from A. A has six years from June 1 , 1997 to file the case for
collection against B.

Certain lawful, voluntary and unilateral acts give rise to the juridical relation
of quasi-contracts to the end that no one shall be unjustly enriched or benefited
at the expense of another. 26 Quasicontracts are governed by Book IV, Title
XVII, Chapter 1 of the 1950 Civil Code. One quasi-contract provided in the
Civil Code is solutio indebiti. This occurs if something is received when there
is no right to demand it, and it has been unduly delivered through mistake,
thereby giving rise to the obligation to return what has been unduly received. 27
In Municipality of Opon vs. Caltex, 28 where a taxpayer mistakenly paid an
amount which is not due, the Supreme Court, citing Gonzalo Puyat & Sons vs.
City of Manila,29 ruled that the prescriptive period was six years as it is a quasi-
contract of solutio indebiti under the Civil Code.

Article 1146. The following actions must be instituted within four years:

26
Article 2142 of the 1950 Civil Code.
27
Article 2154 of the 1950 Civil Code.
28
G.R. No. L-21853, February 26, 1968, 22 SCRA 755.
29
G.R. No. L-17447, April 30, 1963, 7 Phil. 970.
art PresCriPtiOn 51
Prescription of Actions
. 1146

(1) Upon an injury to the rights of the plaintiff;

(2) Upon quasi-delict. (n)

In Virgilio Callanta vs. Carnation Phil., Inc.,30 an employee was unjustly and
illegally dismissed by his employer. He filed a case with the National Labor
Relations Commissions (NLRC) for illegal dismissal, reinstatement and for
back wages three years, one month and five days from the time he was illegally
dismissed. The NLRC dismissed the case on the ground that it had prescribed
pursuant to the Labor Code which provided that such claim should be filed
within 3 years. The Supreme Court overruled the NLRC because the
prescriptive period is four years as the case involved “injury to the rights of the
plaintiff,” thus:
As this Court stated in Bondoc vs. People’s Bank and Trust Co., when a
person has no property, his job may possibly be his only possession or
means of livelihood, hence he should be protected against any arbitrary and
unjust deprivation of his job. Unemployment, said the Court in Almira vs.
B.F. Goodrich Philippines, brings ‘untold hardships and sorrows on those
dependent on the wage earners.’ The misery and pain attendant on the loss
of jobs thus could be avoided if there be acceptance of the view that under
all circumstances of this case, petitioners should not be deprived of their
means of livelihood.
It is a principle in American jurisprudence, which undoubtedly, is well-
recognized in this jurisdiction that one’s employment, profession, trade or
calling is a “property right,” and the wrongful interference therewith is an
actionable wrong. The right is considered to be property within the
protection of a constitutional guaranty of due process of law. Clearly then,
when one is arbitrarily and unjustly deprived of his job or means of
livelihood, the action instituted to contest the legality of one’s dismissal
from employment constitutes, in essence, an action predicated “upon injury
to the rights of the plaintiff,” as contemplated under Art. 1146 of the New
Civil Code, which must be brought within four [4] years.
In the instant case, the action for illegal dismissal was filed by petitioners
on July 5, 1982, or three [3] years, one [1] month and five [5] days after
the alleged effectivity dated of his dismissal on June 1, 1979 which is well-
within the four [4]-year prescriptive period under Article 1146 of the New
Civil Code. x x x
More so, in the instant case, where the delay in filing the

30
G.R. No. L-70615, October 28, 1986, 145 SCRA 268; See also Nemenzo vs.
Sabillano, G.R. No. L-20977, September 7, 1968, 25 SCRA 1.
52 ObligatiOns and COntraCts art
Text and Cases
. 1146

case was with justifiable cause. The threat to petitioner that he would be
charged with estafa if he filed a complaint for illegal dismissal, which
private respondent did after all on June 22, 1981, justifies the delayed filing
of the action for illegal dismissal with the Regional Office No. X, MOLE
on July 5, 1982. Laches will not in that sense strengthen the cause of private
respondent. Besides, it is deemed waived as it was never alleged before the
Labor Arbiter nor the NLRC.
Article 2176 of the Civil Code provides that “whoever by act or omission
causes damage to another, there being fault or negligence, is obliged to pay for
the damage done. Such fault or negligence, if there is no pre-existing
contractual relation between the parties, is called quasi-delict.” Quasi-delict is
governed by Book IV, Title XVII, Chapter 2 of the 1950 Civil Code. An
example of a quasi-delict is the fault or negligence resulting in the liability of
manufacturers and processors of foodstuffs, drinks, toilet articles and similar
goods. They shall be liable for death or injuries caused by any noxious or
harmful substances used, although no contractual relations exists between them
and the consumer. 31 In Coca-Cola Bottlers Philippines, Inc. vs. Court of
Appeals 32 where a complaint filed on May 7, 1990 makes reference to the
reckless and negligent manufacture of “adulterated food items intended to be
sold for public consumption” in that the soft drinks sold to the private
respondent “contained fiber-like matter and other foreign substances or
particles” causing damage to the private respondent’s business when he sold
sometime in August 1989 the soft drinks to students who suffered sickness, the
Supreme Court rejected the contention of the petitioner that the action had
prescribed on the ground that the prescriptive period to file such action was six
months from the delivery of the thing sold pursuant to Article 1571 of the Civil
Code, and ruled that the allegations in the complaint clearly established a
quasi-delict which prescribes in four (4) years pursuant to Article 1146 of the
New Civil Code. In the case of Diocosa vs. Sarabia,18 the Supreme Court held
that:
an action based on quasi-delict is governed by Article 1150 of the Civil
Code as to the question of when the prescriptive period of four years shall
begin to run, that is, “from the day (the action) may be brought,” which
means from the day the quasi-delict occurred or was committed.
In Kramer, Jr. vs. Court of Appeals,19 it was held that an action

31
Article 2187 of the 1950 Civil Code.
32
G.R. No. L-110295, October 18, 1993, 45 SCAD 390, 227 SCRA 292. 18G.R. No. L-10542, July
31, 1958, cited in Capuno vs. Pepsi Cola Bottling Company, G.R. No. L-19331, April 30, 1965,
13 SCRA 658; See also Corpuz vs. Paje, G.R. No. L-26737, July 31, 1969, 28 SCRA 1062.
art PresCriPtiOn 53
Prescription of Actions
. 1147 33

for damages based on quasi-delict resulting from the collision of two vessels
has a prescriptive period of four years from the day of the collision and
the aggrieved party need not wait for a determination by an administrative
body like a Board of Marine Inquiry, that the collision was caused by the
fault or negligence of the other party before he can file an action for
damages. x x x Immediately after the collision the aggrieved party can seek
relief from the courts by alleging such negligence or fault of the owners,
agents or personnel of the other vessel.
In Allied Banking Corporation vs. Court of Appeals,34 where in his third-party
complaint filed on June 17, 1987, the debtor alleged that “by reason of the
tortious interference by the Central Bank with the affairs of GENBANK,
private respondent was prevented from performing his obligation under the
loan such that he should not be held liable,” and where the “tortious
interference” referred to was the Central Bank’s ordering GENBANK on
March 25, 1980 to desist from doing business, the Supreme Court ruled that
such third party complaint was barred by prescription, because quasi-delicts
prescribe after four years from the time the cause of action accrues, which in
this case was on March 25, 1980.

Article 1147. The following actions must be filed

within one year:
(1) For forcible entry and detainer;
(2) For defamation. (n)

In Vda. De Borromeo vs. Pogoy, 35 the Supreme Court explained that the
prescriptive period for forcible entry and detainer is long enough to comply
with prerequisites provided by law for the filing of such case, thus:
Unable to secure a reconsideration of said order, petitioner came to this
court through this petition for certiorari. In both his comment and
memorandum, private respondent admitted not having availed himself of
the barangay conciliation process, but justified such omission by citing
paragraph 4, Section 6 of PD 1508 which allows the direct filing of an
action in court where the same may otherwise be barred by the Statute of
Limitations,

33
G.R. No. L-83542, October 13, 1989, 178 SCRA 518; see also Paulan vs. Sarabia, G.R. No. L-
10542, July 31, 1952.
34
G.R. No. 85868, October 13, 1989, 178 SCRA 526.
35
G.R. No. L-63277, November 29, 1983, 126 SCRA 217.
54 ObligatiOns and COntraCts art
Text and Cases
. 1148

as applying to the case at bar.

The excuse advanced by private respondent is unsatisfactory. Under
Article 1147 of the Civil Code, the period for filing actions for forcible
entry and detainer is one year, and this period is counted from demand to
vacate the premises.
In the case at bar, the letter-demand was dated August 28, 1982, while the
complaint for ejectment was filed in court on September 16, 1982. Between
these two dates, less than a month had elapsed, thereby leaving at least
eleven (11) full months of the prescriptive period provided for in Article
1147 of the Civil Code. Under the procedure outlined in Section 4 of PD
1508, the time needed for the conciliation proceeding before the Barangay
Chairman and the Pangkat should take no more than 60 days. Giving
private respondent nine (9) months ample time indeed — within which to
bring his case before the proper court should conciliation efforts fail. Thus,
it cannot be truthfully asserted, as private respondent would want us to
believe, that his case would be barred by the Statute of Limitations if he
had to course his action to the Barangay Lupon.

Article 1148. The limitations of action mentioned in Articles 1140 to 1142,

and 1144 to 1147 are without prejudice to those specified in
other parts of this Code, in the Code of
Commerce, and in special laws. (n)

The phrase “without prejudice” means that, in proper cases, the prescriptive
period in this chapter may be availed of notwithstanding other special
provisions in other parts of the Civil Code, in the Code of Commerce and in
special laws. Thus, in the case of Virgilio Callanta vs. Carnation Phil., Inc.,36
the Supreme Court applied Article 1146 even though the claim falls under the
prescriptive period provided for in the Labor Code because the illegal and
unlawful dismissal suffered by the plaintiff in the said case falls within the
ambit of “injury to the rights of the plaintiff,” thus:
Even on the assumption that an action for illegal dismissal falls under the
category of “offense” or “money claims” under Articles 291 and 292,
Labor Code, which provide for a three-year prescriptive period, still a strict
application of said provisions will not destroy the enforcement of
fundamental rights of the employees. As a statutory provision on limitation
of actions, Articles 291 and 292 go to matters of remedy and not to the
destruction of fundamental rights. As a general rule, a statute of limitation
extinguishes the remedy only. Although the remedy

36
G.R. No. L-70615, October 28, 1986, 145 SCRA 286.
55 ObligatiOns and COntraCts
Text and Cases
arts. 1149-1150

to enforce a right may be barred, that right may be enforced by some other
available remedy which is not barred.

Article 1149. All other actions whose periods are not

fixed in this Code or in other laws must
be brought within five years from the time the right of action
accrues. (n)
Article 1150. The time for prescription for all kinds of actions, when there
is no special provision which ordains otherwise, shall be counted from the
day they may be brought. (1969)

In Tolentino vs. Court of Appeals,37 the present spouse of a divorced man filed
an action in 1971 against the former spouse to prevent the latter from using the
surname of the husband. The present spouse knew since 1951 that the former
spouse had been using the surname of the husband. The lower court issued a
decision in favor of the present spouse but the Supreme Court reversed the
decision on the ground, among others, that the action had prescribed.
Pertinently, the Supreme Court said:
The petitioner’s contention that her cause of action is imprescriptible is
without merit. In fact, it is contradictory to her own claim. The petitioner
insists that the use by respondent Consuelo David of the surname Tolentino
is a continuing actionable wrong and states that every use of the surname
constitutes a new crime. The contention cannot be countenanced because
the use of a surname by a divorced wife for a purpose not criminal in nature
is certainly not a crime. The rule on prescription in civil cases such as the
case at bar is different. Art. 1150 of the Civil Code provides: “The time for
prescription for all kinds of actions, when there is no special provision
which ordains otherwise, shall be counted from the day they may be
brought.”
All actions, unless an exception is provided, have a prescriptive period.
Unless the law makes an action imprescriptible, it is subject to bar by
prescription and the period of prescription is five (5) years from the time
the right of action accrues when no other period is prescribed by law (Civil
Code, Art. 1149). The Civil Code provides for some rights which are not
extinguished by prescription but an action as in the case before us is not
among them. Neither is there a special law providing for imprescriptibility.
Moreover, the mere fact that the supposed violation of the petitioner’s right may
be a continuous one does not change the

37
G.R. No. L-41427, June 10, 1988, 162 SCRA 66.
56 ObligatiOns and COntraCts art
Text and Cases
arts. 1151-1152

principle that the moment the breach of right or duty occurs, the right of
action accrues and the action from that moment can be legally instituted
(Soriano vs. Sternberg, 41 Phil. 210).
The respondent Court of Appeals, on the other hand, is of the opinion that
the period of prescription should be four (4) years, since it appears to be an
action based on quasi-delict. Whatever the period, it cannot be denied that
the action has long prescribed whether the cause accrued on April 21, 1945
when the petitioner and Arturo Tolentino got married, or on August 30,
1950, when the present Civil Code took effect, or in 1951 when Constancia
Tolentino came to know of the fact that Consuelo David was still using the
surname Tolentino. It is the legal possibility of bringing the action which
determines the starting point for the computation of the period of
prescription (Espanol v. Phil. Veterans Administration, 137 SCRA 314).
The petitioner should have brought legal action immediately against the
private respondent after she gained knowledge of the use by the private
respondent of the surname of her former husband. The action was brought
only in November 23, 1971 with only verbal demands in between and an
action to reconstitute the divorce case. The petitioner should have filed her
complaint at once when it became evident that the private respondent
would not accede to her demands instead of waiting for twenty (20) years.
As aptly stated by the Court of Appeals, “where the plaintiff fails to go to
the court within the prescriptive period, he loses his cause, but not because
the defendant had acquired ownership by adverse possession over his name
but because the plaintiff’s cause of action had lapsed thru the statute of
limitations.”

Article 1151. The time for the prescription of actions which have for their
object the enforcement of obligations to pay principal with interest or annuity
runs from the last payment of the annuity or of the interest. (1970a)

Article 1152. The period for prescription of actions to demand the

fulfillment of obligations declared by a
judgment commences from the time the
judgment became final. (1971)

It is only when the judgment becomes final that the same can be effectively
enforced. Hence, the prescriptive period is not counted from the time the
judgment was rendered but from the time it became final. 24 In Philippine
National Bank vs. Bondoc,25 the Supreme Court stated that “the purpose of the
revival of judgment is to give a creditor a new right of enforcement from the
date of revival” and “the rule seeks to protect judgment creditors from wily and
 PresCriPtiOn 57Prescription of Actions
unscrupulous debtors who, in order to evade attachment and execution,
cunningly
. 1153

conceal their assets and wait until the statute of limitations set in.”

Article 1153. The period for prescription of actions to demand accounting

runs from the day the persons who should render the same cease in their
functions.
The period for the action arising from the result of the accounting runs from
the date when said result was recognized by agreement of the interested
parties. (1972)

In Dira vs. Tanega26 where one of the partners demanded payment of the
accountabilities of another partner who ignored such demand, and where the
demanding partner, since 1947 and after having been ignored by the other
partner, managed, operated and administered the affairs and assets of the
partnership not as a partner but as absolute owner of the same without any
participation from the delinquent partner, the Supreme Court ruled that the
action filed on February 10, 1961 by the delinquent partner-appellant against
the other partner-appellee for an accounting of his share in the partnership had
already prescribed, thus:
Under these circumstances, it would be giving premium to inaction and
indifference to still hold that appellant could sue appellee, almost fourteen
years after the latter, with prior notice to the former, had openly and
publicly taken over exclusive control of the partnership business as if it
were his own and only a little short of ten years after the expiration of the
stipulated term of the partnership. His claims for salaries accrued after each
month they were unpaid. Whether we assume that these claims lost basis
in 1947 when appellee took over the business of the printing press and the
newspaper or in 1951, upon the expiration of the term of the agreements,
by all standards, these claims had already prescribed when the present suit
was filed. On the other hand, under Article 1153 of the Civil Code, a
demand for “accounting runs from the day the persons who should render
the same ceases in their functions,” which in this case was in 1947, when
the appellee began to operate the business as exclusively his own. Again,
inasmuch as the longest period in the chapter on prescription of the Civil
Code is ten years, it is evident that appellant’s action for accounting is
already barred. The same is true with the claim for rentals and recovery of
proportional ownership of the printing equipment and accessories, as to
which,
Philippine National Bank (PNB) vs. Monroy, G.R. No. L-19374, June 30, 1964, 11 SCRA 433.
G.R. No. L-20236, July 30, 1965, 14 SCRA 770.
G.R. No. L-23232, June 17, 1970, 33 SCRA 479.
58 ObligatiOns and COntraCts art
Text and Cases
. 1154

appellant’s period to bring his actions accrued also in 1947, fourteen years before
this suit was filed.

Article 1154. The period during which the obligee was prevented by a
fortuitous event from enforcing his right is not reckoned against him. (n)

In Provident Savings Bank vs. Court of Appeals, 38 a loan was granted to

debtors by a bank collateralized by their properties. Thereafter the bank was
placed under receivership in 1972 and prohibited by the Monetary Board from
transacting business including the foreclosure of properties. For failure of the
debtors to pay, the bank informed the debtors that the property might be sold
at public auction. This was not done because the debtors promised to pay.
However the debtors sold the property to a purchaser who assumed the
mortgage. In 1981, the receivership was lifted. Subsequently, the purchaser
informed the bank that he is a judgment creditor of the original debtors, that
the property was sold to him, and that he was willing to pay the indebtedness
to release the mortgage. In rejecting the notion that the foreclosure of the
mortgage might have already prescribed, the Supreme Court ruled:
Having arrived at the conclusion that a foreclosure is part of a bank’s
business activity which could not have been pursued by the receiver then
because of the circumstances discussed in the Central Bank case, we are
thus convinced that the prescriptive period was legally interrupted by
fuerza mayor in 1972 on account of the prohibition imposed by the
Monetary Board against petitioner from transacting business, until the
directive of the Board against petitioner from transacting business was
nullified in 1981. Indeed, the period during which the obligee was
prevented by a caso fortuito from enforcing his right is not reckoned
against him (Article 1154, New Civil Code). When prescription is
interrupted, all the benefits acquired so far from the possession cease and
when prescription starts anew, it will be entirely a new one. This concept
should not be equated with suspension where the past period after
prescription is resumed (4 Tolentino, Commentaries and Jurisprudence on
the Civil Code of the Philippines, 1991 ed., pp. 18-19). Consequently, when
the closure of petitioner was set aside in 1981, the period of ten years within
which to foreclose under Article 1142 of the New Civil Code began to run
again and, therefore, the action filed on
August 21, 1986 to compel petitioner to release the mortgage

38
G.R. No. L-97218, May 17, 1993, 222 SCRA 125.
art PresCriPtiOn 59
Prescription of Actions
. 1154

carried with it the mistaken notion that petitioner’s own suit for foreclosure
had prescribed. What exacerbates the situation is the letter of private
respondent requesting the petitioner on August 6, 1986 that private
respondent be allowed to pay the loan secured by the mortgage as a result
of the Deed of Sale executed by the Guarins in his favor on July 10, 1986
(pp. 36-37, Rollo). In point of law, this written communication is
synonymous to an express acknowledgment of the obligation and had the
effect of interrupting the period of prescription for the second time (Article
1155, New Civil Code; Osmeña vs. Rama, 14 Phil. 99 [1909]; 4 Tolentino,
supra at p. 50). And this piece of document necessarily estops private
respondent from setting up prescription vis-a-vis his unfounded
supposition that acknowledgment of the debt is of no moment because the
right of petitioner to foreclose had long prescribed in 1977 (p. 13, Petition;
p. 7, Comment; pp. 19 and 58, Rollo).
In Tan vs. Court of Appeals39 where, during the Marcos Regime, the petitioner
was arrested and detained for various offenses, and where he sold his shares in
a particular bank in 1977 and sought to recover them by filing a suit for
reconveyance only in 1987, the Supreme Court ruled that the action had already
prescribed and rejected his claim of legal standing based on fortuitous event,
thus:
We cannot accept the petitioners’ contention that the period during which
authoritarian rule was in force had interrupted prescription and that the
same began to run only on February 25, 1986, when the Aquino
government took over. It is true that under Article 1154:
“Article 1154. The period during which the obligee was prevented by
fortuitous event from enforcing his right is not reckoned against him.”
Fortuitous events have the effect of tolling the period of prescription.
However, we can not say, as a universal rule, that the period from
September 21, 1972 through February 25, 1986 involves a force majeure.
Plainly, we can not box in the “dictatorial” period within the term without
distinction, and without, by necessity, suspending all liabilities, however
demandable, incurred during that period, including perhaps those ordered
by this Court to be paid. While this Court is cognizant of acts of the last
regime, especially political acts, that might have indeed precluded the
enforcement of liability against that regime and its minions, the Court is
not inclined to make quite a
. 1154

39
G.R. No. 90365, March 18, 1991, 195 SCRA 355.
60 ObligatiOns and COntraCts art
Text and Cases
sweeping pronouncement, considering especially the unsettling effects
such a pronouncement is likely to bring about. It is our opinion that claims
should be taken on a case-to-case basis. This selective rule is compelled,
among others, by the fact that not all those imprisoned or detained by the
past dictatorship were true political oppositionists, or, for that matter,
innocent of any crime or wrongdoing. Indeed, not a few of them were
manipulators and scoundrels.
The petitioner Vicente Tan claims that from June 1974 through December,
1977, he was under detention; that sometime in August, 1977, the Central
Bank lodged six criminal cases against him, along with several others, with
Military Commission No. 5 in connection with alleged violation of the
Central Bank Act, falsification of documents, and estafa, that while in
detention, he was made to execute various agreements in which he
conveyed the shares of stock in question; and that “[u]nder the foregoing
factual setting . . . it would be foolhardy on the part of petitioners to institute
. . . [any] action for reconveyance . . .”
The records show, however, that although under detention, Vicente Tan:
1. Commenced, in July, 1976, Civil Case No. 103359 of the defunct
Court of First Instance of Manila, to mandatorily enjoin the Central
Bank as receiver of Continental Bank, to takeover from ‘NISA’ the
control and management and assets of Vicente Tan and his affiliate
corporations;
2. Was ably represented by competent counsel, Atty. Norberto
Quisimbing, throughout;
3. Filed with this Court a petition to stop the trial of the criminal cases
pending against him with the Military Commission No. 5 and
succeeded in obtaining a temporary restraining order.
On top of those facts above-mentioned, he:
1. Asked the Court of First Instance to order the Central Bank
to proceed to rehabilitate Continental Bank by extending to it
such emergency loans and advances as may be needed for its
rehabilitation . . .
2. Wrote, on July 15, 1977, the Central Bank expressing his
approval in the reopening and rehabilitation of Continental
Bank.
We are, therefore, convinced, from Vicente Tan’s very behavior, that
detention was not an impediment to a judicial challenge, and the fact of the
matter was that he was successful
art. 1155 PresCriPtiOn 61
Prescription of Actions

in obtaining judicial assistance. Under these circumstances, we can not

declare detention, or authoritarian rule for that matter, as a fortuitous event
insofar as he was concerned, that interrupted prescription.
To be sure, there is nothing in the petition which would remotely suggest,
assuming that Vicente Tan could not have freely and intelligently acted
during the period of martial rule, that his co-petitioners Victan & Company,
Inc., Transworld Investment Corporation, First International Investment
Company, Inc., Far East Petroleum & Minerals Corporation, and
Philcontrust International Corporation, could not have similarly acted
during the martial law regime and shortly thereafter. As far as they are
therefore concerned, the Court has even better reason to invoke
prescription because none of them acted and none now claims that it could
not have acted.

Article 1155. The prescription of actions is interrupted when they are

filed before the court, when there is a
written extra-judicial demand by the creditors, and when there is any
written acknowledgment of the debt by the debtor. (1973a)

In Ledesma vs. Court of Appeals,40 the Supreme Court had occasion to explain
the effect on the prescriptive period of an extrajudicial demand, an
acknowledgment of a debt by the debtor, and the filing of a case in court. The
case is as follows:
Petitioner had filed a motion for reconsideration of the Court’s resolution
of March 24, 1993 which denied his petition for review on certiorari for
failure to sufficiently show that respondent Court of Appeals had
committed any reversible error in its questioned judgment.
On August 21, 1980, private respondent Rizal Commercial Banking
Corporation filed Civil Case No. 38287 in the then Court of First Instance
of Rizal against petitioner to enforce the terms of Trust Receipt Agreement
No. 7389 executed by them on April 1, 1974 but which petitioner had failed
to comply with. As summons could not be served on the latter, said case
was dismissed without prejudice on March 3, 1981. On December 2, 1988,
private respondent bank instituted Civil Case No. 88-2572 in the Regional
Trial Court of Makati, Metro Manila, Branch 133, against petitioner on the
same cause of action and subject matter.
Petitioner’s motion to dismiss on the ground of prescription was denied and
judgment was rendered in favor of private respondent by the court a quo
ordering petitioner to pay private respondent P168,000.00 with interest thereon
at 12% per annum from December 2, 1988 until full payment of the obligation,
P16,800.00 as attorney’s fees, and costs of suit. Said judgment was affirmed by
respondent Court in CA-G.R. CV No. 2906 in its decision promulgated on

40
G.R. No. L-106646, June 30, 1993, 42 SCAD 975, 224 SCRA 175.
62 ObligatiOns and COntraCts art. 1155
Text and Cases

January 7, 1992, and petitioner’s motion for reconsideration thereof was denied
in a resolution dated August 6, 1992.
Petitioner’s petition for review on certiorari of the said judgment was
denied in our aforesaid resolution, hence its present motion for
reconsideration, dated May 5, 1993. Contending that the second action
filed by private respondent bank had already prescribed, petitioner invokes
the rulings in Vda. de Nator, et al. vs. Court of Industrial Relations, et al.
and Fulton Insurance Co. vs. Manila Railroad Co., et al., and invites us “to
give a second look at the apparently conflicting or divergent
jurisprudence.”
Article 1155 of the Civil Code provides that the prescription of an action,
involving in the present case the 10-year prescriptive period for filing an
action on a written contract under Article 1144(1) of the Code, is
interrupted by: (a) the filing of an action, (b) a written extrajudicial demand
by the creditor, and (c) a written acknowledgment of the debt by the debtor.
The effects of the last two instances have already been decided by this
Court, the rationale therein should necessarily apply to the first.
The matter of the interruption of the prescriptive period by reason of a
written extra-judicial demand by the creditor was decided in Overseas of
Manila vs. Geraldez, et al., in this wise:
“x x x. The interruption of the prescriptive period by written extra-judicial
demand means that the said period would commence anew from the receipt
of the demand. That is the correct meaning of interruption as distinguished
from mere suspension or tolling of the prescriptive period.
xxx
“A written extrajudicial demand wipes out the period that has already elapsed
and starts anew the prescriptive period. x x x.
xxx
“That the same view to the meaning of interruption was adopted in
Florendo vs. Organo, 90 Phil. 483, where it was ruled that the interruption
of the ten-year prescriptive period through a judicial demand means that
the full period of prescription commenced to run anew upon the cessation
of the suspension. When prescription is interrupted by a judicial demand,
the full time for the prescription must be reckoned from the cessation of
the interruption. x x x.”
The interruption of the prescriptive period by reason of a written
acknowledgment of the debt by the debtor was dealt with in Philippine
National Railways vs. National Labor Relations Commission, et al., thus:
“Article 1155 of the Civil Code provides that the prescription of actions is
interrupted inter alia, when there is any written acknowledgment of the
debt by the debtor.” This simply means that the period of prescription,
when interrupted by such a written acknowledgment, begins to run anew;
art. 1155 PresCriPtiOn 63
Prescription of Actions

and whatever time of limitation might have already elapsed from the
accrual of the cause of action is thereby negated and rendered inefficacious.
xxx
“x x x. The effect of the interruption spoken of in Article 1155 is to renew
the obligation, to make prescription run again from the date of the
interruption. x x x”
Based on the aforecited cases, Article 1155 has twice been interpreted to
mean that upon the cessation of the suspension of the prescriptive period,
the full period of prescription commences to run again. Petitioner, on the
other hand, insists that in case of the filing of an action the prescriptive
period is merely tolled and continues to run again, with only the balance of
the remaining period available for the filing of another action. This
postulation of petitioner, if we are to adopt it, would result in an absurdity
wherein Article 1155 would be interrupted in two different ways, i.e., the
prescriptive period interrupted in case of an extrajudicial demand and a
written acknowledg- ment of a debt, but it is merely tolled where an
action is filed in court.
In Vda. de Nator, it was held that:
“x x x The filing of the case with the CFI arrested the period of prescription
(Art. 1155, NCC), and the interruption of said period lasted until the time
that the dismissal for lack of jurisdiction became final. When prescription
is interrupted by a judicial demand, the full time for the prescription must
be reckoned from the cessation of the interruption’ x x x. The whole period
during which the case had been pending cannot be counted for arriving at
the prescriptive period. In other words, the running of the period of
prescription in this particular case was interrupted on August 6, 1953, when
the case in the CFI was filed and began to run again on August 30, 1958,
when the same Court had dismissed the case. As the complaint was filed
with the CIR on December 5, 1959, the action had not yet prescribed.”
This case obviously appears to have made conflicting statements since it
proceeds upon a certain premise but arrives at a different conclusion.
Hence, we cannot agree that the statements therein sufficiently support the
thesis of petitioner.
The case of Fulton Insurance Company is not clear either on the matter of
the interruption of the prescriptive period where an action is filed in court.
It was there held that:
“There are two school(s) of thought as to the legal effect of the cessation
of the interruption by an intervening action upon the period of prescription.
There is the view expressed and perhaps, not without reasons, that the full
period of prescription should start to run anew, reckoned from the date of
the cessation of the interruption. The contrary view is, that the cessation of
the interruption merely tolls the running of the remaining period of
prescription, deducting from the full period thereof the time that has
already elapsed prior to the filing of the intervening action. Nevertheless,
64 ObligatiOns and COntraCts art. 1155
Text and Cases

all discussion on this point is academic; considered in the light of either

view, We find that the second action is not barred.”
In the aforesaid case, the defendant therein moved for the dismissal of the
second case alleging that the filing of the first case neither tolled nor
interrupted the running of the pres-criptive period. This Court ruled that the
filing of the first action interrupted the running of the period, and then
declared that at any rate, the second action was filed within the balance of
the period remaining. It concluded that the issue of whether the filing of
the action merely tolled or it actually interrupted the running of the
prescriptive period was moot and academic because, in either case, the
second action was still filed within the prescriptive period. Consequently,
the Fulton case cannot also sustain the thesis of petitioner.
On the foregoing considerations, we are convinced and so hold that the
correct interpretations of Article 1155 of the Civil Code are reflected in and
furnished by the doctrinal pronouncements in Overseas Bank of Manila
and Philippine National Railways Company, not only because they are later
in point of time but because the issue is squarely resolved in a decisive and
logical manner therein. Petitioner’s submission would result in a bifurcated
interpretation of Article 1155, aside from the irrational conclusion that a
judicial action itself cannot produce the same result on the prescriptive
period as a mere extra-judicial demand or an acknowledgment of the debt.
Accordingly, petitioner having failed to adduce any cogent reason or
substantial argument to warrant a reconsideration of our resolution of
March 24, 1993, the present motion is hereby DENIED with FINALITY.
In Cabrera vs. Tiano30 where the sale of the real property was made on July 2,
1947 and where the action was filed on June 20, 1957 but the summons to the
defendant was only served to him on July 2, 1957, the Supreme Court rejected
the contention that the action had already prescribed to wit:
When the sale of the property took place on July 2, 1947, the ten (10)-year
period within which to file the action had not yet elapsed on June 20, 1957,
when the complaint was presented. While it is true that the sale in question
had taken place before the effectivity of the new Civil Code and the law
then on matter of prescription was Act No. 190, said law, however,
contained no specific provision on the interruption of the prescriptive
period; and the established rule then, as it is the rule now, is that the
commencement of the suit prior to the expiration of the applicable
limitation period, interrupts the running of the statute, as to all parties to
the action (34 Am. Jur., Sec. 247, pp. 202-203; Peralta, et al. vs. Alipio,
G.R. No. L-8273, Oct. 24, 1955). The fact that summons was only served
on defendant on July 2, 1957, which incidentally and/or coincidentally was
the end of the ten (10)-year period, is of no moment, since civil actions are
deemed commenced from the date of the filing and docketing of the
complaint with the Clerk of Court, without taking into account the issuance
and service of summons (Sotelo vs. Dizon, et al., 67 Phil. 573). The
art. 1155 PresCriPtiOn 65
Prescription of Actions

contention that the period was not interrupted until after defendant received
the summons is, therefore, without legal basis.
In the case of Olympia International, Inc. vs. Court of Appeals,31 the Supreme
Court pertinently ruled that:
it is equally important to note that the right to file a new action in this case
has long prescribed, for while a civil action stops the running of the statute
of prescription or limitation, its dismissal or voluntary abandonment by the
plaintiff leaves the parties in exactly the same position as though no action
had been commenced at all. The commencement of an action, by reason of
its dismissal or abandonment, takes no time out of the period of
prescription.
In Philippine National Bank vs. Osete,32 the Supreme Court ruled that under
Article 1155
not all acts of acknowledgment of a debt interrupt prescription. To produce
such effect, the acknowledgment must be “written” so that payment, if not
coupled with a communication signed by the payor, would not interrupt the
running of the period of

G.R. No. L-17299, July 31, 1963, 8 SCRA 542.

prescription.
In Ramos vs. Condez,33 where the defendant on June 25, 1952 sold to the
plaintiff a particular land and where the same defendant on November 10,
1956, upon demand by the plaintiff, recognized the sale and promised to
deliver the property, the Supreme Court rejected the contention that the filing
of the case had already prescribed by ruling:
Under Article 1144 of the Civil Code (new), an action upon a written
contract “x x x must be brought within 10 years from the time the cause of
action accrues.” There is no denying that, in the instant case, the plaintiffs’
cause of action, under the deed of absolute sale, Annex A, has accrued on
June 25, 1952, but in view of defendants’ letter, dated November 10, 1956,
acknowledging the validity of the deed of absolute sale and promising to
comply with their commitments as embodied in the deed of sale that they
will deliver the land which they have sold to the plaintiffs, the running of
the period of limitation of action was interrupted on that date, November
10, 1956. Considering that the action was filed on May 22, 1963, evidently,
the cause of action has not prescribed, because it was filed within the period
of limitation of actions (Article 1155, New Civil Code).
66 ObligatiOns and COntraCts art. 1155
Text and Cases

G.R. No. L-43235, December 20, 1989, 180 SCRA 353.

G.R. No. L-24997, July 18, 1968, 24 SCRA 63.
G.R. No. L-22072, August 30, 1967, 20 SCRA 1146.
68 ObligatiOns and COntraCts Text
and Cases

BOOK IV
OBLIGATIONS AND CONTRACTS

Title I. — OBLIGATIONS
Chapter 1

GENERAL PROVISIONS

Article 1156. An obligation is a juridical necessity to give, to do or not to do.

(n)

An obligation is a “legal bond whereby constraint is laid upon a person or

group of persons to act or forbear on behalf of another person or group of
persons.” 41 In Ang Yu Asuncion vs. Court of Appeals, 42 the Supreme Court
spelled out the requirements for the existence of an obligation, thus:
The obligation is constituted upon the concurrence of the essential
elements thereof, viz.: (a) The vinculum juris or juridical tie which is the
efficient cause established by the various sources of obligations (law,
contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which
is the prestation or con-duct, required to be observed (to give, to do or not
to do); and (c) subjectpersons who, viewed from the demandability of the
obligation, are the active (obligee) and the passive (obligor) subjects.
The word “persons” in this sense is understood as comprehending both natural
and juridical persons. The prestations are to give, to do and not to do.

Article 1157. Obligations arise from:

(1) Law;

41
William F. Elliot, Commentaries on the Law of Contracts, Volume 1, 1913 edition, Indianapolis,
The Bobbs-Merrill Company, page 6, citing Anson Cont. 5, 23.
42
G.R. No. 109125, December 2, 1994, 57 SCAD 163, 238 SCRA 602.

68
 . 1158

(2) Contracts;
(3) Quasi-Contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts. (1089a)

The enumeration of the sources of obligation under this particular article is

exclusive43 which means that there can be no other sources of obligations other
than those enumerated in the article.
Obligations are civil or natural. Civil obligations give a right of action to
compel their performance. Natural obligations, not being based on positive
law 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. x x x 44

Article 1158. Obligations derived from law are not presumed. Only those
expressly determined in this Code or in special laws are demandable, and
shall be regulated by the precepts of the law which establishes them; and as
to what has not been foreseen, by the provisions of this Book. (1090)

Among the sources of obligation, the law is the most important one. It does
not depend upon the will of the parties. It is imposed by the state and is
generally imbued with some public policy considerations. Being thus imposed,
the basis of the obligation must be clear. It cannot be presumed. Hence, the
payment of taxes must be specifically directed by our tax statutes. Also, parents
and children are obliged to support each other as mandated by the provisions
of the Family Code of the Philippines. 45

The importance of law as a source of obligation is highlighted by the legal

principle that existing law enters into and forms part of a valid contract without
need for the parties expressly making reference thereto. 46 A contract is
understood to incorporate therein the provision or provisions of law specifying
the obligations of the parties under the contract.7
70 ObligatiOns and COntraCts art. 1159

43
Sagrado Orden vs. Nacoco, G.R. No. L-3756, June 30, 1952, 91 Phil. 503; Navales vs. Rios,
G.R. No. 3489, September 7, 1907, 8 Phil. 508.
44
Article 1423 of the 1950 Civil Code.
45
Article 195 of Executive Order No. 209 which took effect on August 3, 1988.
46
Lakas ng Manggagawang Makabayan (LMM) vs. Abiera, G.R. No. L-29474,
art ObligatiOns 69
General Provisions
Text and Cases

Article 1159. Obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith.
(1091a)

Contracts are another source of obligations. As defined in our law, a contract

is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service. 47 The
statutory definition is not really accurate as contracts may likewise involve
more than two persons “whereby a right is acquired by at least one of them to
an act or acts, or to forbearance, on the part of other or others.” 48 A contract
may likewise involve mutual and reciprocal obligations and duties between and
among the parties.

In characterizing the contract as having the force of law between the parties, 49
the law stresses the obligatory nature of a binding and valid agreement. Like
the law, the wilfull non-fulfillment of the provisions of a contract may involve
sanctions. The parties voluntarily impose upon themselves the performance of
certain duties and obligations which, in the event of breach or wilfull non-
performance, can prejudice the other party or parties. Whatever stipulations,
clauses, terms and conditions are included in a contract, as long as they are not
contrary to law, morals, good customs, public policy or public order, such
contract is the law between the parties.50 In Perla Compania de Seguros, Inc.
vs. Court of Appeals,5152 the insurance contract between the parties stipulated
that the insurer’s liability for all damages arising out of death or bodily injury
sustained by one person was limited to Twelve Thousand Pesos (P12,000); and
it was likewise stipulated that before the insured enters into a contract with
December 19, 1970, 31 SCRA 329; Boman Environmental Development Corporation vs. Court of
Appeals, G.R. No. L-77860, November 22, 1988, 167 SCRA 540. 7Commissioner of Internal
Revenue vs. United Lines Company, G.R. No. L-16850, May 20, 1962, 5 SCRA 175.

47
Article 1305 of the New Civil Code.
48
William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913 edition,
Indianapolis, The Bobbs-Merrill Company, page 2, citing Anson Cont. 9.
49
Lazo vs. Republic Surety & Insurance Co., G.R. No. L-27365, January 30, 1970, 31 SCRA 329;
Herrera vs. Petrophil Corporation, G.R. L-48349, December 29, 1986, 146 SCRA 385; Chua Peng
Hian vs. Court of Appeals, G.R. No. L-60015, December 19 , 1984, 133 SCRA 572.
50
Gaw vs. Intermediate Appellate Court, G.R. No. 70451, March 24, 1993, 220 SCRA 405; Pe
vs. Court of Appeals, G.R. No. 74781, March 13, 1991, 195 SCRA 137; Intestate Estate of
Ricardo P. Presbitero, Sr. vs. Court of Appeals, G.R. No. 102432, January 21, 1993, 217 SCRA
372.
51
G.R. No. 78860, May 28, 1990, 185 SCRA 741.
52
Romero vs. Court of Appeals, G.R. No. 107207, November 23, 1995, 65 SCAD
 . 1160

the injured party, the written express consent of the insurer was first to be
obtained. The Supreme Court, in ruling that the lower court could not change
the import or extent of the liability of the insurer as indicated in the insurance
contract, stated, thus:
Clearly, the fundamental principle that contracts are respected as the law
between the contracting parties finds application in this case. Thus, it was
error on the part of the trial and appellate courts to have disregarded the
stipulations of the parties and to have substituted their own interpretation
of the insurance policy. In Philippine American and General Insurance
Co., Inc. vs. Mutuc, we ruled that contracts which are the private laws of
the contracting parties should be fulfilled according to the literal sense of
their stipulations, if their terms are clear and leave no room for doubt as to
the intention of the contracting parties, for contracts are obligatory, no
matter what form they may be, whenever the essential requirements for
their validity are present.
From the moment the contract is perfected, the parties are bound not only to
fulfill 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
the law.13

Article 1160. Obligations derived from quasi-contracts shall be subject to the

provisions of Chapter 1, Title XVII, of this Book. (n)

Certain lawful, voluntary and unilateral acts give rise to the juridical relation
of quasi-contract to the end that no one shall be unjustly enriched or benefited
at the expense of the other.14 A good example of an obligation arising from a
quasi-contract is the obligation to return what has been obtained by mistake
(solutio indebiti). Among others, the Civil Code provides that 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.15 There are other instances
of quasi-contract provided for in Chapter 1, Title XVII of the Civil Code,
specifically from Article 2144 up to Article 2175.

Article 1161. Civil Obligations arising from criminal offenses shall be

governed by the penal laws, subject to the

, 250 SCRA 223.

Article 2142 of the 1950 Civil Code.
Article 2154 of the 1950 Civil Code.
Article 100 of the Revised Penal Code.
72 ObligatiOns and COntraCts art. 1161
Text and Cases
art ObligatiOns 71
General Provisions
provisions of Article 2177, and of the pertinent provisions of Chapter 2,
Preliminary Title, on Human Relations, and of Title XVIII of this Book,
regulating damages. (1092a)

Civil liability attaches to any individual who is found to be criminally liable. 16

A person who commits a crime may be penalized by incarceration or payment
of a fine or both. The punishment is meted out because such person has
conceptually offended the State — a criminal offense of whatever nature
constructively disturbs the peace and order of society. However, it cannot be
denied that the victim of a crime is usually an individual, a natural person who
must be compensated for his injury. For this purpose, civil damages may be
awarded to him. Article 1161 subjects the awarding of damages to the
following:
1) Article 2176 of the Civil Code provides that “whoever by act or
omission causes damage to another, there being fault or negligence, is
obliged to pay for the damage done.” However, under Article 2177, the
plaintiff shall not be entitled to recover damages twice for the same act or
omission of the defendant even if the negligence may constitute an entirely
different cause of action.
2) Articles 19 to 36 of the New Civil Code are the provisions on Human
Relations. Generally, these are the provisions which give a person or
persons causes of action for filing damage suits. The relevant provisions
are as follows:
Article 29. When the accused in a criminal prosecution is acquitted on the
ground that his guilt has not been proved beyond reasonable doubt, a civil
action for damages for the same act or omission may be instituted. Such
action requires only a preponderance of evidence. Upon motion of the
defendant, the court may require the plaintiff to file a bond to answer for
damages in case the complaint should be found to be malicious.
If in a criminal case the judgment of acquittal is based upon reasonable
doubt, the court shall so declare. In the absence of any declaration to that
effect, it may be inferred from the text of the decision whether or not the
acquittal is due to that ground.
Article 30. When a separate civil action is brought to demand civil liability
arising from a criminal offense, and no criminal proceedings are instituted
during the pendency of the civil case, a preponderance of evidence shall
likewise be sufficient to prove the act complained of.

1G.R. No. L-29900, June 28, 1974, 57 SCRA 618. Article 33. In cases of defamation,

fraud, and physical injuries, a civil action for damages, entirely separate and
distinct
. 1162
 from the criminal action, may be brought by the injured party. Such civil
action shall proceed independently of the criminal prosecution, and shall
require only a preponderance of evidence.
Article 34. When a member of a city or municipal police force refuses or
fails to render aid or protection to any person in case of danger to life or
property, such peace officer shall be primarily liable for damages, and the
city or municipality shall be subsidiarily responsible therefor. The civil
action herein recognized shall be independent of any criminal proceedings,
and a preponderance of evidence shall suffice to support such action.
Aside from the above provisions, Article 32 likewise provides, in
substance, that whoever violates the enumerated constitutional rights of an
individual enumerated in the said article shall be liable for damages. It
likewise provides that:
“x x x whether or not the defendant’s act or omission constitute a criminal
offense, the aggrieved party has a right to commence an entirely separate
and distinct civil action for damages, and for other relief. Such civil action
shall proceed independently of any criminal prosecution (if the latter
be instituted), and may be proved by preponderance of evi-dence.
The indemnity shall include moral damages. Exemplary damages may also be
adjudicated.
The responsibility herein set forth is not demandable from a judge unless
his act or omission constitutes a violation of the Penal Code or other penal
statute.”
3) Title XVIII of the Civil Code refers to the rules governing damages.
However other rules laid down in other laws shall likewise apply insofar
as they are not inconsistent with the Civil Code.

Article 1162. Obligations derived from quasi-delicts shall be governed by the

provisions of Chapter 2, Title XVII of this Book, and by special laws. (1093a)

Quasi-delict has a statutory definition in the 1950 Civil Code. Article 2176 of
Chapter 2, Title XVII provides that:
whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence,
if there is no pre-existing contractual relation between the parties, is called
a quasi-delict and is governed by the provisions of this chapter.
74 ObligatiOns and COntraCts art. 1162
Text and Cases
 75

Chapter 2

NATURE AND EFFECT OF OBLIGATIONS

Article 1163. Every person obliged to give something is also obliged to take
care of it with the proper diligence of a good father of a family, unless the
law or the stipulation of the parties requires another standard of care.
(1094a)

This article involves the prestation “to give.” The word “something” connotes
a determinate object which is definite, known, and has already been distinctly
decided and particularly specified as the matter to be given from among the
same things belonging to the same kind. Hence, for example, if the object is a
computer, it does not involve any kind of computer but a very particular
computer such as the computer with serial number 7777. Once the determinate
thing becomes the specified object of the prestation, the person who has the
duty to give, must take care of it in order that it can be delivered to the recipient
in good condition. The phrase characterising the kind of diligence required in
the situation is “the proper diligence of a good father of a family.” The
reference point is “the father” because it is a commonly-accepted notion that a
father will always do everything to take care of his concerns. If the law or
contract does not state the diligence which is supposed to be observed in the
performance of an obligation, that which is expected of a good father of a
family is required. 53 The law, however, states that the kind of diligence
required can vary if either “the law or the stipulation of the parties requires
another standard of care.” In case of a contrary stipulation of the parties, such
stipulation should not be one contemplating a relinquishment or waiver of the
most ordinary diligence.

An example where the law requires another standard of care is that which
involves common carriers. Common carriers are persons, corporations, firms
or associations engaged in the business of carrying or transporting passengers
or goods or both, by land, water, or air, for compensation, offering their
services to the public.2 Common

75

53
Article 1173 of the 1950 Civil Code.
74 ObligatiOns and COntraCts
Text and Cases
art. 1164

carriers, from the nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence in the vigilance over the goods and
for the safety of the passengers transported by them, according to all the
circumstances of each case.3

Article 1164. The creditor has a right to the fruits of the thing from the time
the obligation to deliver it arises. However, he shall acquire no real right over
it until the same has been delivered to him. (1095)

This article involves the prestation “to give.” After the right to deliver the
object of the prestation has arisen in favor of the creditor but prior to the
delivery of the same, there is no real right enforceable or binding against the
whole world over the object and its fruits in favor of the person to whom the
same should be given. The acquisition of a real right means that such right can
be enforceable against the whole world and will prejudice anybody claiming
the same object of the prestation. The real right only accrues when the thing or
object of the prestation is delivered to the creditor.

He only has a personal right over the same if it is enforceable only against the
debtor who is under an obligation to give. This means that the personal right
of the creditor can be defeated by a third person in good faith who has
innocently acquired the property prior to the scheduled delivery regardless of
whether or not such third person acquired the property after the right to the
delivery of the thing has accrued in favor of the creditor. In this case, however,
the aggrieved creditor can go against the debtor for damages as the debtor
should have known that the fruits should have been delivered to the creditor
alone.
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,
against whom such right may be personally exercised.4
For example, on February 1, 1990, A buys a mango orchard from X to be
delivered on March 1, 1990. On the latter date, A shall have the right to the
fruits of the mango orchard. If the property is delivered
Article 1732 of the 1950 Civil Code.
Article 1733 of the 1950 Civil Code.
Adorable vs. Court of Appeals, G.R. No. 119466, November 25, 1999, 116 SCAD 189 , 319 SCRA
200.
Article 1170 of the 1950 Civil Code.
art. 1165
 ObligatiOns 75Nature and Effect of Obligations

only on April 1, 1990, A can nevertheless ask that the fruits accruing since
March 1, 1990 be likewise delivered to him. X cannot resist by saying that he
is entitled to the fruits before the actual delivery on April 1, 1990. If, however,
X sells the fruits on March 20, 1990 to B who does not know the previous sale
to A and who immediately takes possession of the fruits, B shall have a better
right over the said fruits. Considering that there is no delivery of the property
to A on March 20, 1990, A has no real right over the said property at that time
binding upon the whole world. A’s remedy is to seek damages from X in
connection with the fruits. If however, the mango orchard has already been
delivered, A already has a real right binding upon the whole world. If X sells
to B the fruits after delivery to A, A can recover from B who in turn can seek
damages from X.

Article 1165. When what is to be delivered is a determinate thing, the

creditor, in addition to the right granted him by Article 1170, may compel the
debtor to make the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be
complied with at the expense of the debtor.
If the obligor 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. (1096)

This provision involves the prestation “to give.” The object of the prestation
can either be determinate or generic. A generic object can be any object
belonging to the same kind. In the event that there is non-delivery of a generic
thing, the creditor may have it accomplished or delivered in any reasonable and
legal way charging all expenses in connection with such fulfillment to the
debtor. The creditor can ask a third party to deliver the same thing of the same
kind with all the expenses charged to the debtor.

In case of non-delivery of a determinate thing, the remedy is to file an action

to compel the debtor to make the delivery. This action is called specific
performance. If the debtor is guilty of fraud, negligence, delay or
contravention in the performance of the obligation, the creditor can
likewise seek damages against the debtor.5

A fortuitous event is an event which “could not be foreseen, or which though

foreseen, were inevitable.”6 As a general rule, a debtor is relieved from his
obligation “to give” if the object of such prestation is lost through a fortuitous
event. The last paragraph of Article 1165
arts. 1166-1168

however provides that a fortuitous event will not excuse the obligor from his
obligation in two cases namely: 1) if the obligor delays; and 2) if he has
76 ObligatiOns and COntraCts
Text and Cases
promised to deliver the same thing to two or more persons who do not have the
same interest. In both cases, the obligor will be liable for damages or will be
bound to replace the lost object of the prestation in cases when the obligee
agrees to the replacement.

Article 1166. The obligation to give a determinate thing includes that of

delivering all its accessions and accessories, even though they may not have
been mentioned. (1097a)

This article still deals with the prestation “to give.” The principal always
includes it accessories and accessions which the law likewise gives to the
creditor as part of what he should receive.

Article 1167. If the person obliged to do something fails to do it, the same
shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor
of the obligations. Furthermore, it may be decreed that what has been poorly
done be undone. (1098)

Article 1168. When the obligation consists in not doing and the obligor does
what has been forbidden, it shall also be undone at his expense. (1099a)

The articles deal with the obligations “to do” and “not to do.” The creditor can
ask any third person to perform the obligation due from the debtor should the
latter fail to do the same. The debtor will be liable for all expenses in
connection with the performance or fulfillment of the obligation undertaken by
the third person. The words “at his cost” imply both the right to have somebody
else perform the obligation and the right to charge the expenses thereof to the
debtor.

With respect to the situation wherein the debtor poorly undertook the
obligation, the creditor has the right to have everything be undone at the
expense of the debtor. The reason for this rule is to prevent the debtor from
taking his obligation lightly. He must exercise due diligence and prudence to
see to it that the prestation is properly performed. In case the prestation is for
the debtor not to do a particular act or service and he nevertheless performs it,
it shall likewise be und one at his own expense.
Article 1174 of the 1950 Civil Code.
G.R. No. 27454, April 30, 1970, 32 SCRA 547.
arts. 1167-1168

In Chaves vs. Gonzales7 where the repairer of a typewriter, upon demand of

the owner, returned the typewriter with missing parts and without having it
repaired, and where the owner had another company fix the typewriter, the
 ObligatiOns 77Nature and Effect of Obligations

Supreme Court ruled that the original repairer can be held liable not only for
the missing parts but also for the cost of the execution of the obligation of
repairing the typewriter by another company, thus:
Because the plaintiff appealed directly to the Supreme Court and the
appellee did not interpose any appeal, the facts, as found by the trial court,
are now conclusive and non-reviewable.
The appealed judgment states that the plaintiff delivered to the defendant
x x x a portable typewriter for routine cleaning and servicing; that the
defendant was not able to finish the job after some time despite repeated
reminders made by the plaintiff; that the defendant merely gave assurances,
but failed to comply with the same; and that after getting exasperated with
the delay of the repair of the typewriter, the plaintiff went to the house of
the defendant and asked for its return, which was done. The inferences
derivable from these findings of fact are that the appellant and the appellee
had a perfected contract for cleaning and servicing a typewriter; that they
intended that the defendant was to finish it at some future time although
such time was not specified; and that such time had passed without the
work having been accomplished for the defendant returned the typewriter
cannibalized and unrepaired, which itself is a breach of his obligation,
without demanding that he be given more time to finish the job, or
compensation for the work he had already done. The time for compliance
having evidently expired, and there being a breach of contract by non-
perfor-mance, it was academic for the plaintiff to have first petitioned the
court to fix a period for the performance of the contract before filing his
complaint in this case. Defendant cannot invoke Article 1197 of the Civil
Code for he virtually admitted non-performance of the contract by
returning the typewriter that he was obliged to repair in a non-working
condition, with essential parts missing. The fixing of a period would thus
be a mere formality and would serve no purpose than to delay (Cf. Tigla,
et al. vs. Manila Railroad Co., 98 Phil. 181).
It is clear that the defendant-appellee contravened the tenor of his
obligation because he not only did not repair the typewriter but returned it
“in shambles,” according to the appealed decision. For such contravention,
as appellant contends, he is liable under Article 1167 of the Civil Code,
jam quot, for the cost of

Rizal Commercial Banking Corporation vs. Court of Appeals, G.R. No. 133107,
78 ObligatiOns and COntraCts art. 1169
Text and Cases

the execution of the obligation in a poor manner. The cost of the execution
of the obligation in this case should be the cost of the labor or service
expended in the repair of the typewriter, which is in the amount of P58.75
because the obligation or contract was to repair it.
In addition, the defendant-appellee is likewise liable, under Article 1170
of the Code, for the cost of the missing parts, in the amount of P31.10, for
in his obligation to repair the typewriter he was bound, but failed or
neglected to return it in the same condition it was when he received it.

Article 1169. Those obliged to deliver or to do something incur in delay from

the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that
delay may exist:
(1) When the obligation or the law expressly so de- clares;
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins. (1100a)
Delay or default can be committed by the debtor in which case it is known as
mora solvendi. If it is committed by the creditor, it is known as mora
accipiendi. In the latter case, the debtor can consign whatever is due to the
creditor in court if the circumstances warrant. Delay in the performance of the
obligation, however, must be either malicious or negligent.8 Hence, if the delay
was only due to inadvertence without any malice or negligent, the obligor will
not be held liable under Article 1170.9

For an obligation to become due, there must generally be a demand. Default

generally begins from the moment the creditor demands the performance of the
obligation. Without such demand, judicial or extra-judicial, the effects of
art. 1169 ObligatiOns 79
Nature and Effect of Obligations

default will not arise. 5455 Commencement of a suit is a sufficient demand. 56

Consequently, an obligor is liable for damages for the delay not from the time
the object of the prestation is to be delivered but from the time of extra-judicial
or judicial demand.57 Also, Article 1169 is applicable only when the obligation
is to do something other than the payment of money. 58

In obligations for the payment of money, Article 2209 shall apply which
provides that
if the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six percent per annum.
Hence, in case of obligation for the payment of sum of money, the interest
replaces the damages. However, the rule is still the same in that default occurs
only after judicial or extra-judicial demand. If the contract stipulates from what
time interest will be counted, said stipulated time controls, and, therefore
interest is payable from such time and not from the date of filing of the
complaint.14 If the contract involving a sum of money does not stipulate any
interest and/or the time when it will be counted, interest will run only from the
time of judicial or extra-judicial demand.

It must be noted however that, for a party to be able to file a suit to compel the
other party to perform his obligation, the law does not make, as a prerequisite,
that extra-judicial demand must be made first on such other party prior to the
filing of the suit. 59 An action or suit can be filed at anytime after the non-
compliance of the other party of his obligation because the cause of action of
the aggrieved party will always start from such time. However, damages or
interest shall start to run only after judicial or extra-judicial demand. Hence, if
the obligation were due on March 1, 1998, the aggrieved party can March 25,
1999, 105 SCAD 233, 305 SCRA 449.

54
Ibid.
55
Rose Packing Company, Inc. vs. Court of Appeals, G.R. No. L-33084, November 14 , 1988, 167
SCRA 309.
56
Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD 209 , 288 SCRA
422.
57
National Marketing Corporation vs. Federation of United Namarco
Distributors, Inc., G.R. No. L-22578, 49 SCRA 238.
58
Picson vs. Picson, G.R. No. L-29139, November 15, 1974, 61 SCRA 67. 14Firestone Tire &
Rubber Co. (P.I.) vs. Delgado, G.R. No. L-11162, December 4 , 1958, 104 Phil. 920.
59
See Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD 209 , 288
SCRA 422.
80 ObligatiOns and COntraCts art. 1169
Text and Cases

file suit for specific performance immediately after March 1, 1998. If, without
any extra-judicial demand on the obligor, the action or suit against the obligor
was filed on April 15, 1998, damages will be counted or reckoned not from
March 1, 1998 but from April 15, 1998, which was the time when judicial
demand was made. If extra-judicial demand however was made on March 15,
1998, damages shall be counted not from March 1, 1998 but from March 15,
1998.

There are two cases where an extra-judicial demand should first be made prior
to the filing of a civil suit. These are in ejectment cases and in consignment
cases. Hence, before a lessor can eject a lessee, the lessor must first make an
extra-judicial demand for the lessee to vacate before filing the suit for
ejectment. If there is no extra-judicial demand, the ejectment suit will be
dismissed. In consignment cases, the debtor must first make an extra-judicial
demand for the creditor to accept payment of the obligation. If the creditor
unjustifiably refuses to accept payment, the debtor can now consign the amount
in court for purposes of extinguishing the obligation. If there is no extra-
judicial demand, the consignment case will be dismissed unless tender of
payment prior to consignment need not be made pursuant to law.

When the law uses the phrase “in delay” what it really means is “in default.”
In SSS vs. Moonwalk Development and Housing Corporation,16 the Supreme
Court had occasion to explain the concept of default, to wit:
But mere delinquency in payment does not necessarily mean delay in the
legal concept. To be in default “x x x is different from mere delay in the
grammatical sense, because it involves the beginning of a special condition
or status which has its own peculiar effects or results.” In order that the
debtor may be in default it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2)
that the debtor delays performance; and (3) that the creditor requires the
performance judicially and extrajudicially. Default generally begins from
the moment the creditor demands the performance of the obligation.
Demand however is not necessary in three cases provided in Article 1169.
The first case is when the obligation or the law expressly so declares. Hence, a
promissory note providing that payment shall be made on a particular date
without the necessity of demand makes the

G.R. No. 73345, April 7, 1993, 221 SCRA 119.

Collector of Internal Revenue vs. Yuseco, L-12518, October 28, 1961, 3 SCRA 313.
E.E.E., Inc. vs. Hanson, 318 N.W. 2d 101 (N.D. 1982).
debtor in default upon his failure to pay on the particular date. Also, the law
expressly declares that taxes to be paid to the government should be paid on a
art. 1169 ObligatiOns 81
Nature and Effect of Obligations

particular date. Taxes, being the chief source of revenue for the Government to
keep it running, must be paid immediately and without delay. 17

The second case when demand is not necessary is when time is of the essence
in a particular contract. Delay constitutes a material breach of the contract
where time is of the essence.18 In stock market transactions made in the stock
exchange, time is of the essence such that there is no need of demand before
the delivery of the shares of stock ought to be made by the seller. Also, if a
contract stipulates that a particular and special car is to be delivered to the
obligee to be used specially and solely for a particular parade at a particular
time, such as an exhibit in a one-day car fair to be held on a particular date,
there is no need for demand because the manufacturer of the said car knows
that had it not been for the time when the car would be exhibited, the obligee
would not have ordered the special car. In the case of Barzaga vs. Court of
Appeals19 where a contract was entered into for the delivery of materials on
December 22, 1990 in time for the construction of a niche of the aggrieved
party’s wife who expressly wished that she be buried before Christmas day,
and where, despite knowing this timetable and having been paid for the
materials, the supplier failed to make the delivery despite pleas and earnest
follow-ups by the widower, the Supreme Court ruled that time is of the essence
of such contract and the supplier should be liable for the delay and the breach,
thus:
The appellate court appears to have belittled petitioner’s submission that
under the prevailing circumstances time was of the essence in the delivery of the
materials to the grave site. However, we find petitioner’s assertion to be anchored
on solid ground. The niche had to be constructed at the very least on the twenty-
second of December considering that it would take about two (2) days to finish
the job if the interment was to take place on the twenty-fourth of the month.
Respondent’s delay in the delivery of the construction materials wasted so much
time that construction of the tomb could start only on the twenty-third. It could
not be ready for the scheduled burial of petitioner’s wife. This undoubtedly
prolonged the wake, in addition to the fact that work at the cemetery had to be put
off on Christmas day. This case is clearly one of non-performance of a reciprocal
19
G.R. No. 115129, February 12, 1997, 79 SCAD 378.
Article 1198 of the 1950 Civil Code.
Vermen Realty Development vs. Court of Appeals, G.R. No. 101762, July 6, 1993 , 43 SCAD 369,
224 SCRA 549.
obligation. In their contract of purchase and sale, petitioner had already
complied fully with what was required of him as purchaser, i.e., the
payment of the purchase price of P2,110.00. It was incumbent upon
respondent to immediately fulfill his obligation to deliver the goods
otherwise delay would attach.
The third case when demand is unnecessary is when it would be useless, as
when the obligor has rendered it beyond his power to perform. For example, a
82 ObligatiOns and COntraCts art. 1169
Text and Cases

debtor promised to constitute his house as a collateral for a particular loan

which is payable at a particular date but before he can make the mortgage, he
donates the house to his friend, demand from the creditor to constitute the
house as a collateral is useless. In this case, his obligation becomes
immediately demandable considering that he loses his right to the period within
which to pay the loan.20

Reciprocal obligations are those created and established at the same time, out
of the same cause and which results in a mutual relationship of creditor and
debtor between the parties.21 In reciprocal obligations, the performance of one
is conditioned upon the simultaneous fulfillment of the other. 60 In reciprocal
obligations, the obligation of one is a resolutory condition of the obligation of
the other, the non-fulfillment of which entitles the other party to rescind the
contract.61 A contract of loan, for example, is not a unilateral contract but one
which involves reciprocal obligations — the obli-gation or promise of each
party is the consideration for that of the other. The promise of the borrower to
pay is the consideration for the obligation of the bank to furnish the loan. 62 A
contract of lease and a contract of sale are likewise agreements involving
reciprocal obligations.

In reciprocal obligations, where one of the parties to a contract does not

perform the undertaking which he is bound by the terms of the agreement to
perform, he is not entitled to insist upon the performance of the other party.
For failure of the other party to assume and perform the obligation imposed
upon him, the other party does not incur in delay. 25 In Binalbagan Tech., Inc.
vs. Court of Appeals26 where the buyer was not able to take possession of the
property, which he bought from the seller, for eight years because, through no
fault of the seller, a third party-claimant, through a court order, evicted the
buyer from the said place but which judicial decree of eviction was later
reversed by the court allowing the buyer to retake possession of the property,
the Supreme Court held that the seller cannot rescind the contract for failure of
the buyer to pay the balance of the purchase price during the said eight-year
period, thus:
x x x petitioner was evicted from the subject subdivision lots in 1974 by
virtue of a court order in Civil Case No. 293 and reinstated to the possession
thereof only in 1982. During the period, therefore, from 1974 to 1982,
seller private respondent Angelina Echaus’ warranty against eviction given
to buyer petitioner was breached though, admittedly, through no fault of
her own. It follows that during the period, 1974 to 1982, private respondent

60
Abaya vs. Standard Vacuum Oil Co., G.R. No. L-9511, August 30, 1957, 101 Phil. 1262.
61
Songcua vs. Intermediate Appellate Court, G.R. No. 75096, October 23, 1990, 191 SCRA 28.
62
Rose Packing Company, Inc. vs. Court of Appeals, G.R. No. 33084, November 14, 1988, 167
SCRA 309; Penacio vs. Ruaya, G.R. No. L-28102, December 14, 1981, 110 SCRA 46.
art. 1169 ObligatiOns 83
Nature and Effect of Obligations

Echaus was not in a legal position to demand compliance of the prestation

of petitioner to pay the price of said subdivision lots. In short, her right to
demand payment was suspended during that period, 1974-1982.
In Agcaoili vs. Government Service Insurance System,27 the GSIS and Agcaoili
entered into a contract of sale of a government housing unit on the condition
that Agcaoili should occupy the same within three days from receipt of the
notice. Failure to immediately occupy contractually allowed the GSIS to
terminate the contract. Agcaoili, upon receipt of the notice, immediately went
to the place and found a house in a state of incompleteness that civilized
occupation was not possible; ceiling, stairs, double walling, lighting facilities,
water connection, bathroom, toilet, kitchen, drainage, were inexistent. The
buyer paid the first monthly installment but refused to make further payments
until and unless the GSIS completed the housing unit. GSIS cancelled the
award and required Agcaoili to vacate the premises. The Supreme Court, in
ruling that the GSIS had no right to rescind the sale ruled, thus:
x x x It was, to be sure, the duty of the GSIS, as seller, to deliver the thing
sold in a condition suitable for its enjoyment by the buyer for the purpose
contemplated, in other words, to deliver the house subject of the contract
in a reasonably livable

Agustin vs. Court of Appeals, G.R. No. 84751, June 6, 1990, 186 SCRA 375; Boysaw, et al. vs.
Interphil Promoters, Inc., G.R. No. L-22590, March 20, 1987, 148 SCRA 635; Abaya vs. Standard
Vacuum Oil, 101 Phil. 1262.
G.R. No. L-100594, March 10, 1993, 219 SCRA 777 27G.R. No. L-
30056, August 30, 1988, 165 SCRA 1.
G.R. No. 117190, January 2, 1997, 77 SCAD 647.
Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993, 222 SCRA 24; South Eastern College,
Inc. vs. Court of Appeals, G.R. No. 126389, July 10, 1998, 96 SCAD
state. This it failed to do.
It sold a house to Agcaoili, and required him to immediately occupy it
under pain of cancellation of the sale. Under the circumstance there can
hardly be any doubt that the house contemplated was one that could be
occupied for purposes of residence in reasonable comfort and convenience.
There would be no sense to require the awardee to immediately occupy and
live in a shell of a house, a structure consisting only of four walls with
openings, and a roof, and to theorize, as the GSIS does, that this was what
was intended by the parties, since the contract did not clearly impose upon
it the obligation to deliver a habitable house, is to advocate an absurdity,
the creation of an unfair situation. By any objective interpretation of its
terms, the contract can only be understood as imposing on the GSIS an
obligation to deliver to Agcaoili a reasonably habitable dwelling in return
for his undertaking to pay the stipulated price. Since the GSIS did not fulfill
that obligation, and was not willing to put the house in habitable state, it
cannot invoke Agcaoili’s suspension of payment of amortizations as cause
84 ObligatiOns and COntraCts art. 1169
Text and Cases

to cancel the contract between them. It is axiomatic “in reciprocal

obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him.”
In Tanguilig vs. Court of Appeals28 where the petitioner and the respondent
entered into a contract for the construction of a windmill for a consideration of
P60,000 with a one-year guaranty, and where, after completion, the petitioner
sued the respondent for non-payment of the balance of the construction price
but the respondent did not pay because the windmill collapsed due to the
defects in the construction, the Supreme Court ruled:
Finally, petitioner’s argument that private respondent was already in
default in the payment of his outstanding balance of P15,000.00 and hence
should bear his own loss, is untenable. In reciprocal obligations, neither
party incurs in delay if the other does not comply or is not ready to comply
in a proper manner with what is incumbent upon him (Article 1169). When
the windmill failed to function properly it became incumbent upon
petitioner to institute the proper repairs in accordance with the guaranty
stated in the contract. Thus, respondent cannot be said to have incurred in
delay; instead, it is petitioner who should bear the expenses for the
reconstruction of the windmill. Article 1167 of the Civil Code is explicit
on this point that if a person obliged to do something fails to do it, the same
shall be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED.

, 292 SCRA 422.

art ObligatiOns 85
Nature and Effect of Obligations
. 1170

Respondent VICENTE HERCE, JR. is directed to pay petitioner JACINTO

M. TANGUILIG the balance of P15,000.00 with interest at the legal rate
from the date of the filing of the complaint. In return, petitioner is ordered
to “reconstruct subject defective windmill system, in accordance with the
one-year guaranty” and to complete the same within three (3) months from
the finality of this decision.

Article 1170. Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner contravene the
tenor thereof, are liable for damages. (1100a)

Obligations must be complied with so as not to prejudice persons who are

directly interested therein. The law specifically provides that damages can be
awarded to any person who may have been prejudiced in the performance of
the obligation as a result of fraud, negligence, delay or contravention of the
tenor of the obligation. Significantly, if any of these four bases of liability co-
exist with a fortuitous event or aggravates the loss caused by a fortuitous event,
the obligor cannot be excused from being liable on his obligation.29 In Barzaga
vs. Court of Appeals,30 where before dying, the wife of the petitioner (husband)
specifically requested the latter that she be buried before Christmas day, and
where the said husband, complying with the said request after the wife’s death,
went to the hardware of the respondent to order the materials to build the niche
and told the latter that the same should arrive by eight o’clock on December
22, 1990 since his hired workers were already at the burial site and time was
of the essence, and where the respondent, after having received payment of the
materials from the petitioner, did not deliver the materials for two-and-a-half
days despite repeated and earnest pleas from the petitioner prompting the latter
to just order from another supplier the materials, the Supreme Court sustained
the award of damages in favor of the petitioner specially when, as in this case,
time is of the essence of the contract, to wit:
We sustain the trial court. An assiduous scrutiny of the record convinces
us that respondent Angelito Alviar was negligent and incurred in delay in
the performance of his contractual obligation. This sufficiently entitles
petitioner Ignacio Barzaga

G.R. No. 115129, February 12, 1997, 79 SCAD 378.

Corliss vs. Manila Railroad Company, G.R. No. L-21291, March 28, 1969, 27 SCRA 674.
Id.
. 1170
86 ObligatiOns and COntraCts art
Text and Cases
to be indemnified for the damage he suffered as a consequence of delay or
a contractual breach. The law expressly provides that those who in the
performance of their obligation are guilty of fraud, negligence, or delay and
those who in any manner contravene the tenor thereof, are liable for
damages.
xxx xxx xxx
We therefore sustain the award of moral damages. It cannot be denied that
petitioner and his family suffered wounded feelings, mental anguish and
serious anxiety while keeping watch on Christmas day over the remains of
their loved one who could not be laid to rest on the date she herself had
chosen. There is no gainsaying the inexpressible pain and sorrow Ignacio
Barzaga and his family bore at that moment caused no less by the
ineptitude, cavalier behavior and bad faith of respondent and his employees
in the performance of an obligation voluntarily entered into.
We also affirm the grant of exemplary damages. The lackadaisical and
feckless attitude of the employees of respondent over which he exercised
supervisory authority indicates gross negligence in the fulfillment of his
business obligations. Respondent Alviar and his employees should have
exercised fairness and good judgment in dealing with peti- tioner who
was then grieving over the loss of his wife. Instead of commiserating with
him, respondent and his employees contributed to petitioner’s anguish by
causing him to bear the agony resulting from his inability to fulfill
his wife’s dying wish.
Article 1171. Responsibility arising from fraud is demandable in all
obligations. Any waiver of an action for future fraud is void. (1102a)

When a party complies with or performs his obligation fraudulently, he is

liable for damages. Thus, if A bought a car from B worth P50,000 and, after
delivery of the car by B, A paid B counterfeit money on due date, A shall be
liable for damages. If, in the contract of sale, A and B stipulated that any
fraudulent act by another in the performance of his obligation shall not be a
ground for the aggrieved party to file a suit against the other for fraud is a void
stipulation. By express provision of law, such waiver is void. The dolo or fraud
which is committed to induce a party to enter into a contract, thereby making
the agreement annullable is not the one contemplated by Article 1171. The dolo
or fraud under Article 1171 necessarily involves a valid agreement but, in the
performance of the same, fraud is committed.

Article 1172. Responsibility arising from negligence in the performance of

every kind of obligation is also demandable, but such liability may be
regulated by the courts, according to
arts. 1171-1173

the circumstances. (1103)

 ObligatiOns 87Nature and Effect of Obligations
Article 1173. The fault or negligence of the obligor consists in the omission
of that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of the
place. When negligence shows bad faith, the provisions of Articles 1171 and
2201, paragraph 2 , shall apply.
If the law or contract does not state the diligence which is to be observed in
the performance, that which is expected of a good father of a family shall be
required. (1104a)

Article 1173 gives a statutory definition of negligence. In essence, negligence

is the want of care required by the circum-stances.31 It is a relative or
comparative, not an absolute term and its application depends upon the
situation of the parties and the degree of care and vigilance which the
circumstances reasonably require.32 Pursuant to Article 1172 therefore, liability
can be regu-lated by the courts depending on the circumstances. As a general
rule, negligence must always be proven. In Syquia vs. Court of Appeals,33
where the personnel of the memorial park company, with the consent of the
latter, bore a hole on the grave of the deceased during a rainy day to prevent
the vault from falling, consequently preventing the earth from caving in and
filling-up the grave, and where such hole made possible the entry of more water
and soil than was natural had there been no hole, the Supreme Court, taking
into consideration the attendant circumstances, ruled that the memorial
company was not negligent and said:
The law defines negligence as the “omission of that diligence which is
required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place.” In the absence
of stipulation or legal provision providing the contrary, the diligence to be
observed in the performance of the obligation is that which is expected of
a good father of a family.
The circumstances surrounding the commission of the assailed act —
boring of the hole — negate the allegation of negligence. The reason for
the hole was explained by Henry Flores, Interment Foreman, who said that:
Q. It has been established in this particular case

G.R. No. 98695, January 27, 1993, 217 SCRA 624.

G.R. No. 126152, September 28, 1999, 113 SCAD 115, 315 SCRA 309.
G.R. No. L-25414, July 30, 1971, 40 SCRA 144.
88 ObligatiOns and COntraCts
Text and Cases
arts. 1172-1173

that a certain Vicente Juan Syquia was interred on July 25,

1978 at the Parañaque Cemetery of the Manila Memorial
Park Cemetery, Inc., will you please tell the Hon. Court what
or whether you have participation in connection with said
internment (sic)?
A. A day before Juan (sic) Syquia was buried our personnel
dug a grave. After digging the next morning a vault was taken
and placed in the grave and when the vault was placed on the
grave a hole was placed on the vault so that water could come
into the vault because it was raining heavily then because the
vault has no hole the vault will float and the grave would be
filled with water and the digging it was raining heavily then
because the vault has no hole the vault would caved (sic) in
and fill up the grave.
Except for the foreman’s opinion that the concrete vault may float should
there be a heavy rainfall, from the above-mentioned explanation, private
respondent has exercised the diligence of a good father of a family in
preventing the accumu-lation of water inside the vault which would have
resulted in the caving in of earth around the grave filling the same with
earth.
In Philippine National Bank vs. Court of Appeals34 where the bank negligently
dishonoured the check of its depositor, the Supreme Court said:
This Court has ruled that a bank is under obligation to treat the accounts
of its depositors with meticulous care whether such account consists only
of a few hundred pesos or of millions of pesos. Responsibility arising from
negligence in the per-formance of every kind of obligation is demandable.
While petitioner’s negligence in this case may not have been attended with
malice and bad faith, nevertheless, it caused serious anxiety,
embarrassment and humiliation to private respondent Lily S. Pujol for
which she is entitled to recover reasonable moral damages. In the case of
Leopoldo Araneta vs. Bank of America35 held that it can hardly be possible
that a customer’s check can be wrongfully refused payment without some
impeachment of his credit which must in fact be an actual injury, although
he cannot, from the nature of the case, furnish independent and distinct
proof thereof.
Damages are not intended to enrich the complainant at the expense of the
defendant, and there is no hard-and-fast rule in the determination of what
would be a fair amount of moral damages since each case must be governed
by its own

G.R. No. 108245, November 25, 1994, 56 SCAD 812, 238 SCRA 397.
art ObligatiOns 89
Nature and Effect of Obligations
. 1173

peculiar facts. The yardstick should be that it is not palpably and

scandalously excessive. In this case, the award of P100,000.00 is
reasonable considering the reputation and social standing of private
respondent Pujol and applying our rulings in similar cases involving banks’
negligence with regard to the accounts of their depositors. The award of
attorney’s fees in the amount of P20,000 is proper for respondent Pujol was
compelled to litigate to protect her interest.
The law likewise provides that when negligence shows bad faith, the
provisions of Articles 1171 and 2201, paragraph 2, shall apply. In Samson vs.
Court of Appeals,36 the Supreme Court, in discussing bad faith, said:
Bad faith is essentially a state of mind affirmatively operating with furtive
design or with some motive of ill-will. It does not simply connote bad
judgment or negligence. It imports a dishonest purpose or some moral
obliquity and conscious doing of wrong. Bad faith is thus synonymous with
fraud and involves a design to mislead or deceive another, not prompted
by an honest mistake as to one’s rights or duties, but by some interested or
sinister motive.
Hence, considering that bad faith is synonymous with fraud, Article 1171 shall
apply if negligence concurs with bad faith. Accordingly, pursuant to Article
2201, second paragraph, the obligor shall be responsible for all damages which
may be reasonably attributed to the non-performance of the obligation.

Article 1174. Except in cases expressly specified

by the law, or when it is otherwise declared by stipulation, or
when the nature of the obligation requires the assumption of risk, no person
shall be responsible for those events which, could not be foreseen, or which,
though foreseen, were inevitable. (1105a)

The general rule is that “no one should be held to account for fortuitous
cases”63 which are those situations that could not be foreseen, or which though
foreseen, were inevitable. An act of God has been defined as an accident, due
directly and exclusively to natural causes without human intervention, which
by no amount of foresight, pains or care, reasonably to have been expected,
could have been prevented.38 In Nakpil vs. Court of Appeals,39 the Supreme
Court again reiterated the elements for an event to be considered fortuitous, to
wit:

63
Lawyers Cooperative Publishing Company vs. Tabora, G.R. No. L-21263, 13 SCRA 762;
Dioquino vs. Laureano, G.R. No. L-25906, May 28, 1970; Crame Sy Panco vs. Gonzaga, 10 Phil.
646; Keep vs. Chan Gioco, 14 Phil. 5 (1909); Novo & Co. vs.
90 ObligatiOns and COntraCts art. 1174
Text and Cases
To exempt the obligor from liability under Article 1174 of the Civil Code,
for a breach of an obligation due to an “act of God,” the following must
concur: (a) the cause of the breach of the obligation must be independent
of the will of the debtor; (b) the event must either be unforeseeable or
unavoidable; (c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and (d) the debtor must
be free from any participation in, or aggravation of the injury. 40
Thus, if upon the happening of a fortuitous event or an act of God, there
concurs a corresponding fraud, negligence, delay or violation or
contravention in any manner of the tenor of the obligation as provided for
in Article 1170 of the Civil Code, which results in damage, the obligor
cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the
act must be one occasioned exclusively by the violence of nature and all
human agencies are to be excluded from creating or entering into the cause
of the mischief. When the effect, the cause of which is to be considered, is
found to be in part the result of the participation of man, whether it be from
active intervention or neglect, or failure to act, the whole occurrence is
thereby humanized, as it were, and removed from the rules applicable to
the acts of God.41
Thus it has been held that when the negligence of a person concurs with
an act of God in producing a loss, such person is not exempt from liability
by showing that the immediate cause of the damage was the act of God. To
be exempt from liability for loss because of an act of God, he must be free
from any previous negligence or misconduct by which that loss or damage
may have been occasioned.42
In Tanguilig vs. Court of Appeals43 where the contractor resisted liability in
connection with the destruction of a windmill which he built by invoking that
the collapse of the windmill was due to a typhoon which is a fortuitous event,
the Supreme Court rejected such defense by ruling that the elements in the
Nakpil case were not present and
stated:Ainsworth, 26 Phil. 380 (1913).
38
1 Corpus Juris 1174.
Nakpil vs. Court of Appeals, October 3, 1986, 144 SCRA 596; Sia vs. Court of Appeals, G.R.
No. 102970, May 13, 1993, 222 SCRA 24.
Vasquez vs. Court of Appeals, G.R. No. L-42926, September 1985, 138 SCRA 553; Estrada vs.
Consolacion, G.R. No. L-40948, June 29, 1976, 71 SCRA 523; Austria vs. Court of Appeals, 39
SCRA 527; Republic vs. Luzon Stevedoring, G.R. No. L-21749, September 29, 1967, 21 SCRA
279; Lasam vs. Smith, G.R. No. L-21749, September 29 , 1967, 45 Phil. 657.
art. 1174 ObligatiOns 91
Nature and Effect of Obligations

Petitioner failed to show that the collapse of the windmill was due solely
to a fortuitous event. Interestingly, the evidence does not disclose that there
was actually a typhoon on the day the windmill collapsed. Petitioner merely
stated that there was a “strong wind.” But a strong wind in this case cannot
be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong
wind should be present in places where windmills are constructed,
otherwise the windmills will not turn.
The appellate court correctly observed that “given the newly constructed
windmill system, the same would not have collapsed had there been no
inherent defect in it which could only be attributable to the appellee.” It
emphasized that respondent had in his favor the presumption that “things
have happened according to the ordinary course of nature and the ordinary
habits of life.” This presumption has not been rebutted by petitioner.
In Sia vs. Court of Appeals44 where the bank failed to notify its client of the
flooding of its safety deposit box containing the said client’s valuable stamp
collection resulting in the destruction of the said collection, and where the said
bank already had two previous experiences of the flooding of the said safety
deposit box located inside the bank that was guarded twenty-four hours a day,
the Supreme Court reversed the ruling of the Court of Appeals in not holding
the bank for damages on the basis of fortuitous event and held that the bank
was negligent, to wit:
SBTC’s negligence aggravated the injury or damage to the petitioner
which resulted from the loss or destruction of the stamp collection. SBTC
was aware of the floods of 1985 and 1986; it also knew that the floodwaters
inundated the room where Safe Deposit Box No. 54 was located. In view
thereof, it should have lost no time in notifying the petitioner in order that
the box could have been opened to retrieve the stamps, thus saving the same
from further deterioration and loss. In this respect, it failed to exercise the
reasonable care and prudence expected of a good father of a family, thereby
becoming a party to the aggravation of the injury or loss. Accordingly, the
aforemen-tioned fourth characteristic of a fortuitous event is absent and
Article 1170 of the Civil Code thus comes to the succor of the petitioner.
The destruction or loss

41
1 Corpus Juris 1174-1175.
Fish & Elective Co. vs. Phil. Motors, G.R. No. L-32611, November 3, 1930, 55 Phil. 129; Tucker
vs. Milan, 49 O.G. 4379; Limpangco & Sons vs. Yangco Steamship Co., 34 Phil. 594; Lasam vs.
Smith, 45 Phil. 657.
G.R. No. 117190, January 2, 1997, 77 SCAD 647.
Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993, 222 SCRA 24. 45G.R. No. L-25906,
May 28, 1970, 33 SCRA 65; Roman Catholic Bishop of Jaro vs. De la Peña, 26 Phil. 144 (1913);
Lasam vs. Smith, 445 Phil. 657 (1924); Yap Kim
of the stamp collection which was, in the language of the trial court, the
“product of 27 years of patience and diligence caused the petitioner
pecuniary loss;” hence, he must be compensated.
92 ObligatiOns and COntraCts art. 1174
Text and Cases

In Dioquino vs. Laureano45 where the sudden and unexpected throwing of

stone directed at the car of the plaintiff causing damage to the said car was
considered a fortuitous event, the Supreme Court explained the concept of this
exculpating occurrence, thus:
Its basis, as Justice Moreland stressed, is the Roman law principle major
casus est, cui humna infirmis reistere no potest. Authorites of repute are in
agreement, more specifically con-cerning an obligation arising from
contract that some extraordinary circumstance independent of the will of
the obligor, or of his employees, is an essential element of a caso fortuito.
If it could be shown that such indeed was the case, liability is ruled out.
There is no requirement of diligence beyond what human care and foresight
can provide.
In Victorias Planters Association, Inc. vs. Victorias Milling Co.46 where the
contract between the parties stipulated that, in the event of a fortuitous event,
the period provided in the contract for the delivery of certain products shall be
suspended, the Supreme Court ruled that the period of time (6 years) when the
contract was suspended can not be deducted from the term of the contract
because, to add the said years upon the resumption of the contract would in
effect be an extension of the contract. More particularly, the Supreme Court
said:
Fortuitous event relieves the obligor from fulfilling a contractual
obligation. x x x The seventh paragraph of Annex “C” x x x where the
parties stipulated that in the event of flood, typhoon, earthquake, or other
force majeure, war, insurrection, civil commotion, organized strike, etc.,
the contract shall be deemed suspended during said period, does not mean
that the happening of those events stops the running of the period agreed
upon. It only relieves the parties from the fulfillment of their respective
obligations during that time — the planters from delivering sugar cane and
the central from milling it. In order that the central, herein appellant, may
be entitled to demand from the other parties the fulfillment of their part in
the contracts, the latter must have been able to perform it but failed or
refused to
Chuan vs. Tiaoqui, 31 Phil. 433 (1655); University of Sto. Tomas vs. Descals, 38 Phil. 267 (1918);
Lizares vs. Hernaez, 40 Phil. 981 (1920); Garcia vs. Escudero, 43 Phil. 437 (1922); Milan vs. Rio
y Olabarrieta, 45 Phil. 718 (1924); Obejara vs. Iga Sy, 76 Phil.
580 (1946) ; Gillaco vs. Manila Railroad Co., 97 Phil. 884.
G.R. No. L-6648, July 25, 1955, 97 Phil. 318.
G.R. No. 119729, January 21, 1997, 71 SCAD 146.
Ponce de Leon vs. Rehabilitation Finance Corporation, G.R. No. L-24571,
do so and not when they were prevented by force majeure such as war. To
require the planters to deliver the sugar cane which they failed to deliver
during the four years of the Japanese occupation and the two years after
liberation when the mill was being rebuilt is to demand from the obligors
the fulfillment of an obligation which was impossible of performance at
the time it became due. Nemo tenetur ad impossibilia. The obligee not
art. 1174 ObligatiOns 93
Nature and Effect of Obligations

being entitled to demand from the obligors the performance of the latter’s
part of the contracts under those circumstances cannot later on demand its
fulfillment. The performance of what the law has written off cannot be
demanded and required. The prayer that the plaintiffs be compelled to
deliver sugar cane to the appellant for six more years to make up for what
they failed to deliver during those trying years, the fulfillment of which
was impossible, if granted, would in effect be an extension of the term of
the contracts entered into by and between the parties.
In Ace-Agro Development Corporation vs. Court of Appeals,47 where the
petitioner was engaged by the private respondent to clean its bottles and repair
wooden shells inside its plant from January 1, 1990 up to December 31, 1990,
and where, because of the burning on April 25, 1990 of the said plant, the work
of the petitioner was suspended for a certain period of time, thereby prompting
the petitioner to seek an extension of the contract period to compensate for the
suspension and refusing to work without such extension despite notification
from the private respondent for the resumption of the contract on November 7,
1990, the Supreme Court ruled against such extension and said:
Nor was petitioner justified in refusing to resume work on November 7
when it was again notified by petitioner to work. Although it cited the
pending labor case as reason for turning down private respondent’s offer,
it would appear that the real reason for petitioner’s refusal was the fact that
the term of the contract was expiring in two months and its request for an
extension was not granted. But as the appellate court correctly ruled, the
suspension of work under the contract was brought about by force majeure.
Therefore, the period during which work was suspended did not justify an
extension of the term of the contract. For the fact is that the contract was
subject to a resolutory period which relieved the parties of their respective
obligations but did not stop the running of the period of their contract.
When the object of the prestation is generic, like the payment of

December 18, 1970, 36 SCRA 289.

a sum of money as a consequence of a loan contract, the debtor cannot avail of
the benefit of a fortuitous event even if the object for which the loaned money
is used, such as the construction of a factory, is wiped out by a typhoon.48 Also,
even if there is a fortuitous event, a person can still be held responsible for the
performance of his obligation if the law, or the stipulation of the parties, or
when the nature of the obligation so requires.

The law can provide that, even if there is a fortuitous event, the obligor can
still be liable. An example of this is the third para-graph of Article 1165 which
provides that if the obligor 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 delivery. Also, Article 1268
94 ObligatiOns and COntraCts art. 1174
Text and Cases

provides that when the 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, unless the thing having been
offered by him to the person who should receive it, the latter refused without
justification to accept it. Article 552 of Book II on property of the Civil Code
pertinently provides that a possessor in bad faith shall be liable for deterioration
or loss in every case, even if caused by a fortuitous event. In the liquidation of
the conjugal partnership of gains, Article 129(6) of the Family Code of the
Philippines64 likewise provides that, unless the owner had been indemnified
from whatever source, the loss or deterioration of movables used for the benefit
of the family, belonging to either spouse, even due to fortuitous event, shall be
paid to said spouse from the conjugal funds, if any.

In the same vein, the bailee in commodatum50 is liable for the loss of the thing,
even if it should be through a fortuitous event in the following cases: a) if he
devotes the thing to any purpose different from that for which it was loaned; b)
if he keeps it longer than the period stipulated, or after the accomplishment of
the use for which the commodatum has been constituted; c) if the thing loaned
has been delivered with appraisal of its value unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event; d) if he
lends or leases the thing to a third person who is not a member of his household;
or e) if, being able to save either the thing borrowed or his own thing, he chose
to save the latter. Interestingly also, Article 1919 of the Civil Code on deposits
provides that if the depositary by force majeure or government order loses the
thing and receives money or another thing in its place, he shall deliver the sum
or other thing to the depositor.

When the parties declare that they shall be liable even for loss due to a
fortuitous event, they shall be so liable. An example would be a contract
providing that the obligor shall, within 10 days, deliver a particular transistor
with serial number 1234 and shall be liable even if the transistor shall be
destroyed by an Act of God for the value of the same.

When the nature of the obligation requires the assumption of risk, the person
obliged to perform the obligation shall likewise not be excused should a
fortuitous event occur. In Republic vs. Luzon Stevedoring,51 by a towed barge,
which usually traversed the Pasig river passing the Nagtahan bridge, rammed
against one of the wooden piles of the bridge, smashing the posts and causing
the bridge to list. The accident occurred at a time when the river was swollen
and the current swift on account of heavy downpour in Manila. The barge

64
Executive Order No. 209 as amended. This law took effect on August 3, 1988. 50Article 1935 of
the 1950 Civil Code provides that a bailee in commodatum is one who acquires the use of the thing
loaned but not its fruits; if any compensation is
art. 1174 ObligatiOns 95
Nature and Effect of Obligations

owner contended that it should not be held liable for the damage on the bridge
as such damage was caused by fortuitous event or force majeure. The Supreme
Court rejected such contention by ruling, thus:
The appellant stresses the precautions taken by it on the day in question:
that it assigned two of its most powerful tugboats to tow down river its
barge L-1892; that it assigned to the task the more competent and
experienced among its patrons, had the towlines, engines and equipment
double-checked and inspected; that it instructed its patrons to take extra
precautions; and concludes that it had done all it was called to do, and that
the accident, therefore, should be held due to force majeure or fortuitous
event.
These very precautions, however, completely destroy the appellant’s
defense. For caso fortuito or force majeure (which in law are identical in
so far as they exempt an obligor from liability) by definition, are
extraordinary events not foreseeable or avoidable, events that could not be
foreseen, or which, though foreseen, were inevitable (Article 1174, Civil
Code of the Philippines). It is therefore not enough that the event should
not have been foreseen or anticipated, as is commonly believed, but it must
be one impossible to foresee or to avoid. The mere difficulty to

to be paid by him who acquires the use, the contract ceases to be a commodatum.
51
G.R. No. L-21749, September 29, 1967, 21 SCRA 279.
52
G.R. No. L-16477, May 31, 1961, 2 SCRA 549.
53
Adorable vs. Court of Appeals, G.R. No. 119466, November 25, 1999, 116 SCAD
foresee the happening is not impossiblity to foresee the same: “un hecho
no constituye caso fortuito por la sola circumstancia de que su existencia
haga mas dificil o mas onerosa la accion diligente del presento ofensor”
(Peirano Facio, Responsabilidad Extra-contractual, p. 465; Mazeaud,
Trait de la Responsibilite Civil, Vol. 2, sec. 1569). The very measure
adopted by appellant prove that the possibility of danger was not only
foreseeable, but actually foreseen, and was not caso fortuito.
Otherwise stated, the appellant, Luzon Stevedoring Corporation, knowing
and appreciating the perils posed by the swollen stream and its swift
current, voluntarily entered into a situation involving obvious danger; it
therefore assumed the risk, and cannot shed responsibility merely because
the precautions it adopted turned out to be insufficient. Hence, the lower
court committed no error in holding it negligent in not suspending
operations and in holding it liable for the damages caused.
It avails the appellant naught to argue that the dolphins, like the bridge,
were improperly located. Even if true, these circumstances would merely
emphasize the need of even higher degree of care on appellant’s part in the
situation involved in the present case. The appellant whose barge and tugs
travel up and down the river everyday, could not safely ignore the danger
96 ObligatiOns and COntraCts art. 1174
Text and Cases

posed by these allegedly improper constructions that had been erected and,
in place, for years.

Article 1175. Usurious transactions shall be governed by special laws.

Article 1175 in itself does not prohibit usurious contracts. However, it

specifically provides that it shall be governed by special laws. A special law
may either prohibit usurious interest, allow it, or merely put a ceiling as to what
can be the highest interest that can be legally imposed.

Article 1176. The receipt of the principal by the creditor, without reservation
with respect to the interest, shall give rise to the presumption that said interest
has been paid.
The receipt of a later installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such installments have
been paid. (1110a) A presumption must always arise from a fact or a set of
facts.

, 319 SCRA 200.

 ObligatiOns 97Nature and Effect of Obligations
arts. 1175-1176

To have probative value, the creation of the presumption must be provided by

law. If the facts are proven, then the presumption as a matter of law will attach
and will hold as true unless and until it is rebutted. Thus, if an obligation
consists in the payment of principal and interest, the payment of the principal
without reservation is the fact that will give rise to the presumption that the
interest on the principal has already been paid. This is so because, in ordinary
business transactions, interest is normally paid first. The burden of proof to
show that the interest has not been paid shifts to the creditor. Consequently, the
presumption can be rebutted by strong evidence to the contrary. For instance,
it can be shown that the payment of the principal was made because the debtor
requested the creditor to apply the payment to the principal first.

Another presumption created by law is in connection with a sale in installment.

The payment of the later installment shall give rise to the presumption that
prior installments have already been paid. The later installment however must
clearly indicate that indeed it is the latest installment. In Manila Trading &
Supply Co. vs. Medina52 where, in a purchase by installment, the obligor
presented numerous receipts which were found by the court as partly spurious
and partly genuine, and where the obligor maintained that, even if some
receipts were found to be spurious, the receipts found to be genuine were
allegedly made in January, 1957 after the issuance of the spurious receipts and
therefore the presumption that the prior installments were already paid should
be considered, the Supreme Court rejected this contention by ruling:
Appellant avers that the genuine receipts dated January, 1957 raise the
presumption that prior installments were paid. This might be true if such
receipts recited that they were issued for the installments corresponding to
the month of January, 1957; but nowhere does that fact appear. And even
if such recital had been made, the resulting presumption would only be
prima facie, and the evidence before us is clear that the payments made do
not correspond to the installments falling due on the dates of the genuine
receipts.

Article 1177. The creditors, after having pursued the property in the
possession of the debtor to satisfy their claims, may exercise all the rights
and bring all the actions of the latter for the same purpose, save those which
are inherent in his person; they may also impugn the acts which the debtor
may have done to defraud them. (1111)
. 1177

The law protects the creditors. The nature of a civil obligation is that it is
demandable and enforceable in a court of law. Since an obligor is either bound
98 ObligatiOns and COntraCts art
Text and Cases
by the prestation to give or to do, the creditor is given by law all possible
remedies to enforce such obligations. Hence, the creditor, after exhausting all
means to satisfy his claim, is given the opportunity to bring all actions which
the obligor can institute against his own debtors to protect and satisfy his claims
against the said obligor.
Thus the following successive measures must be taken by a creditor before
he may bering an action for rescission of an allegedly fraudulent sale: (1)
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
of the contracts executed by the debtor in fraud of their rights (accion
pauliana).53
However, this right is not absolute as the creditor cannot bring those which are
inherent in the person of the obligor. Hence, the creditor cannot file an action
on behalf of the obligor to claim support from the latter’s parents and to satisfy
the indebtedness from the money obtained by way of support from the parents.
This claim for support is very personal to the obligor which therefore cannot
be brought by the creditor. Article 1381(1) which provides that a contract
entered into by the debtor is rescissible if it were made in fraud of creditors
when the latter cannot in any other manner collect the claim due them is another
remedy.

It has also been held in Adorable vs. Court of Appeals65 that unless a debtor
acted in fraud of his creditor, the creditor has no right to rescind a sale made
by the debtor to someone on the mere ground that such sale will prejudice the
creditor’s rights in collecting later on from the debtor. The creditor’s right
against the debtor is only a personal right to receive payment for the loan; it is
not a real right over the lot subject of the deed of sale transferring the debtor’s
property.

Article 1178. Subject to the laws, all rights acquired in virtue of an obligation
are transmissible, if there has been no stipulation to the contrary. ( 1112)

Generally, rights growing out of an obligation are transmissible.

art. 1178

Thus, the transferee of a Children’s Educational Insurance Plan, originally

obtained by the transferor, acquires all the rights of the said transferor under
the said plan. Hence, the transferee can avail of the various financial bonuses

65
G.R. No. 119466, November 25, 1999, 116 SCAD 189, 319 SCRA 200.
 ObligatiOns 99Nature and Effect of Obligations
provided by the plan in the event that the child of the transferee graduates with
distinction if such right is provided for in the contract.

However, the person who transmits the right cannot transfer greater rights than
he himself has by virtue of the obligation. Conversely, the person to whom the
rights are transmitted can have no greater interest than that possessed by the
transmitter at the time of transmission of the rights. The rights of the transferee
do not rise higher than the transferor. Hence, if the transferor has no right to
encumber a property within a certain period of time, the transferee has no such
right as well. If the transferor has no right to earn interest from money he is
keeping for a principal, a transferee obtains no such right.

The transmissibility of rights may be limited, or altogether prohibited by

stipulation of the parties. Thus, it can be stipulated in a contract that the
assignment of any or all the rights provided by such contract is prohibited. A
less prohibitive provision is one which disallows such transfer of rights unless
with the express consent of one of the parties to the contract. Likewise, no
transmission can be made of a particular right if the personal qualifications or
circumstances of the transferor is a material ingredient attendant in the
obligation. Hence, an author who specializes in horror stories written in a very
distinct and peculiar style and who has been engaged by a publisher to write
his (the author’s) kind of horror stories for his magazine cannot transmit his
rights arising from such obligation to anybody else.

Transmission must likewise be subject to pertinent laws. Hence if the law

prohibits the alienation of homesteads within five years from the issuance by
the government of the patent,66 any transmission of rights of dominion over the
same within the prohibitory period shall be void.
. 1178

66
Artales vs. Urbi, G.R. No. L-29421, January 30, 1971, 37 SCRA 395.
 103

Chapter 3

DIFFERENT KINDS OF OBLIGATIONS

SECTION 1. — Pure and Conditional Obligations

Article 1179. Every obligation whose performance does not depend upon a
future or uncertain event, or upon a past event unknown to the parties, is
demandable at once.
Every obligation which contains a resolutory condition shall also be
demandable, without prejudice to the effects of the happening of the event.
(1113)

A pure obligation is an unqualified obligation which is demandable

immediately. It is an obligation whose performance does not depend upon a
future or uncertain event, or past event unknown to the parties. In Pay vs. Vda.
De Palanca1 where the debtor issued a promissory note to the creditor to pay a
sum of money payable upon receipt of a particular sum of money from the
estate of a certain deceased person or upon demand, and where the case for
collection on the basis of said note was filed 15 years after the execution of the
promissory note, the Supreme Court ruled that, since the prescriptive period
for filing the action based on a written document was 10 years and considering
that the promissory note’s payment constituted a pure obligation and therefore
demandable at once, the action to collect could no longer prosper. The Supreme
Court pertinently stated:
From the manner in which the promissory note was executed, it would
appear that petitioner was hopeful that the satisfaction of his credit could
be realized either through the debtor sued receiving cash payment from the
estate of the late Carlos Palanca presumptively as one of the heirs, or, as
expressed therein, “upon demand.” There is nothing in the record that
would indicate whether or not the first alternative was fulfilled. What is
undeniable is that on August 26, 1967, more than fifteen years after the
execution of the promissory note on January 30, 1952,

John D. Calamari and Joseph M. Perillo, The Law of Contracts, Third Edition 1987 , Page 438,
West Publishing Co. St. Paul, Minnesota.
Gaite vs. Fonacier, G.R. No. L-11827, 2 SCRA 831.103
art ObligatiOns 101
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
. 1179

this petition was filed. The defense interposed was prescription.

Its merit is rather obvious. Article 1179 of the Civil Code provides: “Every
obligation whose performance does not depend upon a future or uncertain
event, or upon a past event unknown to the parties, is demandable at once.”
This used to be Article 1113 of the Spanish Civil Code of 1889. As far back
as Floriano vs. Delgado, a 1908 decision, it has been applied according to
its express language. The well-known Spanish commentator, Manresa, on
this point, states: “Dejando, con acierto, el caracter mas teorico y grafico
del acto, o sea la perfeccion de este, see fija, para determinar el concepto
de la obigacion pura, en el distintivo de esta, y que es consecuencia de
aquel: la exigibilidad immediata.
The obligation being due and demandable, it would appear that the filing of
the suit after fifteen years was much too late. x x x.
A conditional obligation is exactly the reverse of a pure obligation. A
condition is an act or event, other than a lapse of time, which, unless the
condition is excused, must occur before a duty to perform a promise in the
agreement arises or which discharges a duty of performance that has already
arisen.2 In conditional obligations, the performance depends upon a future or
uncertain event or upon a past event unknown to the parties. What characterizes
a conditional obligation is the fact that its efficacy or obligatory force is
subordinated to the happening of a future or uncertain event. 3

A resolutory condition is also demandable at once. This is because once the

condition is established and acknowledged, the right immediately exists and
therefore the obligation concomitant to the right can be demanded at once.
However, once the future or uncertain event happens which constitutes the
condition, it operates to discharge the obligation. The obligation is resolved or
extinguished by operation of law but such resolution can be made effective at
some later date if the parties so stipulate in their contract, such as when the
parties stipulate that resolution becomes effective only from the date written
notice thereof is sent.4 An example of a contract with a resolutory condition is
when the contract provides that a purchaser can obtain a refund of their money
for as long as the government continues to allow refunds of such a character.
In such case, the purchaser can immediately demand the performance of the
obligation for the seller to

Bañez vs. Court of Appeals, G.R. No. L-30351, September 11, 1974, 59 SCRA 15.
Songcuan vs. Intermediate Appellate Court, G.R. No. L-75096, October 23, 1990 , 191 SCRA 28.
Central Philippine University vs. Court of Appeals, G.R. No. 112127, July 17, . 1179
102 ObligatiOns and COntraCts art
Text and Cases
refund the money. However, if the purchaser does not do anything and once
the government comes up with a law disallowing such a refund, then the
obligation to refund on the part of the seller is extinguished. Also, it has been
likewise held by the Supreme Court that, in case a contract involves a
reciprocal obliga-tion, the obligation of one is a resolutory condition of the
obligation of the other, the non-fulfillment of which entitles the other party to
rescind the contract.5 Likewise,
when a person donates land to another on the condition that the latter would
build upon the land a school, the condition im-posed was not a condition
precedent or a suspensive condition but a resolutory one. It is not correct
to say that the schoolhouse had to be constructed before the donation
became effective, that is, before the donee could become the owner of the
land, other-wise, it would be invading the property rights of the donor. The
donation had to be valid before the fulfillment of the condition. If there was
no fulfillment or compliance with the condition, x x x the donation may
now be revoked and all rights which the donee may have acquired under it
shall be deemed lost and extinguished.6
A suspensive condition is not demandable at once. It can be demanded only
upon the happening of the future or unknown event or a past event unknown
to the parties, which constitutes the condition. A suspensive condition gives
rise to the performance of the obligation. If the condition does not take place,
the parties would stand as if the conditional obligation had never existed. 7 An
example of a contract which provides a positive suspensive condition is a
“contract to sell” where, in a purchase of property in installment, it is expressly
provided in the contract that title remains vested on the seller until after the last
payment of the installment is made by the buyer.8 Prior to the last payment, the
purchaser has yet no title to the property. However, once the future event,
which is the payment of the last installment, occurs, the obligation of the seller
to execute the final deed of sale and to transfer title to the property, arises.9 It
is from that time that the purchaser can demand transfer of the title.
In a contract to sell
where the ownership or title is retained by the seller and is not
1995, 63 SCAD 72, 246 SCRA 511; Parks vs. Province of Tarlac, G.R. No. L-24190, to pass
until the full payment of the price, such payment being
July 13, 1926, 49 Phil. 142.
Gaite vs. Fonacier, G.R. No. L-11827, 2 SCRA 831.
Coronel vs. Court of Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141. 9Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc., G.R. No. L-25885, 46 SCRA 381, 43 SCRA
93.
Roque vs. Lapuz, G.R. No. L-32811, March 31, 1980, 96 SCRA 741.
Coronel vs. Court of Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141.
Id., Page 10.
. 1179
art ObligatiOns 103
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
a positive suspensive condition and failure of which is not a breach, casual
or serious, but simply an event that prevented the obligation of the vendor
to convey title from acquiring binding force.10

A “contract to sell” and a “conditional contract of sale,” though both involving

a suspensive condition, are different from each other. In Coronel vs. Court of
Appeals,11 the Supreme Court said that, in a contract to sell, the consent or
meeting of the minds relative to the transfer of ownership in exchange for the
price is not present because the seller expressly reserves the transfer of title to
the prospective buyer until the happening of the suspensive condition. There is
only a promise to sell upon the happening of the suspensive condition. While
in a conditional contract of sale, “where the seller may likewise reserve title to
the property subject of the sale until the fulfillment of a suspensive
condition,”12 there is already consent, “although it is conditioned upon the
happening of a contingent event which may or may not occur. If the suspensive
condition is not fulfilled, the perfection of the contract is abated.” 13
However, if the suspensive condition is fulfilled, the contract of sale is
thereby perfected, such that if there had already been previous delivery of
the property subject of the sale to the buyer, ownership thereto
automatically transfers to the buyer by operation of law without any further
act having to be performed by the seller.
In a contract to sell, upon fulfillment of the suspensive condition which is
the full payment of the purchase price, ownership will not automatically
transfer to the buyer although the property may have been previously
delivered to him. The prospective seller still has to convey title to the
prospective buyer by entering into a contract of sale. x x x x x x It is
essential to distinguish between a contract to sell and a conditional contract
of sale specially in cases where the subject property is sold by the owner
not to the party the seller contracted with, but to a third person, as in the
case at bench. In a contract to sell, there being no previous sale of the
property, a third person buying such property despite the fulfill-ment of the
suspensive condition such as the full payment of the purchase price, for
instance, cannot be deemed a buyer in bad faith and

Id.
Id., Pages 10-11.
G.R. No. 48194, March 15, 1990, 183 SCRA 171.
John D. Calamari and Joseph M. Perillo, The Law of Contracts, Third Edition
, Page 439, West Publishing Company, St. Paul Minnesota, citing Internatio-
. 1179

the prospective buyer cannot seek the relief of re-conveyance of the

property. There is no double sale in such case. Title to the property will
transfer to the buyer after registration because there is no defect on the
104 ObligatiOns and COntraCts art
Text and Cases
ownership title per se, but the latter, of course, may be sued for damages
by the intending buyer.
In a contract of sale, however, upon the fulfillment of the suspensive
condition, the sale becomes absolute and this will definitely affect the
seller’s title thereto. In fact, if there had been previous delivery of the
subject property, the seller’s ownership or title to the property is
automatically transferred to the buyer such that the seller will no longer
have any title to transfer to any third person. Applying Article 1544 of the
Civil Code, such second buyer of the property who may have had actual or
constructive knowledge of such defect in the seller’s title, or at least was
charged with the obligation to discover such defect, cannot be a registrant
in good faith. Such second buyer cannot defeat the first buyer’s title. In
case a title is issued to the second buyer, the first buyer may seek
reconveyance of the property subject of the sale.14

Another example of an obligation with a suspensive condition is when an

obligor promises to give an obligee a book if it rains the next day which is
uncertain event. The obligor’s obligation arises once it really rains the next day
as the happening of the condition gives rise to the obligation to give the book.
In Javier vs. Court of Appeals15 where, in consideration of certain rights to a
timber license, the obligor undertook to pay the sum of P30,000 to the obligee
as soon as the additional area for forest concession has been obtained by the
obligee and approved by the government, the Supreme Court said that the
obligor was not liable under the said deed of assignment as it involves the non-
happening of a suspensive condition, to wit:
As to the alleged nullity of the agreement dated February 28, 1966, we
agree with petitioner that they cannot be held liable therein. The efficacy
of said deed of assignment is subject to the condition that the application
of private respondent for an additional area for forest concession be
approved by the Bureau of Forestry. Since private respondent did not
obtain that approval, said deed produces no effect. When a contract is
subject to a suspensive condition, its birth or effectivity can take place only
if and when the event which constitutes the condition happens or is
fulfilled.

Rotterdam, Inc. vs. River Brand Ice Mills, Inc., 259 F.2d 137 (2nd Cir. 1958), certiorari denied
358 U.S. 946, 79 S.Ct. 352, 3 L. Ed.2d 352 (1959); Ross vs. Harding, 64 Wn.2d
art ObligatiOns 105
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
arts. 1180-1181

Article 1180. When the debtor binds himself to pay when his means permit
him to do so, the obligation shall be deemed to be one with a period, subject
to the provisions of Article 1197. ( n )

The debtor is usually the passive subject of the prestation because he is the one
who can be compelled to give or do the prestation. The creditor is the active
subject because he is the one who can compel performance. When the debtor
binds himself to pay when his means permit him to do so, the law presumes
that the debtor really intends to satisfy his obligation. The only problem is that
the creditor is left to speculate when the satisfaction of the obligation or, more
particularly, the payment will occur as the payment depends principally on the
debtor. Hence, payment, in so far as the creditor is concerned, could be an
uncertain event. By way of balancing the presumed intention of the debtor to
really make payment and the interest of the creditor to be paid, the law
classifies this condition as a period which is presumed to have been established
for the benefit of both the creditor and the debtor. To achieve this balance,
Article 1197 is made to apply. It provides that the parties may ask the court to
fix the duration of the period within which the payment is to be made especially
when the period depends upon the will of the debtor.

Article 1181. In conditional obligations, the acquisition of rights, as well as

the extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition. (1114)

This particular provision merely generally provides what a condition, whether

suspensive or resolutory, can do to the existence or extinguishment of a right.
A suspensive condition is also called a condition precedent while a resolutory
condition is also known as a condition subsequent. A condition precedent is an
act or event, other than a lapse of time, which must exist or occur before a duty
to perform a promised performance arises.16 If the condition does not occur and
is not excused, the promised performance need not be rendered. 17 A condition
subsequent is an event, the existence of which, by agreement of the parties,
operates to discharge a duty of performance that has arisen. 18

, 391 P.2d 398, 261 P.2d 394 (1953); Restatement, Contracts 250(a ).
Id., Page 439.
. 1182
106 ObligatiOns and COntraCts
Text and Cases
Article 1182. When the fulfillment of the
condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon the will of a third
person, the obligation shall take effect in conformity with the provisions of
this Code. (1115)

The phrase “when fulfillment of a condition” connotes a suspensive character

of the prestation. There is the expectation of the existence or accomplishment
of a duty to give or to render some service in the future. If this fulfillment
depends upon the sole will of the debtor, then it is essentially a condition
because whether the debtor will or will not fulfill the obligation is a future and
uncertain event. This condition is known as a potestative suspensive condition,
which is void. In Lao Lim vs. Court of Appeals,19 the Supreme Court considers
as void a stipulation providing that the lease contract shall subsist “for as long
as the defendant needed the premises and can meet and pay said increases”
considering that such provision
x x x is a purely potestative condition because it leaves the effectivity and
enjoyment of leasehold rights to the sole and exclusive will of the lessee.
It is likewise a suspensive condition because the renewal of the said lease,
which gives rise to a new lease depends upon said condition. It should be
noted that a renewal constitutes a new contract of lease although with the
same terms and conditions as those in the expired lease. It should also not
be overlooked that the said condition is not resolutory in nature because it
is not a condition that terminates the lease contract. The lease contract is
for a definite period of three (3) years upon the expiration of which the
lease automatically terminates.
The invalidity of a condition in a lease contract similar to the one at bar
has been resolved in Encarnacion vs. Baldomar, et al. (77 Phil. 470
[1946]), where we ruled that in an action for ejectment, the defense
interposed by the lessees that the contract of lease authorized them to
continue occupying the premises as long as they paid the rents is untenable,
because it would give to the lessees the sole power to determine whether
the lease should continue or not. As stated therein, “if this defense were to
be allowed, so long as the defendants elected to continue the lease

Id., Page 441.

G.R. No. 87047, October 31, 1990, 191 SCRA 150.
Id., Pages 234-235; Osmeña vs. Rama, G.R. No. L-4437, September 9, 1909, 14 Phil. 99.
G.R. No. L-5003, June 27, 1953, 93 Phil. 383.
Taylor vs. Uy Tieng Piao, G.R. No. 16109, October 2, 1922, 43 Phil. 873.
Id.; Rustan Pulp & Paper Mills, Inc. vs. IAC, G.R. No. 70789, October 19, 1992, a rt. 1182

by continuing the payment of rentals, the owner would never be able to

discontinue it; conversely, although the owner should desire the lease to
art ObligatiOns 107
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
continue, the lessees would effectively thwart his purpose if they should
prefer to terminate the contract by the simple expedient of stopping
payment of rentals. This of course is prohibited by the aforesaid article of
the Civil Code. (8 Manresa,
3rd ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100).”
In this Lao Lim case, it must be observed that the birth of the new lease contract
(the renewed lease) also depends upon the sole will of the lessee. Hence,
according to Article 1308, this is likewise prohibited and may make the whole
contract invalid. However, if the potestative condition is imposed not on the
birth of the obligation but on its fulfillment, only the condition is avoided,
leaving unaffected the obligation itself.20 Thus, in Trillana vs. Quezon
College,21 where the full payment of the shares in a certain school was to be
made only after the obligor had harvested fish (“babayaran kong lahat
pagkatapos na ako ay makapaghuli ng isda”), the Supreme Court likewise held
that the condition was solely dependent on obligor and therefore void.
Moreover, it was a condition imposed upon the birth or creation of the
obligation, in that the obligation to pay would only arise or exist after
harvesting of fish, thereby voiding not only the condition but also the whole
obligation. This was a suspensive condition facultative as to the debtor 22
contemplated in Article 1182.

However, a condition at once facultative and resolutory may be valid even

though the condition is made to depend upon the will of the obligor. 23 For
example, if a person promises to put in the possession of his friend a house
while he (the giver) is abroad but requires that the house be returned to his
possession in the event that he returns to the Philippines, the condition is valid
as it is resolutory in nature.

When the potestative condition is imposed on the fulfillment of the obligation,

the condition alone is voided but not the obligation. This can be seen in the
case of Osmeña vs. Ramos,24 where the Supreme Court held that, in the
following provision of a promissory note, the potestative condition is void but
the whole obligation to pay still subsists:25
On this date, I hereby promise, in the presence of two 214 SCRA 665.
G.R. No. 4437, September 9, 1909, 14 Phil. 99.
This was the explanation given when this case was compared by the Supreme Court with the case
of Trillana vs. Quezon Colleges, 93 Phil. 383 in the latter case.
G.R. No. 117009, October 11, 1995, 64 SCAD 962.
G.R. No. L-4433, May 29, 1953, 93 Phil. 218; See also Angeles vs. Court of . 1182

witnesses that, if the house of strong material in which I live in Paguing is

sold, I will pay my indebtedness to Don Tomas Osmeña as set forth in this
document.
108 ObligatiOns and COntraCts
Text and Cases
In Security Bank and Trust Company vs. Court of Appeals, 26 where a
contractor spent more than the cost construction as contemplated in the contract
and whose application for the adjustment of the contract price was not acted
upon by the owner on the ground that there was no “mutual agreement of both
parties” pursuant to the contractual provision which stated:
“If, at anytime prior to the completion of the work to be performed
hereunder, increase in prices of construction materials and/or labor
supervene through no fault on the part of the contractor whatsoever, or any
act of the government and its instrumentalities which directly or indirectly
affects the increase of the cost of the project, OWNER shall equitably make
the appropriate adjustment on mutual agreement of both parties.”
The Supreme Court ruled against Security Bank and Trust Company and
required it to pay and fulfill its obligation to the contractor on the ground,
among others, that the above-mentioned provision violates Article 1182. The
Supreme Court said:
“In the present case, the mutual agreement, the absence of which petitioner
bank relies upon to support its non-liability for the increased construction
cost, is in effect a condition dependent on the petitioner bank’s will, since
respondent would naturally and logically give consent to such an
agreement which would allow him recovery of the increased cost.”
In the event that the condition is declared void but the obligation is still valid,
should the obligation be declared pure and unconditional? This is the exact
query answered in the negative by the Supreme Court in Patente vs. Omega.27
In the said case, the Supreme Court ruled that, in converting it into a pure and
demandable obligation, an arrangement might be enforced which is not within
the contemplation of the parties. Hence, according to the Supreme Court, the
best solution is to consider the parties as having intended a period within which
the valid obligation is to be complied such that the creditor should ask the court
to fix a period for compliance.

Appeals, G.R. No. 111821, November 8, 1993.

28
Hermosa vs. Longara, 49 Official Gazette 4287, October 1953.
29
G.R. No. 107207, November 23, 1995, 65 SCAD 621, 250 SCRA 223.
30
G.R. No. 107112, February 24, 1994, 48 SCAD 539, 230 SCRA 351.
art. 1182

Mixed obligations are those which depend not only upon the will of the debtor
but also upon chance and some other factors. 28 In Romero vs. Court of
Appeals29 where the contract stipulates that the downpayment made by the
buyer to the seller regarding the sale of a property shall be returned in the event
art ObligatiOns 109
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
that the seller “shall not be able to remove the squatters from the property”
within 60 days from the execution of the contract, the Supreme Court held that
such provision is not a potestative void condition
but a “mixed” condition dependent not on the will of the vendor alone but
also of third persons like the squatters and government agencies and
personnel concerned.
In Naga Telephone Co., Inc. vs. Court of Appeals30 where the petitioner and
the respondent stipulated that the petitioner can use the electrical posts of the
respondent for as long as it needed the post but the contract can nevertheless
be terminated should the respondent stop operations, the Supreme Court, on
the issue of whether the condition is potestative or casual, ruled:
x x x A potestative condition is a condition, the fulfillment of which
depends upon the sole will of the debtor, in which case, the conditional
obligation is void. Based on this definition, respondent court’s finding that
the provision in the contract, to wit:
“(a) That the term or period of this contract shall be as long
as the party of the first part (petitioner) has need for the
electric light posts of the party of the second part (private
respondent) x x x”
is a potestative condition, is correct. However, it must have overlooked the other
conditions in the same provision, to wit:
“x x x it being understood that this contract shall terminate
when for any reason whatsoever, the party of the second part
(private respondent) is forced to stop, abandoned (sic) its
operation as a public service and it becomes necessary to
remove the electric light post (sic);”

G.R. No. L-58286, May 16, 1983, 122 SCRA 280.

Taylor vs. Uy Tieng Piao and Tan Liuan, 43 Phil. 873.
Ibid.
G.R. No. 96053, March 3, 1993, 219 SCRA 480; see also Coronel vs. Court of Appeals, G.R. No.
103577, October 7, 1996, 75 SCAD 141.
. 1183

which are casual conditions since they depend on chance, hazard, or the
will of a third person. In sum, the contract is subject to mixed conditions,
that is, they depend partly on the will of the debtor and partly on chance,
hazard, or the will of a third person, which do not invalidate the
aforementioned provision. x x x
110 ObligatiOns and COntraCts
Text and Cases
A resolutory condition that depends upon the will of a third person is not void.
Thus in Ducusin vs. Court of Appeals31 where the lease contract provides that
“the term of the contract shall be on a month-to-month basis commencing on
February 19, 1975 until terminated by mutual agreement or terminated by the
lessor on the ground that his children need the premises for their own use,” the
Supreme ruled in favor of the validity of such resolutory condition stating that
the lease will terminate when the lessor’s children need the premises for their
own use considering that the happening of the condition is not dependent solely
on the will of the lessor but rather the happening of the condition depended
upon the will of third persons — the lessor’s children.

Article 1183. Impossible conditions, those contrary to good customs or

public policy and those prohibited by law shall annul the obligation which
depends upon them. If the obligation is divisible, that part thereof which is
not affected by the impossible or unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not
having been agreed upon. (1116a)

Conditions, which are impossible, render the obligation dependent upon them
legally ineffective. It is very clear from the law that it is not only the condition
which is annulled but the whole obligation itself. Thus, an obligation to give
money as a loan only if it snows in the Philippines destroys the efficacy of the
prestation. The condition annuls the prestation. This is also true in case the
condition is against good customs, public policy or is prohibited by law.

Also, an impossible thing can never be done. Hence, to make as a condition

the doing of an impossible thing is a useless stipulation which should be
considered as not having been agreed upon. The whole obligation which
involves an impossible condition can be annulled.

Article 1184. The condition that some event happen at a determinate time
shall extinguish the obligation as soon as

Article 1187 of the 1950 Civil Code.

arts. 1184-1185

the time expires or if it has become indubitable that the event will not take
place. (1117)

This article deals with the existence of an obligation as soon as the condition
happens at a particular time and it is extinguished should the condition not
happen within the said period. Hence, if the condition is the election of Mr. X
art ObligatiOns 111
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
as president on or before 1998 and the prestation is the giving of a particular
car and the effect is the extinguishment of the obligation when the time expire,
then once Mr. X becomes the president prior to 1998 or on 1998, the obligor
has to give the car. If Mr. X does become president on or before 1998, then the
car should be given. The same situation applies if there is doubt that the event
will occur in the given time. Hence, in the same example, if Mr. X dies before
he even files his candidacy, it is clear that his becoming president will not
happen anymore on or before 1988 . This will immediately extinguish the
obligation to give the car.

Article 1185. 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.
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. (1118)

This article deals with the effectivity of an obligation in case the condition
does not happen at a particular time. Again, if the condition is the election of
Mr. X as president on or before 1998 and the prestation is the giving of a
particular car and the effect is the effectivity of the obligation when the
condition does not happen, then once Mr. X does not become the president
prior to 1998 or on 1998, the obligor has to give the car. If Mr. X becomes
president on or before 1998, then the car should not be given. The same
situation applies if the event will not occur in the given time. Hence, in the
same example, if Mr. X dies before he even files his candidacy, it is clear that
his becoming president will not happen anymore on or before 1998. This will
immediately give rise to the obligation to give the car.

The second paragraph talks of a condition which has no time fixed. For
example, the condition is simply the non-election of Mr. X. If the law provides
that elections are to be held on August 1998 and August 1998 passes without
Mr. X being elected, the condition is deemed fulfilled.
. 1186

Article 1186. The condition shall be deemed

fulfilled when the obligor voluntarily prevents its
fulfillment. (1119)
112 ObligatiOns and COntraCts
Text and Cases
The good faith-obligation of the parties includes an implied term on the part
of the said parties not to impede, hinder, obtruct or prevent the fulfillment of
the obligation.32 In the event that these preventive acts are undertaken, they
constitute a breach of the contract and therefore are unwarranted and
unlawful.33 If the obligor voluntarily prevents the fulfillment of the condition
in an obligation, the law states that the obligation shall be deemed fulfilled.
This is known as constructive fulfillment.

A conditional obligation states that the obligor will give to a school a brand
new computer if the school will donate its old computer to charity. In the event
that the obligor destroys the old computer, the condition will be considered as
having been fulfilled and he is now bound to deliver the new computer to the
school. In Tayag vs. Court of Appeals34 where, as a condition of a contract of
sale of real property, the buyer was required to pay the balance of a particular
loan which was collateralized by the property subject of the sale so that the said
property can be delivered to him and where the vendors prematurely paid the
loan, thereby preventing the buyer to fulfill the condition, the Supreme Court
upheld the ruling of the lower court when the latter applied Article 1186, to
wit:
Insofar as the third item of the contract is concerned, it may be recalled
that respondent court applied Article 1186 of the Civil Code on
constructive fulfillment which petitioners claim should not have been
appreciated because they are the obligees while the proviso in point speaks
of the obligor. But, petitioner must concede that in a reciprocal obligation
like a contract of purchase (Ang vs. Court of Appeals, 170 SCRA 286
[1989]; 4 Paras, supra, at p. 201), both parties are mutually obligors and
also obligees (4 Padilla, supra, at p. 197), and any of the contracting parties
may, upon non-fulfillment by the other privy of his part of the prestation,
rescind the contract or seek fulfillment (Article 1191, Civil Code). In short,
it is puerile for petitioners to say that they are the only obligees under the
contract since they are also bound as obligors to respect the stipulation in
permitting the private respondent to assume the loan with the Philippine
Veterans Bank

Article 562 of the 1950 Civil Code.

G.R. No. 7506, October 23, 1990, 191 SCRA 28.
G.R. No. 95641, September 22, 1994, 55 SCAD 478, 236 SCRA 643.
Spouses Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001.
Spouses Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001; Ocampo
art ObligatiOns 113
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
. 1187

which petitioners impeded when they paid the balance of said loan. As
vendors, they are supposed to execute the final deed of sale upon full
payment of the balance x x x.

Article 1187. The effects of a conditional obligation to give, once the

condition has been fulfilled, shall retroact to the
day of the constitution of the obligation. Nevertheless, when the obligation
imposes reciprocal prestations upon the parties, the fruits and the interests
during the pendency of the condition shall be deemed to have been mutually
compensated. If the obligation is unilateral, the debtor shall appropriate the
fruits and interests received, unless from the nature and circumstances of the
obligation it should be inferred that the intention of the person constituting
the same was different.
In obligations to do and not to do, the courts shall determine, in each case,
the retroactive effect of the condition that has been complied with. (1120)

In resolutory conditions, the fulfillment of the event extinguishes the

obligation. Hence, retroactivity in this case is not relevant. However, in
suspensive conditions, the efficacy of the obligation is merely suspended or
held in abeyance until the condition is fulfilled. Article 1187 therefore applies
only to obligations subject to a suspensive condition. When the suspensive
condition occurs, the effect of a conditional obligation “to give” retroacts to
the day of the constitution of the obligation. Hence, if, on February 1996, an
obligor promises to give an obligee a specific car in the event it rains on the
first Saturday of June 1996 and it does rain on the said day, the obligee is
entitled to the accessories of the said car as of February 1996, the day the
obligation has been constituted. Hence, the obligor is duty bound to take care
not only of the car but also its accessories from the time the obligation has been
constituted. In the event that the car is chosen as a special car in a competition
and wins a prize sometime during the period beginning from the time the
obligation has been constituted up to the time the condition is fulfilled, the
prize obtained by the obligor shall belong to the said obligor. This is so because
the law also provides that, if the obligation is unilateral, the debtor or obligor
shall appropriate the fruits and interests received, unless from the nature and
circumstances of the obligation it should be inferred that the intention of the
person constituting the same is different.

When the obligation imposes reciprocal prestations upon the

. 1188
114 ObligatiOns and COntraCts art
Text and Cases
parties, the fruits and interests during the pendency of the condition shall be
deemed to have been mutually compensated. Hence, if Juan promises to give
a mango orchard to Pedro, on the one hand, and Pedro promises to give Juan
P50,000 and both obligations shall take effect only if it rains on the first
Saturday of June, any fruit of the mango orchard and any interest on the money
shall mutually compensate each other. Hence, Juan will not get the interest on
the money, and Pedro will not get the fruits of the orchard once the condition
is fulfilled, even though technically their right to the fruits and interest retroacts
to the date the obligation has been constituted.

In obligations to do and not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with.

Article 1188. The creditor may, before the fulfillment

of the condition, bring the appropriate actions for the
preservation of his right.
The debtor may recover what during the same time he has paid by mistake
in case of a suspensive condition. (1121a)

It is always in the interest of the creditor to have the prestation complied with
for his benefit. Non-compliance may cause him serious damage. Hence, to
prevent this eventuality, the law allows the creditor to protect his interest even
if the condition in a conditional obligation has not yet been fulfilled. Thus, a
creditor can file an injunction suit to stop the debtor from alienating his
property which is supposed to be given to the creditor once a particular
condition is fulfilled. On the other hand, if, prior to the happening of the event
constituting the suspensive condition, the debtor, by mistake, pays the creditor,
the debtor can recover because the obligation is not yet due and demandable.
Indeed, the condition may never even be fulfilled and the debtor would never
have been liable after all.

Article 1189. When the conditions have been imposed with the
intention of suspending the efficacy of an
obligation to give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the pendency of the
condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall
be extinguished;
(2) If the thing is lost through the fault of the debtor,
. 1189
art ObligatiOns 115
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
he shall be obliged to pay damages; it is understood that the thing
is lost when it perishes, or goes out of commerce, or disappears
in such a way that its existence is unknown or it cannot be
recovered;
(3) When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may
choose between the rescission of the obligation and its
fulfillment, with indemnity for damages in
either case;
(5) If the thing is improved by its nature, or by time, the improvement
shall inure to the benefit of the
creditor;
(6) If it is improved at the expense of the debtor, he shall have no other
right than that granted to the usufructuary. (1122)

Prior to the fulfillment of the suspensive condition, anything could happen to

the object of the prestation. For example, the object may be lost. The law
importantly provides that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or it
cannot be recovered. Hence, if during the pendency of the suspensive
condition, the car which is the object of the prestation is hit by a bomb and gets
totally destroyed, it can be considered as having perished. If the car has been
discovered to have historical value and has been retrieved by the government
as a national treasure and the government has prohibited the sale of the car,
then it goes out of commerce. If the car is transported from Mindanao to Luzon
by ship, and the ship has been lost at sea and it cannot be found, it may be said
to have disappeared in such a way that its existence is unknown or it cannot be
recovered.

If the thing is lost, the existence or extinguishment of the obligation depends

on whether or not the loss occurred due to the fault of the debtor. If the thing
is lost without the fault of the debtor, the obligation is extinguished unless of
course the thing to be given is not determinate but generic. If the determinate
thing is lost through the fault of the debtor, he shall be liable for damages.

While the suspensive condition is yet unfulfilled, the obligation has not yet
arisen and the determinate thing is usually still in the possession or control of
the debtor. While in the possession of the debtor, the thing may deteriorate. If
it deteriorates without the fault
. 1189
116 ObligatiOns and COntraCts art
Text and Cases
of the debtor, any impairment is to be borne by the creditor.

If the deterioration is caused by the debtor, the creditor can choose between
rescission of the obligation and its fulfillment, with damages in either case. The
option is given to the creditor because, while the object might have
deteriorated, it might still be useful to the creditor and therefore there is no
need to rescind the contract. The creditor could still ask for fulfillment but he
should be paid damages on account of the deterioration caused by the debtor.
However, if the object has deteriorated so badly that the creditor does not see
any more use for the object, he could choose to rescind the obligation plus
damages. Hence, if during the pendency of the suspensive condition, the debtor
uses the car, which he is supposed to give to the creditor upon the happening
of a certain condition, in a car-racing event seriously causing its deterioration,
the creditor can seek rescission of the obligation and damages in the amount
equivalent to the deterioration of the car. If, however, the creditor believes that
he can still make use of the car, the creditor can seek fulfillment with damages.

It must be emphasized, however, that the choice of the remedies to be pursued,

whether rescission plus damages or fulfillment plus damages, belongs to the
creditor regardless of the degree of deterioration caused by the debtor. Thus
even if the object, through the fault of the debtor, deteriorated but the same can
still be used, the creditor can still choose rescission plus damages. The debtor
cannot say that the remedy chosen by the creditor should have been fulfillment
plus damages because the deterioration did not fully diminish the usefulness of
the object. The reverse situation is also true, if the object deteriorated so badly
seriously diminishing the usefulness of the car, the creditor can still choose
fulfillment plus damages and not rescission plus damages.

However, if the deterioration caused by the debtor is so grave that the object
goes out of commerce, it can be considered lost and the creditor can seek
damages from the debtor.

If the thing is improved by its nature, or by time, the improvement shall inure
to the benefit of the creditor. This is so because once the condition is fulfilled,
the effects of the conditional obligation shall retroact to the day of the
constitution of the obligation.35 If it is improved at the expense of the debtor,
his only right would be that of a usufructuary. A usufruct gives a right to enjoy
the property of another with the obligation of preserving its form and substance
unless the title constituting it or the law otherwise provides. 36
. 1190

Article 1190. When the conditions have for their purpose the extinguishment
of an obligation to give, the parties, upon the fulfillment of
art ObligatiOns 117
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
said conditions, shall return to each other what
they have received.
In case of the loss, deterioration or improvement of the thing, the provisions
which, with respect to the debtor, are laid down in the preceding article shall
be applied to the party who is bound to return.
As for obligations to do and not to do, the provisions of the second paragraph
of Article 1187 shall be observed as regards the effect of the extinguishment
of the obligation. (1123)

Once a resolutory condition is fulfilled, the obligation is extinguished. There

must be restitution of what has been obtained. Hence, if the conditional
obligation states that the obligor shall continue having possession over a
particular car provided that he will not bet in the lottery and the obligor bets in
the lottery, the right of the obligor to the possession of the car is extinguished.
At the same time the obligation of the obligee to allow the obligor the
possession of the car is extinguished also. The obligor should return the car.
While the resolutory condition has not yet been fulfilled and the car is
destroyed without the fault of the obligor, the obligation to return is
extinguished. If the car is lost through the fault of the debtor, he shall be liable
for damages. If the car deteriorates without the fault of the obligor, the
impairment is to be borne by the creditor. If the car deteriorates through the
fault of the obligor, the obligee may choose between the rescission of the
obligation and its ful-fillment, with indemnity for damages in either case. If the
car is im-proved by its nature, or by time, the improvement shall inure to the
benefit of the obligee. Lastly, if the car improves at the expense of the debtor,
he shall have no other right than that granted to the usufructuary.

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

Article 1191. The power to rescind obligations is implied in reciprocal ones,

in case one of the obligors should not comply with what is incumbent upon
him.

vs. Court of Appeals, 52 SCAD 610, 233 SCRA 551.

41
Deiparine, Jr. vs. Court of Appeals, G.R. No. 96643, April 23, 1993, 221 SCRA
118 ObligatiOns and COntraCts art. 1191
Text and Cases

The injured party may choose between the fulfillment

and the rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with Articles 1385 and 1388 and the
Mortgage Law. (1124)

In Songcua vs. IAC, the Supreme Court37 said that, in reciprocal obligations,
the obligation of one is a resolutory condition of the obligation of the other, the
non-fulfillment of which entitles the other to rescind the contract. In the case
of Areola vs. Court of Appeals,38 the Supreme Court described the nature of a
reciprocal obligation to wit:
Reciprocal obligations are those which arise from the same cause and in
which each party is both a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other.
Hence, in a contract of sale for example, the non-payment of the balance of
the purchase price by the buyer violates the very essence of reciprocity in the
contract of sale, a violation that conse-quently gives rise to the seller’s right to
rescind the contract in accordance with law.39

Under Article 1191, in case of non-compliance, the aggrieved party has an

implied power to rescind or, more properly, to resolve the contract. More
appropriately, the termination of the obligation under Article 1191 is resolution
and not rescission. Nevertheless, resolution and rescission under this article
have been used inter-changeably. To rescind does not merely mean to
terminate a contract and to release the parties from further obligations to each
other, but, more importantly, it means to abrogate the contract from the
beginning and to restore the parties to their relative positions as if no contract
has been made. As such, to rescind in a significant sense “is to declare the
contract void at its inception and to put an end to it as though it never was.”40

Rescission or resolution under Article 1191 is predicated on the breach of faith

by any of the parties to a contract that violates the
503; Universal Food Corporation vs. Court of Appeals, G.R. No. L-29155, May 13, 1970, 33
SCRA 1.
reciprocity between them.41 There could be no rescission if there is no breach
of faith. Thus, if, after the properties subject of the contract were already
transferred to the buyer, the said buyer cancelled the deeds of sale on the valid
art. 1191 ObligatiOns 119
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations

ground that there was a negation of the cause of the contract as the properties
purchased turned out to be unsuitable for the purpose for which they were
acquired without the fault of the seller, the cancellation made by the buyer was
not rescission or resolution under Article 1191 as there was clearly no breach
of faith on the part of any party. The seller dutifully complied with his
obligation to deliver the properties. Neither did the buyer suffer injury directly
as a result of such delivery by the seller. It was simply the negation of the cause
of the contract that prompted the cancellation of the same. 67

The power to rescind however is not absolute and must be based on a serious
or substantial breach of an obligation as to defeat the object of the parties in
making the agreement.68 A mere casual breach does not justify rescission of
the contract. 69 Thus in Philippine Amusement Enterprises, Inc. vs.
Natividad 707172 where the lessee of an automatic phonograph, known as
jukebox, sought the rescission of the contract of lease of the said machine on
the ground, among others, that “there were times” when the machine did not
work, the Supreme Court rejected the rescission stating:
Rescission will be ordered only where the breach complained of is
substantial as to defeat the object of the parties in entering into the
agreement. It will not be granted where the breach is slight or casual. The
defendants asked the plaintiff to retrieve its phonograph, claiming that
there were times when the coins dropped into the slot would get stuck,
resulting in its failure to play the desired music. But apart from this bare
statement, there is nothing in the evidence which shows the frequency with
which the jukebox failed to function properly. The expression “there are
times” connotes occasional failure of the phonograph to operate, not
frequent enough to render it unsuitable and unserviceable. As a matter of
fact, there is not even a claim that, as a result of unsatisfactory performance
thereof, the income therefrom dropped to such a level that the defendants
could not even pay the plaintiff its guaranteed share of P50 a week. On the
contrary, the evidence (Stipulation of Facts, Annexes, J, K, L, M, N and O)
shows that, during the period complained of, the operation of the jukebox
was quite profitable to both parties.
In Tan vs. Court of Appeals,46 where the seller failed to clear the lot for a few
days and failed to cause the cancellation of the mortgage lien on the property
on the date set for the execution of the deed of sale, despite having already

67
Uy vs. Court of Appeals, G.R. No. 120465, September 9, 1999, 112 SCAD 63, 314 SCRA 69.
68
Massive Construction, Inc., et al. vs. Intermediate Appellate Court, G.R. Nos. 70310-11, June 1,
1993, 223 SCRA 1; Philippine Amusement Enterprises, Inc. vs.
Natividad, 21 SCRA 284 (1967); Tan vs. Court of Appeals, 175 SCRA 656 (1989).
69
Franco-Jacinto vs. Kaparaz, G.R. No. L-81158, May 22, 1992, 209 SCRA 246.
70
G.R. No. L-21876, September 29, 1967, 21 SCRA 284.
71
G.R. No. 80479, July 28, 1989, 175 SCRA 656.
72
Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001.
120 ObligatiOns and COntraCts art. 1191
Text and Cases

done everything to effect the cancellation, and where it was the bank which
delayed the cancel-lation (which cancellation nevertheless was effected 12
days after the supposed date of execution), and where there was also a failure
to obtain the approval of the Secretary of Natural Resources on time, the
Supreme Court rejected the prayer for rescission based on the said failures by
stating:
A thorough review of the records clearly indicates that private respondents
had substantially complied with their undertaking of clearing the title to the
property which has a total land area of 886 square meters. It must be
pointed out that the subject lot consists of private land, with an area of 548
square meters, covered by TCT No. T-13826 and of a portion of the public
land which has been awarded to the private respondents under Townsite
Sales Application No. 7-676-A. While TCT No. T-13826 was subject to a
mortgage in favor of DBP. Private respondents, upon receipt of the earnest
money paid by petitioner, utilized the same to settle its obligations with
DBP thus enabling them to secure a cancellation of the existing mortgage,
which was duly noted in the title to the property [See Original Records, p.
94].
It is a settled principle of law that rescission will not be permitted for a
slight or casual breach of the contract but only for such breaches as are so
substantial and fundamental as to defeat the object of the parties in making
the agreement [Universal Food Corporation vs. Court of Appeals, G.R. No.
L-29155, May 13, 1970, 33 SCRA 1; Philippine Amusement Enterprises,
Inc. vs. Natividad, supra; Roque vs. Lapuz, G.R. No. L-32811, March 31,
1990, 96 SCRA 741]. A court, in determining whether rescission is
warranted, must exercise its discretion judiciously considering that the
question of whether a breach of a contract is substantial depends upon the
attendant circumstances [Corpus vs. Alikpala, et al., G.R. Nos. L-23720
and L-23707, January 17, 1968 , 22 SCRA 104].

Sonf Fo & Co. vs. Hawaiian-Philippines Co., 47 Phil. 821.

Zepeda vs. Court of Appeals, 216 SCRA 293.
Tan vs. Court of Appeals, G.R. No. L-80479, July 28, 1989, 175 SCRA 656.
Froilan vs. Pan Oriental Shipping Co., G.R. No. L-11897, October 31, 1964. 52Areola vs. Court of
Appeals, G.R. No. 95641, September 22, 1994, 55 SCAD 478 , 236 SCRA 643.
In this case, as to the lot covered by TCT No. T-13826, it is true that as of
June 25, 1984, the date set for the execution of the final deed of sale, the
mortgage lien in favor of DBP annotated in the title has not yet been
cancelled as it took DBP some time in processing the papers relative
thereto. However, just a few days after, or on July 12, 1984, the
cancellation of the DBP mortgage was entered by the Register of Deeds
and duly noted on the title. Time not being of the essence in the agreement,
a slight delay on the part of the private respondents in the performance of
their obligation, is not sufficient ground for the resolution of the agreement
art. 1191 ObligatiOns 121
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations

[Biando and Espanto vs. Embestro and Bardaje, 105 Phil. 1164 (1959)],
more so when the delay was not totally attributable to them.
As to the notice of levy and execution annotated on TCT No. T-13826, a
request to lift the same had already been filed with the Register of Deeds
and duly noted on the title [Original Records, p. 95]. The fact that said
notice had not yet been cancelled by the Register of Deeds as of June 25,
1984 cannot prejudice the sellers who must be deemed to have substantially
complied with their obligation. The rule in this jurisdiction is that where
the fulfillment of the condition (in a conditional obligation) does not
depend on the will of the obligor, but on that of a third person, the obligor’s
part of the contract is com-plied with if he does all that is in his power and
it then becomes incumbent upon the other contracting party to comply with
the terms of the contract [Article 1182, Civil Code; Smith Bell and Co. vs.
Sotelo Matti, 44 Phil. 874 (1922)].
On the other hand, private respondents’ interest in the public land used as
a driveway can likewise be conveyed to petitioner although no title has yet
been issued in the name of Visitacion Singson. Such portion of the public
land has long been awarded to Singson in 1972 and payment of the
purchase price thereof has already been completed as of July 17, 1984. The
fact that the consent of the Secretary of Agriculture and Natural Resources
to the sale of the property to petitioner has not yet been secured cannot be
considered a substantial breach of private respondents’ obligation under the
contract of sale.
In Juanico and Barredo vs. American Land Commercial
Co., Inc., et al. [97 Phil. 221 (1955)], this Court had ruled that the prior
approval of the Secretary of Agriculture and Natural Resources is required
only in cases of sale and encumbrance of the public land during the
pendency of the application by the purchaser and before his compliance
with the requirements of the law. x x x
Since, the land in question had already been awarded to private respondents
since 1972 and all the requirements of the law for the purchase of public land
were subsequently complied with, private respondents, as owners of said
property, can properly convey title thereto to petitioner.
In Velarde vs. Court of Appeals,47 the Supreme Court rejected the contention
of the debtor that his slight delay of one month in paying the obligation was
merely a casual breach. The Supreme Court said that while a delay of 20 days,48
one week49 or even a month may indeed be casual provided that time was not
of the essence, the totality of the whole case showed that, aside from the delay,
the debtor, in showing his willingness to pay the obligation, imposed upon the
creditor preconditions for the payment. The Supreme Court said that, in effect,
the qualified offer to pay was a repudiation of an existing obligation, which
was legally due and demandable under the contract of sale. These pre-
conditions left the creditor with no other legal option but to validly have the
contract rescinded. The rescission therefore was proper.
122 ObligatiOns and COntraCts art. 1191
Text and Cases

This implied power to rescind can only be enforced through court action, 50 in
the absence of stipulation to the contrary.51 The decision of the court is the
revocatory act of rescission.

The remedy in case of non-compliance with the obligation is either fulfillment

or rescission, with the payment of damages in either case. In Areola vs. Court
of Appeals52 where the insurance company contended that the insured, in
successfully seeking the enforcement of an erroneously canceled insurance
policy by seeking the rein-statement of the same, in effect chose the fulfillment
of the obligation, thereby barring him from further seeking damages, the
Supreme Court ruled thus:
Under the law governing reciprocal obligations, particularly the second
paragraph of Article 1191, the injured party, petitioner-insured in this case,
is given a choice between fulfillment or rescission of the obligation in case
one of the obligors, such as respondent insurance company, fails to comply
with what is incumbent upon him. However, said article entitles the injured
party to payment of damages, regardless of whether he demands fulfillment
or rescission of the obligation. Untenable then is respondent insurance
company’s argument, namely that reinstatement being equivalent to
fulfillment of its obligation divests petitioner-insured of a rightful claim for
payment of

G.R. No. L-39378, August 28, 1984, 131 SCRA 439.

G.R. No. L-39778, September 13, 1985, 138 SCRA 536.
De Luna vs. Abrigo, G.R. No. 57455, January 18, 1990, 181 SCRA 150; Froilan
damages. Such a claim finds no support in our laws on obligations and contracts.
The injured party may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible. In Ayson Simon vs.
Adamos,53 the buyer of certain lots filed a case against the seller for delivery of
the same. However, a case was previously filed by the heirs of the deceased
original owner against the seller for delivery of the same properties to them.
The heirs won and the properties were reconveyed to them. In the other case,
the buyer also won against the seller. However, the delivery of the properties
to the winning buyer had become impossible considering that the properties
were already validly in the possession of the heirs who won in the previous
case. Hence, the buyer filed another suit for rescission and damages against the
seller. The Supreme Court held that the course of action undertaken by the
buyer in filing a rescission case with damages against the seller was correct as
fulfillment of the contract had become an impossibility in accordance with
Article 1191 of the Civil Code. In Siy vs. Court of Appeals,54 the Supreme Court
said that the law however does not authorize the injured party to rescind the
obligation and at the same time seek its partial fulfillment under the guise of
recovering damages. Thus, in the Siy case, the Supreme Court disallowed the
art. 1191 ObligatiOns 123
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations

recovery of penalty charges stipulated in the contract which was sought to be

rescinded.

The power to rescind need not be implied in all cases. It can be expressly
stipulated in the contract. The law does not prohibit parties from entering into
an agreement providing that the violation of the terms of the contract shall
cause the cancellation, termination or rescission thereof even without court
intervention.55 The stipulation is in the nature of a facultative resolutory
condition which in many cases has been upheld by the courts. 56 Also, notice
must always be given to the defaulter before rescission can take effect. 57

Also in University of the Philippines vs. De Los Angeles,58 the Supreme Court
made a further explanation of the consequences of this express unilateral extra-
judicial stipulation to rescind, to wit:
Of course, it must be understood that the act of a party in treating a contract
as cancelled or resolved on account of infractions by the other contracting
party must be made known
vs. Pan Oriental Shipping, et al., L-11879, October 31, 1964, 12 SCRA 276; Torralba vs. De los
Angeles, 96 SCRA 69; Luzon Brokerage Co., Inc. vs. Maritime Building Co., 43 SCRA 93, 86
SCRA 305; Lopez vs. Commissioner of Customs, 37 SCRA 327; UP vs. De los Angeles, 35 SCRA
102; Ponce Enrile vs. Court of Appeals, 29 SCRA 504; Taylor vs. Uy Tieng Piao, 43 Phil. 873.
to the other and is always provisional, being ever subject to scrutiny and
review by the proper court. If the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf, and bring
the matter to court. Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the responsible party will
be sentenced to damages; in the contrary case, the resolution will be
affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action,
but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law. But the law definitely does not
require that the contracting party who believes itself injured must first file
suit and wait for a judgment before taking extra-judicial steps to protect its
interest. Otherwise, the party injured by the other’s breach will have to
passively sit and watch its damages accumulate during the pendency of the
suit until the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own damages
( Civil Code, Article 2203).
In De Luna vs. Abrigo,59 the Supreme Court further said that judicial
intervention is necessary not for purposes of obtaining a judicial determination
rescinding a contract already deemed rescinded by virtue of an agreement
providing for rescission even without judicial intervention, but in order to
determine whether or not the rescission was proper. Otherwise stated, if there
124 ObligatiOns and COntraCts art. 1191
Text and Cases

is a stipulation granting the right of rescission on the part of the aggrieved party
and he or she validly rescinds the contract pursuant to such express grant, any
court decision adjudging the propriety of the rescission extra-judicially
made is not the revocatory act of rescission but merely declaratory
or an affirmation of the revoca-tion. In case of an implied power of rescission
which has been
Ponce Enrile vs. Court of Appeals, 29 SCRA 504.
Jison vs. Court of Appeals, G.R. No. L-45349, August 15, 1988, 164 SCRA 339.
G.R. No. L-28602, September 29, 1970, 35 SCRA 102.
G.R. No. 57455, January 18, 1990, 181 SCRA 150.
G.R. No. L-37976, July 16, 1985, 137 SCRA 563.
G.R. No. L-112127, July 17, 1995, 63 SCAD 72, 246 SCRA 511.
Co vs. Court of Appeals, G.R. No. 112330, August 17, 1999, 110 SCAD 886, 312 SCRA 528.
G.R. No. 120820, August 1, 2000, 131 SCAD 68, 337 SCRA 67.
Palay, Inc. vs. Clave, G.R. No. L-56076, September 21, 1983, 124 SCRA 638.
G.R. No. L-45349, August 15, 1988, 164 SCRA 339.
exercised, the court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period. In Roman vs. Court of Appeals,60 the
contract stipulated that the buyer shall pay the purchase price within 60 days
from receipt of the notice that the properties have already been titled. Notice
was accordingly sent on October 11, 1958. Payment however was not made.
An action was filed for rescission. The buyer claimed that he was not given
notice and prayed for a period within which to pay. The Supreme Court did not
allow the granting of the period by saying thus:
Moreover, there would be no “just cause,” a requirement in Article 1191,
for fixing a period. After institution of the action against him, what Roman
should have done, which he did not do, was to pay Sarangaya within 60
days after service of summons. It would not have been just to grant him an
extension of more than six (6) years, from October 11, 1958 to January 9,
1965, to comply with his 60-day obligation.
Also in Central Philippine University vs. Court of Appeals61 where the donee
failed to comply with the resolutory conditions provided in the deed of
donation, the Supreme Court ruled that there was no just cause for the fixing
of a period considering that more than a reasonable period of fifty (50) years
had already been allowed the donee to avail of the opportunity to comply with
the condition even if the conditions were burdensome. According to the
Supreme Court, the fixing of a period would be a mere technicality and
formality and would serve no purpose than to delay or lead to an unnecessary
and expensive multiplication of suits.

In case a valid rescission is made, it creates an obligation to return the things

which were the object of the contract. Thus, rescission can only be made when
the one who demands rescission can return whatever he or she may be obliged
to restore. Rescission is designed to restore the parties in their former
art. 1191 ObligatiOns 125
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations

situations. If however, one of the parties has already paid the price pursuant to
the contract but has not yet received what should be delivered to him under the
contract, he has nothing to restore but is entitled to the return of what he or she
has paid, for such is the consequence of rescission which is to restore the parties
to their former position.62

If the contract involved is a contract to sell and not a contract of sale and the
seller is given the unilateral right to terminate the contract in case of non-
payment of the purchase price, the

G.R. Nos. L-17859-9, July 18, 1962, 5 SCRA 581; Price, Inc. vs. Court of Appeals, G.R. Nos. L-
17865-6, July 18, 1962.
termination is not a rescission under Article 1191 but an enforcement of the
contract. In Santos vs. Court of Appeals,63 the Supreme Court explained the
difference thus,
In a contract to sell, title remains with the vendor and does not pass on to
the vendee until the purchase price is paid in full. Thus, in a contract to sell,
the payment of the purchase price is a positive suspensive condition.
Failure to pay the price agreed upon is not a mere breach, casual or serious,
but a situation that prevents the obligation of the vendor to convey title
from acquiring an obligatory force. This is entirely different from the
situation in a contract of sale, where non-payment of the price is a negative
resolutory condition. The effects in law are not identical. In a contract of
sale, the vendor had lost ownership of the thing sold and cannot recover it,
unless the contract of sale is rescinded and set aside. In a contract to sell,
however, the vendor remains the owner for as long as the vendee has not
complied fully with the condition of paying the purchase price. If the
vendor, should eject the vendee for failure to meet the condition precedent,
he is enforcing the contract and not rescinding it.
Also, in the case of Palay, Inc. vs. Clave64 where the parties entered into a
contract to sell a parcel of land where it was expressly stipulated that the seller
“shall have the right to declare this contract canceled and of no effect without
notice” to the buyer in case the latter fails to pay his installment, and where the
seller did indeed cancel the contract without notice upon failure of the buyer to
pay the installment, the Supreme Court invalidated the cancellation on the
ground that there was no notice sent to the defaulter informing him of the
termination. Hence, the provision allowing cancellation “without notice” was
disregarded by the Supreme Court. With respect to the importance of making
a notice of cancellation regarding real estate sold in installment, the Supreme
Court in Jison vs. Court of Appeals65 said:
The indispensability of notice of cancellation to the buyer was to be later
underscored in Republic Act No. 6552 entitled “An Act to Provide
126 ObligatiOns and COntraCts art. 1191
Text and Cases

Protection to Buyers of Real Estate on Installment Payments” which took

effect on September 14, 1972, when it specifically provided:
Sec. 3(b) x x x the actual cancellation of the contract shall
127 ObligatiOns and COntraCts art
Text and Cases
. 1192

take place thirty days from receipt by the buyer of the notice of cancellation
or the demand for rescission of the contract by a notarial act and upon full
payment of the cash surrender value to the buyer.

Article 1192. In case both parties have committed a breach of the

obligation, the liability of the first shall be
equitably tempered by the courts. If it cannot be determined which of
the parties first violated the contract, the same
shall be deemed extinguished, and each shall bear his own
damages. (n)

If the violation can be traced to the parties and both of them committed the
breach, this article penalizes the first violator only if, in fact or by evidence,
such first violator can be determined. The subsequent violator will not be held
liable. However the liability of the first violator shall be equitably tempered by
the court as the injury to the other party-violator might not have been so great
had it not for the subsequent infraction of such other party-violator. The law
however states that if it cannot be determined which of the parties first violated
the contract, the obligation shall be deemed extinguished, and each shall bear
his own damages. In Camus vs. Price, Inc.66 where, on the one hand, the lessor
did not comply with his obligation to increase the elevation of the low portion
of the lot and erect thereon a concrete wall topped with barbed wire and, on the
other hand, the lessee did not comply with his obligation to cover the building
with insurance, and where it cannot be determined with definiteness who of the
parties committed the first infraction of the terms of the contract, the Supreme
Court said:

x x x Under the circumstances, the conclusion of the Court of Appeals, that

the parties are actually in pari delicto, must be sustained, and the contract
deemed extinguished, with the parties suffering their respective losses.

. 1192
132 ObligatiOns and COntraCts Text
and Cases

SECTION 2. — Obligations with a Period

Article 1193. Obligations for whose fulfillment a day certain has been fixed,
shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon
arrival of the day certain.
A day certain is understood to be that which must necessarily come,
although it may not be known when.
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 the preceding Section.
(1125a)

A period designates a particular time which is certain to happen as the moment

when the obligation will either be effective or be extinguished. If it gives rise
to the effectivity of the obligation, it is a suspensive period. If it extinguishes,
it is a resolutory one. An example of an obligation with a suspensive period is,
if on December 1, 1997, one promises to sing at another’s nightclub starting
March 1, 1998. While the obligation is constituted at a much earlier date, its
effectivity only commences on a certain future period of time, namely on
March 1, 1998. In Gaite vs. Fonacier,73 where the contract provided that the
balance of the purchase price “will be paid from and out of the first letter of
credit covering the first shipment of iron ores and/ or the first amount derived
from the local sale of iron ore made by the Larap Mines & Smelting Co., Inc.,
its assigns, administrators, or successors-in-interest,” the Supreme Court ruled
that the stipulation is not a suspensive condition but a suspensive period by
saying:
The words of the contract express no contingency in the buyer’s obligation
to pay: “The balance of Sixty-Five Thousand Pesos (P65,000) will be paid
out of the first letter of credit covering the first shipment of iron ore x x x

73
G.R. No. L-11827, July 31, 1961, 2 SCRA 831.
art ObligatiOns 129
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
etc. There is no uncertainty that the payment will have to be made sooner
or later; what is

132
 ObligatiOns 130
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
arts. 1194-1195

undetermined is merely the exact date at which it will be made. By the very
terms of the contract, therefore, the existence of the obligation to pay is
recognized; only its maturity or demandability is deferred.
On the other hand if one promises to sing at another’s nightclub as soon as the
contract is signed on December 1, 1997 up to March 1, 1998, a resolutory
period exists because the obligation to sing can be demanded at once by the
obligee but the obligation shall be extinguished on a day certain which is on
March 1, 1998.

A period may refer to a day certain. A day certain is understood to be that

which must necessarily come, although it may not be known when. If the
uncertainty consists in whether the day will come or not, it is a condition. Thus,
if an obligor commits to deliver imme-diately a particular special candy to his
sister’s 6-year-old son when the said son’s temporary front tooth naturally falls
off, it is not known when the temporary tooth will fall-off or be removed
but it is certain to happen. In this case, the “condition” refers to a period.
However, if the stipulation is that the candy will be given when he passes the
entrance examination at the Ateneo Grade School, a condition exists because
the event is not certain to happen, hence, it is to be governed by the rules on
conditional obligations provided by the Civil Code.

Article 1194. In case of loss, deterioration, or improvement of the thing

before the arrival of the day certain, the rules in Article 1189 shall be
observed. (n)

Article 1189 provides the rules in case there is loss, deterioration or

improvement of the thing which is the object of the prestation during the
pendency of the condition suspending the efficacy of an obligation to give. The
said rules apply also to obligations subject to a suspensive period and to a
resolutory period.

Article 1195. Anything paid or delivered before the arrival of the period, the
obligor being unaware of the period or believing that the obligation has
become due and demandable, may be recovered with the fruits and interests.
(1126a)

In a suspensive period, the obligation to give or to pay will not take effect upon
the arrival of the period. Hence, the creditor has no right to obtain the thing or
to be paid until the arrival of the period unless the debtor and the creditor, with
full knowledge of the period, decide to give and accept the thing to be delivered
or the payment.
art ObligatiOns 131
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
. 1196

Otherwise, the debtor has the right to recover what he has given or paid with
fruits and interest. Hence, if John, on October 1, 1997, promises to deliver to
Jane a Mango orchard on December 1, 1997, and, on November 1, 1997, John
delivers the Mango orchard believing that it is due and demandable on that
date, he can recover what he has delivered together with fruits and interest.
Prior to December 1, 1997, Jane obviously has no right to possess the Mango
orchard. However, if Jane is in the possession of the mango orchard by
December 1, 1997, John can only recover the fruits and interest accruing from
the time he delivered the property up to December 1, 1997.

Article 1196. 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, unless from the tenor of the same or other circumstances it should
appear that the period has been established in favor of one or of the other.
(1127)

In Fernandez vs. Court of Appeals74 involving a contract of lease which was

clearly a reciprocal contract, the Supreme Court said:
the period of the lease must be deemed to have been agreed upon for the
benefit of both parties, absent any language showing that the term was
deliberately set for the benefit of the lessee or lessor alone. We are not
aware of any presumption in law that the term of the lease is designed for
the benefit of the lessee alone.
In Abesamis vs. Woodcraft Works, Inc.75 where the contract provided that the
appellant shall make the shipment “before the end of July, but will not
commence earlier than April with the option to make partial shipment
depending on the availability of logs and vessels,” the Supreme Court, in
deciding who was to bear the loss as a result of the typhoon in a contract for
the delivery of logs, ruled that the quoted provision provides a period and
stated:
appellee maintains that due to the failure of appellant to send a vessel to
Dolores, Samar, the storm on May 5, 1951 swept away almost all the logs
then awaiting shipment, amounting to 410,000 board feet, valued at
P73,537.77. On this point it should be noted that under the contract,
shipment was to be made before the end of July 1951, but not to commence
earlier than April of the same year. The obligation between the parties was

74
G.R. No. 80231, October 18, 1988, 166 SCRA 577.
75
G.R. No. 18916, November 28, 1969, 30 SCRA 372.
132 ObligatiOns and COntraCts art
Text and Cases
a reciprocal one, appellant to furnish the vessel and appellee to furnish the
logs. It
. 1197

was also an obligation with a term, which obviously was intended for the
benefit of both parties, the period having been agreed upon in order to avoid
the stormy weather in Dolores, Samar, during the months of January to
March. The obligation being reciprocal and with a period, neither party
could demand performance nor incur in delay before the expiration of the
period. Consequently, when the typhoon struck on May 5, 1951 there was
yet no delay on the part of appellant, and the corresponding loss must be
shouldered by the appellee.
However, the benefit of the period may be waived by the person in whose
favor it was constituted. Hence, in the Abesamis case where delivery of some
portions of the shipment was promised to be made on July 31, 1951, the obligor
informed the obligee that he will make an earlier delivery of these subject
portions of the shipment on July 25, 1951. The obligor failed to make the
delivery on the said earlier date and he was made to bear the loss for the portion
of the shipment to be made on the said date.76

Article 1197. If the obligation does not fix a period but from its nature and
the circumstances it can be inferred that a period was intended, the courts
may fix the duration thereof.
The courts shall also fix the duration of the period when it depends
upon the will of the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed
by the courts, the period cannot be changed by them. (1128a)

In Gregorio Araneta, Inc. vs. Phil. Sugar Estates Development Co., Ltd.77
where a two-year period fixed by the lower court for the obligor to fulfill its
obligation was struck down as arbitrary, the Supreme Court said:
It must be recalled that Article 1197 of the Civil Code involves a two-step
process. The Court must first determine that “the obligation does not fix a
period” (or that the period is made to depend upon the will of the debtor),”
but from the nature and the circumstances it can be inferred that a period
was intended” (Article 1197, pars. 1 and 2). This preliminary point settled,
the
Court must then proceed to the second step, and decide what

76
Id., Pages 378-379.
77
G.R. No. L-22558, May 31, 1967, 20 SCRA 330.
art ObligatiOns 133
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
. 1197

period was “probably contemplated by the parties (Do., par. 3). So that,
ultimately the Court can not fix a period merely because in its opinion it is
or should be reasonable, but must set the time that the parties are shown to
have intended. As the record stands, the trial court appears to have pulled
the two-year period set in its decision out of thin air, since no circumstances
are mentioned to support it. Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that
the parties were fully aware that the land described therein was occupied
by squatters, because the fact is expressly mentioned therein (Rec. on
Appeals, Petitioner’s Appendix B, pp. 12-13). As the parties must have
known that they could not take the law into their own hands, but must resort
to legal processes in evicting the squatters, they must have realized that the
duration of the suits to be brought would not be under their control nor
could the same be determined in advance. The conclusion is thus forced
that the parties must have intended to defer the performance of the
obligations under the contract until the squatters were duly evicted, as
contended by the petitioner Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that it would render the
date of performance indefinite. Yet, the circumstances admit no other
reasonable view; and this very indefiniteness is what explains why the
agreement did not specify any exact periods or dates of performance.
It follows that there is no justification in law for setting the date of
performance at any other time than that of the eviction of the squatters
occupying the land in question; and in not so doing, both the trial court and
the Court of Appeals committed reversible error. It is not denied that the
case against one of the squatters, Abundo, was still pending in the Court of
Appeals when its decision in this case was rendered.
In Radiowealth Finance Company vs. Del Rosario,78 it was contended by the
debtors-respondents that, since the creditorpetitioner allowed them to apply
their promotion services for its financing business as payment of the
promissory note, the date for the payment of installment in the promissory note
was left in blank, thereby signifying that, before their debt was to become due,
the court should first fix a period of payment considering that the pay-ment
was dependent upon the sole will of the debtors-respondents. The Supreme
Court rejected this contention and said:
. 1197

78
G.R. No. 138739, July 6, 2000, 129 SCAD 527, 335 SCRA 288.
134 ObligatiOns and COntraCts art
Text and Cases
This contention is untenable. The act of leaving blank the due date of the
first installment did not necessarily mean that the debtors were allowed to
pay as and when they could. If this was the intention of the parties, they
should have so indicated in the Promissory Note. However, it did not reflect
any such intention.
On the contrary, the Note expressly stipulated that the debt should be
amortized monthly in installments of P11,579 for twelve consecutive
months. While the specific date on which each installment would be
due was left blank, the Note clearly provided that each installment should
be payable each month.
Furthermore, it also provided for an acceleration clause and a late payment
penalty, both of which showed the intention of the parties that the
installments would be paid at a definite date. Had they intended that the
debtors could pay as and when they could, there would have been no need
for these two clauses. Verily, the contemporaneous and subsequent acts of
the parties manifest their intention and knowledge that the monthly
installments would be due and demandable each month. In this case, the
conclusion that the installments had already become due and demandable
is bolstered by the fact that respondent started paying installments on the
Promissory Note even if the checks were dishonored by their drawee bank.
We are convinced neither by their avowals that the obligation had not yet
matured nor by their claim that a period for payment should be fixed by a
court.
Convincingly, the petitioner has established not only a cause of action
against the respondents, but also a due and demandable obligation. The
obligation of the respondents had matured and they clearly defaulted when
their checks bounced. Per acceleration clause, the whole debt became due
one month (April 2, 1991) after the date of the Note because the check
representing their installment bounced.
The very last sentence of Article 1197 states that “once fixed by the courts, the
period cannot be changed by them.” The objective of this is precisely to put a
sense of definiteness in an otherwise highly ambiguous situation and to finally
put the parties in a position where their obligations are predictable.

Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes
insolvent, unless he gives a guaranty or security for the debt:
(2) When he does not furnish to the creditor the guaranties or
securities which he has promised;
. 1198
art ObligatiOns 135
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
(3) When by his own acts he has impaired said guaranties or
securities after their establishment, and when through a
fortuitous event they disappear, unless he immediately gives new
ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of
which the creditor agreed to the period;
(5) When the debtor attempts to abscond. (1129a)

The law provides five instances when the debtor loses every right to the period
whether the period has been contracted for the benefit of the debtor alone or of
both the debtor and the creditor. The first one is when after the obligation has
been contracted, he becomes insolvent, unless he gives a guaranty or security
for the debt. Hence, if a debtor has been given up to January 8, 1996 to pay his
obligation and he becomes insolvent, the creditor need not wait up to January
8, 1996 to demand payment. However, if the debtor has asked a third person to
guarantee his debt or if the debtor puts up his house as collateral for the debt,
he will again have the benefit of the period. Insolvency here need not be
judicially declared. By putting up the guarantee or the collateral, the interest of
the creditor is safeguarded as he will have other means to satisfy his claim.

The second instance is when he does not furnish the creditor the guaranties or
securities which he has promised. The guaranties and securities will further
protect the interest of the creditor. Usually, in the event the debtor fails to pay
the creditor and the latter has exhausted all avenues to satisfy his claim against
the debtor without any favorable result, the creditor can turn to the guarantor
for payment. If the guarantor has committed himself solidarily, the creditor can
even go against the guarantor immediately without need of going against the
principal debtor. Securities can take the form of real-estate mortgages or
pledges. Hence, if the loan is collateralized through the mortgage of a house
and the debtor does not pay, the mortgage will be foreclosed, and the house
will be sold in a public bidding and a sufficient amount of the proceeds to
satisfy the indebtedness of the debtor will go to the creditor.

The third instance is when, by his own acts, the debtor impairs said guaranties
or securities after their establishment, and when through a fortuitous event they
disappear, unless he immediately gives new ones equally satisfactory. In Gaite
vs. Fonacier7 where the payment of the obligation was secured by two surety
bonds:
. 1198

one coming from a mining company and some of its stockholders as sureties
and the other one from a bonding company, and where the obligor was obliged
136 ObligatiOns and COntraCts art
Text and Cases
to pay the indebtedness from the time it received the proceeds of the sale of
iron ore, the Supreme Court ruled that the obligor in this case lost its right to
the period by saying:
We agree with the court below that the appellants have forfeited the right to
compel Gaite to wait for the sale of the ore before receiving payment of the
balance of P65,000.00, because of their failure to renew the bond of the Far
Eastern Surety Company or else replace it with an equivalent guarantee. The
expiration of the bonding company’s undertaking on December 8, 1955
substantially reduced the security of the vendor’s rights as creditor for the unpaid
P65,000.00, a security that Gaite considered essential and upon which he had
insisted when he executed the deed of sale of the ore to Fonacier (Exhibit “A”).
xxx
Appellants’ failure to renew or extend the surety company’s bond upon its
expiration plainly impaired the securities given to the creditor (appellee
Gaite), unless immediately renewed or replaced.
There is no merit in appellants’ argument that Gaite’s acceptance of the
surety company’s bond with full knowledge that on its face it would
automatically expire within one year was a waiver of the renewal after the
expiration date. No such waiver could have been intended, for Gaite stood
to lose and had nothing to gain barely; and if there was any, it could be
rationally explained only if the appellants had agreed to sell the ore and pay
Gaite before the surety company’s bond expired on December 8, 1955. But
in the latter case the defendants-appellants’ obligation to pay became
absolute after one year from the transfer of the ore to Fonacier by virtue of
the deed Exhibit “A.”

It must be noted that, in this third instance, the debtor loses the benefit of the
period even if the guaranties or securities disappear through a fortuitous event
unless new ones equally satisfactory are immediately given. Hence, if the
house used as collateral is hit by lightning, the debtor will still lose the right to
the period unless he gives another house of the same quality as collateral.

The fourth instance is when the debtor violates any undertaking, in

consideration of which the creditor agreed to the period. Thus, if the debtor
persuaded the creditor to allow him to pay his indebtednes 7 s on March 7, 1998
instead of on January 30, 1998
G.R. No. L-11827, July 31, 1961, 2 SCRA 830.
and the creditor agrees because the debtor, who is a singer, promises
. 1198

the creditor that he (the debtor) will sing in his nightclub for three consecutive
nights for only half his talent fee, and the debtor fails to sing as promised, the
art ObligatiOns 137
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
debtor loses his right to the period. The creditor can immediately demand
payment of the obligation.

In Allen vs. Province of Albay,79 the Supreme Court ruled that, if through the
act of the owner in a construction contract, the contractor has been or will be
prevented from finishing the works on the contractual completion date, the
owner shall be deemed to have waived the time limit or the period and the
contractor is bound only to finish the construction within a reasonable time,
and if there are liquidated damages provided for in the contract in case of delay,
a claim for such damages cannot be sustained; and neither could the liquidated
damages be restored to be made applicable to an unreasonable length of time.

The fifth instance is when the debtor attempts to abscond. If the debtor
attempts to flee from his obligations, or to move away to evade payment of his
indebtedness, the debt can be demanded from him immediately. Otherwise, if
the debtor absconds, he may not be heard of again and the creditor cannot
effectively collect his credit.

79
G.R. No. 11433, December 20, 1916, 35 Phil. 826.
 141

SECTION 3. — Alternative Obligations

Article 1199. A person alternatively bound by different prestations shall

completely perform one of them.
The creditor cannot be compelled to receive part of one and part of the other
undertaking. (1131)

Under the Civil Code, there are only three prestations namely: to give, to do
and not to do. Strictly speaking therefore, when the Code speaks of different
prestations, it refers only to these three prestations. Hence, technically
speaking, a person who is bound to give either a house, a car or a truck has
only one prestation which is “to give.” But a person who is obliged to either
deliver a house or to paint a picture has two prestations, namely: “to give” and
“to do.” It appears however that the phrase “different prestations” in the law
refers to both the strict sense and the loose sense of the word “prestation.”

Partial performance of the different prestations cannot be considered

fulfillment of the obligation and therefore cannot be done unless the creditor
accepts such partial performance as complete performance. Hence, if the
obligor or debtor can either give a house and a car or paint two murals for the
satisfaction of his obligation, he cannot give the car and one mural. The creditor
cannot even be compelled to accept such kind of satisfaction. It will be
considered an incomplete satisfaction which is not acceptable. The debtor must
make a choice and when he does, it should either be the delivery of the house
and car or the painting of two murals. The obligation will not be satisfied
through partial fulfillment of several prestations.

If all but one of the alternatives become legally impossible to fulfill, the
obligation will cease to be alternative. Thus, in a case where a loan was payable
in Philippine Peso or in United States Dollars, the alternative obligation ceased
to exist when, at the time the amount became due during the Japanese
Occupation, payment in United States Dollars was prohibited. 1

Article 11 200. The right of choice belongs to the debtor, Legardo vs. Miailhe, 88
Phil. 637.

141
arts. 1200-1201
 ObligatiOns 139
Different Kinds of Obligations
Sec. 3 — Alternative Obligations
unless it has been expressly granted to the creditor.
The debtor shall have no right to choose those prestations which are
impossible, unlawful or which could not have been the object of the
obligation. (1132)

The debtor or the obligor is the passive subject in an obligation. He, not the
creditor, is the one obliged to give, to do or not to do. Hence, the choice is
given to him by law. Any doubt as to whom the choice is given must always
be interpreted in favor of the debtor. Only by an express grant of choice can a
creditor have the right to choose which prestation is to be performed.

The debtor shall have no right to choose those prestations which are
impossible, unlawful or which could not have been the object of the obligation.
Hence, if for the accomplishment of the obligation, the debtor can either give
a car, fly to the moon, or not join the army, he has all the three prestations as
alternatives, namely: to give, to do and not to do. The first and the last alter-
natives are possible and lawful while the second, which is to fly to the moon,
is impossible. The debtor therefore has no right to choose this second
alternative. If he is allowed to do so, then the obligation can never be fulfilled.
If the alternatives are: to give opium, to sing a song or not to join the navy, the
first alternative is clearly unlawful and therefore the debtor has no right to
choose this prestation. If the alternative prestations in a modeling contract are:
to deliver the dresses, to act as model or to engage in prostitution, not only is
the last alternative illegal but it could not have been the object of the prestation.

Article 1201. The choice shall produce no effect except from the time it has
been communicated. (1133)

The creditor is always entitled to be notified of the choice. Communication to

the creditor gives effect to the choice. The manner by which the
communication is made can vary provided that it clearly conveys the
unmistakable choice of the debtor. When the alternatives are all possible,
lawful or consistent with the object of the obligation, the creditor has no right
to oppose the choice. He must accept the chosen alternative. However, if some
of the prestations are impossible, unlawful or which could not have been the
object of the obligation, the creditor can relay his objection to the same so that
the debtor will know, but, in any event, the debtor has no right to choose such
proscribed alterna-tives.2

Article 1202. The debtor shall lose the right of choice when among the
prestations whereby he is alternatively bound, only
arts. 1202-1203

one is practicable. (1134)

140 ObligatiOns and COntraCts
Text and Cases
Majority of the choices must be practicable. Otherwise, there will be no use to
the various alternative prestations given. It must be noted however that whether
only one, some, or a majority are practicable is generally irrelevant to the rights
of the creditor. It is generally the debtor’s choice which prevails. If only one is
practicable, the creditor has no right to complain about such situation because
such affects only the debtor who will lose his right of choice. The creditor has
no choice but to accept this single practicable choice provided that it is not
unlawful or inconsistent with the object of the obligation.

It must be noted that the law uses the word “practicable.” Practicable means
capable of being done, or simply feasible.3 If the choices are either impossible,
unlawful or which could not have been the object of the obligation, not only
does the debtor have no right to choose them but it is also not practicable to
undertake them. However, prestations that are not “practicable” may also
include lawful and possible prestations but, because of some special attendant
circumstances which do not necessarily make them unlawful or impossible,
they cannot be done. Hence, if the debtor has the following alternatives: to kiss
a highly contagious leper, to sing a song, or not to pay taxes, it is clear that the
last alternative is not only impracticable but also unlawful. The first alternative,
although not unlawful and not impossible, is nevertheless not practicable
because to do so will endanger the debtor’s health. In this case therefore, the
debtor loses his right of choice because only one prestation is practicable which
is to sing.

Article 1203. If through the creditor’s acts the debtor cannot make a choice
according to the terms of the obligation, the latter may rescind the contract
with damages. (n)

A debtor cannot perpetually be held liable for obligations the satisfaction or

compliance of which the creditor himself prevents the debtor from fulfilling. If
the debtor has three alternatives namely: to give a particular car, to sing at a
particular night club, or not to resign from his job, and the creditor burns the
particular nightclub where he should sing, the debtor has effectively been
prevented from making a choice from the three alternatives, due to the fault of
the creditor.

See Ong Guan Can vs. Century Insurance Company, 46 Phil. 492.
The New Lexicon Webster’s Dictionary of the English Language, 1987 edition, Page 787.
art. 1204

In this case, the debtor can ask for the rescission of the contract with damages.
If, despite, the act of the creditor, the debtor still wants to maintain the contract,
said debtor can make his selection from the remaining choices.
 ObligatiOns 141
Different Kinds of Obligations
Sec. 3 — Alternative Obligations
Article 1204. The creditor shall have a right to indemnity for damages when,
through the fault of the debtor, all the things which are alternatively the
object of the obligation have been lost, or the compliance of the obligation
has become impossible.
The indemnity shall be fixed taking as a basis the value of the last thing
which disappeared, or that of the service which last became impossible.
Damages other than the value of the last thing or service may also be
awarded. (1135a)

It must be pointed out that the debtor will not be liable in any way for reducing
the alternatives from three to two alternatives, provided what remains are
lawful, practicable, possible or consistent with the object of the obligation.
Likewise, the debtor will not even be liable for converting his alternative
obligation to a sim- ple one where there is only one lawful and
possible prestation. The debtor may even cause the loss of the thing, or render
the service impossible.

When the debtor is responsible for losing or rendering impossible all his
alternative prestations, the creditor is entitled to damages. Hence, if the debtor
has the following alternative prestations: to give a car worth P50,000 or to paint
a portrait in a special canvass worth P25,000, he will be liable for damages to
the creditor if he (the debtor) willfully destroys the car and willfully destroys
the special canvass where the portrait is to be painted, thereby rendering both
alternatives impossible. If the special canvass were first destroyed and
thereafter the car, the damages to be paid to the creditor will be the value of
said car which is P50,000. This is so because, had the car not been destroyed,
the debtor could have delivered the car, being the only remaining choice. This
is pursuant to the law which provides that the indemnity shall be fixed, taking
as a basis the value of the last thing which disappeared, or that of the service
which last become impossible. Also damages other than the value of the last
thing or service may also be awarded.

Article 1205. When the choice has been expressly given to

142 ObligatiOns and COntraCts
Text and Cases
. 1205

the creditor, the obligation shall cease to be alternative from the day when
the selection has been communicated to the debtor.
Until then the responsibility of the debtor shall be governed by the following
rules:
(1) 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;
(2) If the loss of one of the things occurs through the fault of the
debtor, the creditor may claim any of those subsisting, or the
price of that which, through the fault of the former, has
disappeared, with a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice
by the creditor shall fall upon the price of any one of them, also
with indemnity for damages.
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. (1136a)

When the choice is given to the creditor, the conferment of such right must
always be express. Once the choice of the creditor has been communicated to
the debtor, the obligation ceases to be alternative. Thus, if the debtor has three
alternative prestations: to give a car, to give a truck or to give a boat, once he
receives the selection of the creditor, he (the debtor) is bound to deliver the
choice properly. He is obliged to take care of it with the proper diligence of a
good father of a family, unless the law or the stipulation of the parties requires
another standard of care.

Prior to the selection of the creditor, the law provides three rules governing
the responsibility of the debtor. First, if one of the things is lost through a
fortuitous event, the debtor shall perform the obligation by delivering that
which the creditor should choose from among the remainder, or that which
remains if only one subsists. If the car, the truck and the boat were lost because
of a fortuitous event, the obligation is extinguished. If only the car were lost,
then the creditor has a choice between the truck and the boat. If only the boat
remains, then the obligation becomes a simple one and the
art. 1206
art ObligatiOns 143
Different Kinds of Obligations
Sec. 3 — Alternative Obligations
creditor can demand the delivery of the same.

Second, if the loss of one of the things occurs through the fault of the debtor,
the creditor may claim any of those subsisting, or the price of that which,
through the fault of the former, has disappeared, with a right to damages. If the
debtor destroys the car, the creditor still has three choices, the truck, the boat
or the price of the car. In addition, the creditor shall be entitled to damages
regardless of which alternative he chooses.

Third, if all the things are lost through the fault of the debtor, the choice of the
creditor shall fall upon the price of any one of them, also with indemnity for
damages. If the car, the truck and the boat were all lost through the fault of the
debtor, the creditor still has three choices namely: the price of the car, the price
of the truck or the price of the boat. No matter what he chooses, the creditor
shall be entitled to damages.

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.

Article 1206. When only one prestation has been agreed upon, but the
obligor may render another in substitution, the obligation is called
facultative.
The loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the
substitution has been made, the obligor is liable for the loss of the substitute
on account of his delay, negligence or fraud. (n)

This particular provision deals with a facultative-alternative obligation. For

example, if the debtor is obliged to give a car, such prestation is the principal
obligation. It becomes facultative if, in lieu of the car, he can undertake another
prestation like the painting of a mural. Undertaking the substitute prestation
however is not mandatory in the event that the principal prestation is not
performed as the creditor only agrees that it may be given as a substitute. If the
substitute however is given, the creditor cannot refuse it unless it is unlawful.
However, there is nothing to prevent the parties from agreeing that the giving
of the substitute prestation is mandatory in the event the principal obligation
cannot be performed.

In the event that the substitute is lost through the negligence of the debtor, it
does not affect the principal obligation and hence the debtor will not be liable.
If there is bad faith on the part of the
. 1206
144 ObligatiOns and COntraCts
Text and Cases
debtor, it will depend on the situation. If the substitute prestation was one of
the main reasons which induced the creditor to enter into the contract with the
debtor, but the latter did not really intend to constitute it as a substitute, this
could be an act of fraud on the part of the debtor, which could make the whole
contract voidable. For example, a debtor negotiates with a creditor in order to
let him (the debtor) pay the obligation by giving a boat to the creditor instead
of a particular car which is preferred by the creditor. The creditor resists but,
eventually, he agrees on the promise of the debtor to give not only one but two
cars of the same type, which the debtor represents as owned by him, as
substitute prestation in the event that the principal prestation is not performed.
Here, the creditor would not have agreed to the contract without this substitute
prestation. After the signing of the contract and before the fulfillment of the
main prestation, the creditor learns that the debtor does not own the cars. The
act of the debtor may constitute fraud and the whole contract may be annulled.
If the creditor does not make any move to annul the contract and accepts the
giving of the boat as satisfaction of the obligation, he can no longer assail the
contract as his acceptance cured the defect of said voidable contract. However,
if the promise to the creditor relative to the two substitute cars does not
constitute the reason for which the creditor entered into the contract, the debtor
would not be liable for his bad faith if the principal obligation can still be
performed.

Once the substitution has been made, the obligor is liable for the loss of the
substitute on account of his delay, negligence or fraud.
148 ObligatiOns and COntraCts Text
and Cases

SECTION 4. — Joint and Solidary Obligations

Article 1207. The concurrence of two or more creditors or of two or more

debtors in one and the same obligation does not imply that each one of the
former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestation. There is solidary liability only
when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity. (1137a)

A solidary obligation implies a situation where there are debts or obligations

incurred by two or more debtors in favor of two or more creditors, and giving
anyone, some or all of the creditors the right to demand from anyone, some or
all of the debtors the satisfaction of the total obligation and not merely the share
of each debtor in the debts or obligations. A solidary obligation exists only
when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity. A surety for example binds himself to pay the
obligation of the debtor when it becomes due. He becomes a solidary debtor in
that the creditor need not go against the principal debtor first before he (the
creditor) can collect from the surety. The creditor can immediately go against
the surety for the whole amount of the indebtedness or for such amount as the
surety was made liable by contract. 80 A surety, who is solidarily liable, is
therefore an insurer of the debt.81 A surety is different from a guarantor who
can be required to pay the indebtedness of the principal debtor only after the
creditor has unsuccessfully exhausted all means to collect from the debtor. A
guarantor therefore is subsidiarily liable for the debt of the debtor. He is not
even jointly liable. A guarantor insures the solvency of the debtor.82 However,
by stipulation of the parties, the guarantor can make himself solidarily liable
for the indebtedness.

80
Republic of the Philippines vs. Court of Appeals, G.R. No. 103073, March 13, 2001.
81
Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD 209 , 288 SCRA
422.
82
Ibid.
146 ObligatiOns and COntraCts art
Text and Cases
In Sesbreño vs. Court of Appeals,4 Delta Motors Promissory

148
Note No. 2731 in the amount of P307,933.33 issued in favor of Philfinance by
Delta was assigned to Sesbreño as security for the payment of the indebtedness
of Philfinance to Sesbreño. The said note was placed in the custody of Pilipinas
Bank which informed Sesbreño via a “Denominated Custodian Receipt”
(DCR) No. 10805 that it had possession of the promissory note and that “upon
your written instructions we shall undertake physical delivery of the above
securities fully assigned to you.” The Supreme Court rejected the claim that
the said statement implied that the bank became a solidary debtor with
Philfinance and Delta. The Supreme Court said that:
we found nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under the terms
of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof
or at any other time. x x x The solidary liability that petitioner seeks to
impute to Pilipinas cannot, however, be lightly inferred. Under Article
1207 of the Civil Code, “there is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.” The record exhibits no express assumption
of solidary liability visa-vis petitioner, on the part of Pilipinas. Petitioner
has not pointed us to any law which imposed such liability upon Pilipinas
nor has petitioner argued that the very nature of the custodianship assumed
by private respondent Pilipinas necessarily implies solidary liability under
the securities, custody of which was taken by Pilipinas. Accordingly, we
are unable to hold Pilipinas solidarily liable with Philfinance and private
respondent Delta under DMC PN No. 2731.
Also in the case of Philippine National Bank vs. Sta. Maria5 where the
principal, in a special power of attorney, merely empowered his agent to
borrow money and to deliver mortgages of real estate to the creditor and where
the said agent indeed borrowed money but executed a mortgage not on the
account of his principal but in his own name, the Supreme Court, applying
Article 1207 of the Civil Code, rejected the lower court’s decision stating that
the liability of the principal and the agent on the mortgage was joint and several
because in the special power of attorney the principal did not grant the agent
the authority to bind her solidarily with him on any loan he might secure
thereunder.

The stipulation of the parties can expressly provide for solidary

G.R. No. 89252, May 24, 1993, 222 SCRA 466.

art. 1207 ObligatiOns 147
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
G.R. No. L-24765, August 29, 1969, 29 SCRA 303.
. 1207

liability. In Pacific Banking Corp. vs. Intermediate Appellate Court, 83 the

document was denominated as a “Guarantor’s Undertaking” but the provision
therein stated that the guarantor jointly and severally shall pay the bank any
and all indebtedness of the principal debtor. The Supreme Court stated that
since the undertaking expressly stipulated the joint and several obligation of
the debtor, the nature of the obligation was clearly solidary. In Ronquillo vs.
Court of Appeals, 84 the Supreme Court said that an agreement to be
“individually and jointly liable” indicates solidary liability and it further made
the following explanation:
The term “individually” has the same meaning as “collectively,”
“separately,” “distinctly,” “respectively” or “severally.” An agreement to
be “individually liable” undoubtedly creates a several obligation and a
“several obligation” is one by which one individual binds himself to
perform the whole obligation.
The phrases “juntos o separadamente” and “mancomun o insolidum”
likewise denote a solidary obligation. 85 Also the phrase “jointly and severally
guaranteed,” though using the word “guaranteed,” nevertheless indicates a
solidary obligation.8687 Also,
where the contract reads “I promise.” Or “I hereby bind myself,” and is
signed by two or more promisors, it has been held to impose a joint and
several liability. The same has been held true of a promissory note which
read “I promise to pay” and signed by one person at the bottom, and by
another on the back thereof. An agreement between three creditors of a
bankrupt, that it should have a third of any dividend paid on a claim filed
by two of the debtors, has been held joint and several contract. Such
expressions as “we or either of us,” or “we jointly and severally promise”
usually give rise to a joint and several obligation. 10
It must be noted that, in the aforequoted wordings of the above promissory
notes, the debtors who were referred merely as “I” were not identified in the
body or content of the document itself. Hence, the signatories must be
considered to have acknowledged that the “I” in the document was referring to
each of them individually. Hence, the obligation is solidary. However, if the

83
G.R. No. 72275, November 13, 1991, 203 SCRA 496.
84
G.R. No. L-55138, September 28, 1984, 132 SCRA 274.
85
Parot vs. Gemora, 7 Phil. 94.
86
Rubio vs. Court of Appeals, G.R. No. L-50911, March 12, 1986, 141 SCRA 488. 10William F.
Elliott, Commentaries on the Law on Contracts, Volume II, 1913 edition, The Bobbs-Merrill
Company, Indianapolis, pages 747-748.
87
Article 1370 of the 1950 Civil Code.
148 ObligatiOns and COntraCts art
Text and Cases
phrase “I promise to pay” were worded differently in that it identified the
particular person referred to as “I,” then, for obvious reasons, even if there
were a number of signatures in the promissory note, it is clear that the others
cannot be held liable as joint and solidary debtors because only one person as
identified expressly in the promissory note made the promise to pay. They
cannot even be held liable as joint debtors. It is only the person identified as
the “I” who will be liable and the others should and must only be treated as
witnesses. Hence, if the promissory note reads “I, Mr. X, of legal age and
residing in Quezon City promises to pay Mr. J the amount of P1,000 on or
before January 1, 2003” and if in this promissory note the signatures of Mr. X
(the debtor) and Mr. J (the creditor) appear, and, at the lower portion of this
document, the signatures of Mr. M and Mr. N appear, it can never be presumed
that Mr. M and Mr. N also signed as solidary debtor or creditor. This is so
because, First, the law does not make such a presumption. Second, there is no
fact in the wording of the document from where such a presumption could
arise. Third, which is the most obvious and important reason, the names of the
only debtor and the only creditor were exactly identified in the body of the
document. The promissory note is indeed very clear and leaves no doubt that
only Mr. X is the debtor and Mr. J the creditor. As Mr. X was identified in the
body of the document immediately preceding the word “I” and he signed it,
then the promise to pay contained in the document must mean his promise
alone and nobody else’s. The law provides that if the terms of the contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control.11 Fourth, it would have been so easy
to expressly identify and indicate in writing Mr. M and Mr. N as either debtor
or creditor also, whether joint or solidary, in the body of the promissory note
if that were the intention of the parties. The absence of any reference to Mr. M
and Mr. N as debtor or creditor also negates any obligation on their part.
Indeed, if at all, the intent of the parties was to be detected from the document
itself. The naming of Mr. X as the sole debtor and Mr. J as the sole creditor in
the body of the promissory note leaves no doubt that it is only Mr. X who was
intended to be the only debtor and Mr. J as the only creditor. Fifth, even the
nature of the obligation which is a simple loan does not give rise to a solidary
obligation. Sixth, in affixing their signatures, Mr. X, Mr. J, Mr. M and Mr. N
must have read the clear and express written content of the contract that Mr. X
is liable as debtor and only Mr. J is the creditor and therefore they

Section 9, Rule 130 of the Rules of Court; Gaw vs. IAC, G.R. No. 70451, March
. 1207

are now estopped from claiming any other debtor or creditor. Once the terms
of an agreement have been reduced into writing, it is deemed to contain all the
art. 1207 ObligatiOns 149
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
terms agreed upon by the parties and no evidence of such terms other than the
contents of the written agreement shall be admissible.12 Accordingly, Mr. M
and Mr. N should be treated as mere witnesses in the promissory note
especially because to have witnesses in a promissory note is usually done in
ordinary business transactions particularly where the creditors are banking
institutions and professional lenders.

However, even if the parties stipulated in their contract that the obligation of
the obligor is joint and solidary but such contract was superseded by a judicial
decision arising from the said contract between the parties judicially declaring
the obligation to be merely joint, the said decision must be enforced in a joint
manner.88 Also, if a decision does not state that the obligation of the judgment
debtors is solidary, the writ of execution enforcing such a decision cannot be
implemented in a solidary manner among the judgment debtors.89

The law can likewise provide for a solidary nature of the obligation. Thus, the
last paragraphs of Articles 94 and 121 of the Family Code of the Philippines 90
provide that, except for certain specified exceptions, if the absolute community
or conjugal property is insufficient to cover the liabilities for which the
absolute community of property or the conjugal partnership of gains is liable,
the spouses shall generally be solidarily liable for the unpaid balance with their
separate properties. If the property arrangement of the spouses is the separation
of property regime, Article 145 of the Family Code provides that the liability
of the spouses to creditors for family expenses shall be solidary. In case of
inheritance, Article 927 of the Civil Code provides that if two or more heirs
take possession of the estate (of the deceased), they shall be solidarily liable
for the loss or destruction of a thing devised or bequeathed, even though only
one of them should have been negligent. Article 1824 of the Civil Code also
provides that all partners are solidarily liable with the partnership for
everything chargeable to the partnership in cases provided in Articles 1822 and
1823 of the Civil Code.16 In Article 1894 of the Civil Code, two or more agents
may agree to bind themselves solidarily and, under 24 , 1993, 220 SCRA 405.

Article 1895, if solidarity has been agreed upon, each of the agents is
responsible for the non-fulfillment of the agency, and for the fault or
negligence of his fellow agents, except in the latter case when the fellow agents
acted beyond the scope of their authority. With respect to bailees in
commodatum, Article 1945 provides that when there are two or more bailees
to whom a thing is loaned in the same contract, they are liable solidarily. In the

88
Oriental Philippines Company vs. Abeto, 60 Phil. 723.
89
Industrial Management International Development Corporation vs. National Labor Relations
Commission, G.R. No. 101723, May 11, 2000, 126 SCAD 283, 331 SCRA 640.
90
Executive Order No. 209 as amended which took effect on August 3, 1988. 16Article 1822.
Where, by any wrongful act or omission of any partner acting in the ordinary course of the business
of the partnership or with the authority of his co
150 ObligatiOns and COntraCts art
Text and Cases
quasi-contract known as negotiorum gestio, Article 2146 pertinently provides
that the responsibility of two or more officious managers shall be solidary,
unless the management was assumed to save the thing or business from
imminent danger. Article 2157 provides that the responsibilities of two or more
payees, when there is payment of what is not due, is solidary. Article 2194
provides that the responsibility of two or more persons who are liable for quasi-
delict is solidary.

Solidary obligations shall likewise exist if the nature of the obligation requires
it. It has been opined that some provisions in the Preliminary Title, Chapter 2
on Human Relations of the Civil Code, particularly Articles 19 to 22, 17 though
not expressly providing for solidary liability, nevertheless should give rise to
solidary obligations if violated by two or more persons.18

Article 1208. If from the law, or the nature or the wording of the obligations
to which the preceding article refers the contrary does not appear, the credit
or debt shall be presumed
partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty
is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting
to act. (n)
Article 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of a third
person and the money or property so received is misapplied by any partner while it is in
the custody of the partnership. ( n )
17
Article 19. Every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith.
Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another,
shall indemnify the latter for the same.
Article 21. Any person who wilfully causes loss or injury to another in a manner that is contrary
to morals, good customs or public policy shall compensate the latter for damages.
Article 22. Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just cause or
legal ground, shall return the same to him.
18
Civil Code of the Philippines, Volume IV by Tolentino, 1991 edition, Pages 221 to 222.
. 1208

to be divided into as many equal shares as there are creditors or debtors, the
credits or debts being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits. (1138a)

The presumption of the law is that an obligation is always joint. Thus, in Un

Pak Leung vs. Negorra,19 the Supreme Court said that in the absence of a
finding of facts that the defendants made themselves individually liable for the
debt incurred, they were each liable only for one-half of said amount. The joint
debtors are obliged to pay only their share in the indebtedness while the
art. 1207 ObligatiOns 151
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
creditors can only claim their share in the credit. It is only when the law or the
nature or the wording of the obligation clearly provides for solidary liability
will the obligation be such. Hence, unless there is no specification as to their
proportionate share in the credit or in the debt, the creditors and debtors in a
joint obligation shall be entitled or shall make payment in equal proportions.
Hence, if A and B are indebted to C and D for P1,000, C can collect from A
and B P250 each. D can likewise collect from A and B P250 each. However,
if, in the said P1,000 obligation, A owes only 1/3 of such indebtedness and B
owes 2/3 of the same while creditor C owns 1/5 of the credit and D owns 4/5
of the same, the creditors and the debtors shall collect and pay only in
proportion to what they own and owe, as the case may be. Thus A is obliged
to pay C only P66.67 and D only P266.67. This is so because A owes only 1/3
of P1,000 which is P333.33. C and D can collect only from that share of A.
Considering that the obligation is joint and since C only owns 1/5 of P333.33,
he can only collect P66.67 from A and since D owns 4/5 of P333.33, he can
only collect P266.67 from A. On the other hand, B is obliged to pay P133.33
to C and to D only P533.33. Following the same principle, B only owes 2/3
of the P1,000 indebtedness which is P666.67. C and D can collect only from
that share of B. Considering that the obligation is joint and since C only owns
1/5 of P666.67, he can only collect P133.33 from B. In the same vein, since D
owns 4/5 of P666.67, he can only collect P533.33 from B.

Article 1209. If the division is impossible, the right of the creditors may be
prejudiced only by their collective acts, and the debt can be enforced only by
proceeding against all the

G.R. No. 3128, December 19, 1907, 9 Phil. 381.

Article 1224 of the Civil Code.
Id.
152 ObligatiOns and COntraCts
Text and Cases
arts. 1209-1210

debtors. If one of the latter should be insolvent, the others shall not be liable
for his share. (1139)

If the division of the obligation is impossible and the obligation is joint, the
creditors must act collectively. Thus, if the joint obligation is to give a house
to 3 creditors, one of the creditors cannot undertake an act which will prejudice
the others. For example, a waiver of the obligation cannot be made by anyone
of the creditors unless such waiving-creditor has been authorized by the others
to undertake such act. If there is no such authority and a waiver is to be made,
all the creditors must waive the obligation.

If there are three debtors obliged to give a single house, all of the debtors must
be sued if they renege on their obligation. If one of the three debtors refuses to
deliver the house, the obligation will be converted into a claim for damages. A
joint indivisible obligation gives rise to indemnity for damages from the time
anyone of the debtors does not comply with the undertaking.20 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 the
value of the service in which the obligation consists.21 Thus, if the house is
worth P150,000, the creditors can file a case for damages against the three
debtors in the amount of P150,000. Each of the debtors will be liable for
P50,000. However, the debtor who refuses to deliver or who is, in effect,
responsible for the suit by the creditor may be liable for additional damages.
Those who did not refuse or who were willing shall not contribute to the
indemnity beyond the corresponding portion of the price of the thing.
Considering that the obligation is joint and each debtor is responsible to pay
only such amount corresponding to his share, the debtors shall not be
responsible for the share of a debtor who is insolvent.

Article 1210. The indivisibility of an obligation does not necessarily give rise
to solidarity. Nor does solidarity of itself imply indivisibility. (n)

Solidarity and indivisibility of an obligation are not synonymous. Solidary

obligation refers to the nature of the obligation attaching to the obligor and
obligee while indivisibility refers to the nature of the object of the prestation.

Article 1211. Solidarity may exist although the creditors

G.R. No. 93010, August 30, 1990, 189 SCRA 325.
Guerrero vs. Court of Appeals, G.R. No. L-22366, October 30, 1969, 29 SCRA arts. 1211-1212
 ObligatiOns 153
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
and the debtors may not be bound in the same manner and by the same
periods and conditions. (1140)

Since a solidary obligation refers to the nature of the obligation attached to the
parties themselves, it can exist even if the creditors and debtors may not be
bound in the same manner and by the same periods and conditions. Hence, if
A, B and C are solidarily indebted to D in the amount of P15,000, D can collect
from anyone of the debtors the whole amount of the indebtedness. If A is
required to pay only on August 1, 1997, B only on May 1, 1998 and C
immediately, the creditor D can collect from anyone of them the whole amount
of P15,000 at the time when the periods imposed on the particular debtors have
been fulfilled. However, if D demands payment from C on January 6, 1997, he
can pay only P5,000 which pertains to his share considering that the liability
of A and B has not yet matured. On August 2, 1997, creditor D can still demand
payment of the balance from C who can legally pay only P5,000 representing
A’s share considering that B’s liability has not yet matured.

Article 1212. Each one of the solidary creditors may do whatever may be
useful to the others, but not anything which may be prejudicial to the latter.
(114a)

In Quiombing vs. Court of Appeals,22 only one of the solidary creditors filed a
suit for collection against the solidary debtors. The debtors moved for the
dismissal of the suit on the ground that the other solidary creditor should have
been included in the case. The Supreme Court rejected the dismissal of the suit
invoking Article 1212 and stated that recovery of the contract price was surely
a useful act and can be done even by one solidary creditor. Moreover, the
Supreme Court also said that the question as to who should sue on a solidary
obligation for the collection of the price was a personal issue between the
solidary creditors, and it did not matter who as between them filed the
complaint because the solidary debtors were liable to either of the two as
solidary creditors, for the full amount of the debt. The satisfaction of a
judgment obtained against them by one solidary creditor will discharge their
obligation to the other solidary creditor and vice versa. Inclusion therefore in
the case of the other solidary creditor would have been a useless formality.

Also, if one of the solidary creditors makes an extra-judicial demand for the
debtor to pay, this will benefit also the other creditors

791 .
arts. 1213-1214
154 ObligatiOns and COntraCts
Text and Cases
as the demand will effectively make the prescriptive period for the fulfillment
of the obligation run anew.

The solidary creditor however should not do anything which may be

prejudicial to the other solidary creditors. For example, if the solidary
obligation has become due and the debtor decides to make complete payment
to one of the solidary creditors, such solidary creditor must accept payment.
Non-acceptance is clearly prejudicial to the other solidary creditors, as it would
lead to a delay or default on the part of the creditors for which said creditors
may be liable. Also, if one of the solidary creditors remits the obligation in
favor of one of the solidary debtors, the whole obligation is extinguished. This
is prejudicial to the other solidary creditors because they could not anymore
collect from any of the solidary debtors what should be due them. The fact that
these other solidary creditors were prejudiced will not invalidate the
extinguishment of the obligation. Their remedy is to collect their share of the
indebtedness from the solidary creditor who made the remission. They can
likewise ask for damages for what ever they may have lost as a result of the
remission, such as interest which should have been earned had it not for the
remission.

Article 1213. A solidary creditor cannot assign his rights without the consent
of the others. (n)

Ideally, the relationship between and among solidary creditors is one of mutual
trust. With this trust, each solidary creditor will be confident that his solidary
co-creditors will only act for the good of all the solidary creditors, and that they
will not act to prejudice others. Hence, to preserve as much as possible this
confidence, a solidary creditor cannot assign his rights without the consent of
the others.

Article 1214. The debtors may pay any one of the solidary creditors; but if
any demand, judicial or extra-judicial, has been made by one of them,
payment should be made to him. (1142a)
Anyone of the solidary creditors may accept full performance of the
obligation. However, if one of the solidary creditors makes the demand,
whether judicially or extra-judicially, payment must be made to such solidary
creditor. Consequently, once a court case has been filed by one solidary
creditor, the debtor cannot pay the other solidary creditor who is not included
in the case. There are authorities to the effect that, if payment is made to the
other creditors who are not included in the suit or who did not make a demand,
the payment
art ObligatiOns 155
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
. 1214

shall not be considered as valid. This is based on the conceptual view that, as
soon as one of the creditors make the demand, the mutual representation of the
creditors with respect to each other, which is the basis of a solidary obligation,
momentarily ceases, and therefore the debtor must only pay the one who, at the
moment of demand, seeks the full payment of the obligation. If the judicial
case is terminated with the demanding-creditor accepting partial payment with
a reservation as to the balance or, if after extra-judicial demand, the
demandingcreditor accepts partial payment with reservation as to the balance,
the other creditors can now again seek payment from the debtor. The creditors’
mutual representation will again exist.

The interpretation or application of the law making invalid the payment to the
non-demanding creditors should be abandoned. The better rule is to make
payment to the other non-demanding creditors valid. It must be noted that
Article 1214 does not by itself expressly make invalid or void payment to the
other non-demanding creditors. It is remarkably silent on this point.
Accordingly, the provision must be interpreted in the light of what would be
most beneficial to all the solidary creditors pursuant to Article 1212 which
states that any of the solidary creditors can do whatever is beneficial to the
others. Hence, while the law states “payment should be made to him” referring
to the demanding creditor, this must not be applied in a mandatory and narrow
manner but, rather, it must be inter-preted merely as giving a preference to the
demanding-creditor without necessarily curtailing the rights of the other
creditors to be paid or the right of the debtor to pay the other creditors their
rightful due. By allowing the debtor to pay the other creditors, it will better
serve the purpose of the law as to the solidarity and fulfillment of the
obligation. If payment is made in full to the non-demanding creditors, then the
share of the demanding-creditor will be given to him. If payment is made to
fulfill the obligation of the non-demanding creditors only, then the claim of the
demanding-creditor as to the whole obligation must necessarily be adjusted to
reflect only his remaining share. In both cases, the other non-demanding
creditors, in accepting the payment, clearly did something beneficial to all
creditors including the demanding creditor. The demanding creditor will not
be prejudiced because the case for collection pending in court will not
necessarily be dismissed as it will still go on for purposes of satisfying any
interest, damages or attorney’s fees also being claimed by the demanding-
creditor, unless he waives all of them. Also, if what the demanding creditor
undertook is an extra-judicial demand, payment to the non-demanding
creditors will even facilitate the fulfillment of the obligation and ultimately the
. 1215
156 ObligatiOns and COntraCts art
Text and Cases
satisfaction of his share. Applying Article 1214 in this manner will also be
consistent with Article 1222 which provides that a solidary debtor may, in
actions filed by the creditor, avail himself of all defenses which are derived
from the nature of the obligation and of those which are personal to him, or
pertain to his own share. With respect to those which personally belong to the
others, he may avail himself thereof only as regards that part of the debt for
which the latter are responsible.

Article 1215. 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, without prejudice to the provisions of Article 1219.
The creditor who may have executed any of these acts, as well as he who
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them. (1143)

Novation is basically the change of creditors, debtors or the principal condition

of the contract. The novation must however be clear to release the solidary
obligation of the debtors.23 Compensation takes place when two persons, in
their own right, are creditors and debtors of each other. Confusion is the merger
of the characters of creditor and debtor in the same person. Remission is the
condonation of an obligation. Novation, compensation, confusion and
remission are modes of extinguishing an obligation. If A, B and C are solidary
debtors of D, E and F in the amount of P1,500 and thereafter A informs D that
he is recommending X to pay the debt provided that A is released from the
obligation, and X and D agrees to the change, there is a novation in the person
of A, one of the debtors. Because of this novation, not only A’s obligation, but
also B’s and C’s are extinguished. In the same example, if instead of novation,
A becomes the creditor of D also in the amount of P1,500, and said amount is
also due, there is compensation between A and D. The compensation
extinguishes not only the obligation of A but also that of B and C. Likewise, in
the same example, if D issues a promissory note to X in the amount of P1,500
and X endorses it to A who endorses it to D, there is a merger of the persons
of the creditor and the debtor. Consequently, the debt of is extinguished. The
debt has been extinguished because of creditor D without creditors E and F
being benefited. So as not to

G.R. No. L-32425, November 21, 1984, 133 SCRA 317.

G.R. No. L-22366, October 30, 1969, 29 SCRA 791.
. 1216
art ObligatiOns 157
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
prejudice the other solidary creditors (namely: E and F), D must pay each of
them P500. This should be the case because the law clearly provides that the
creditor who may have executed any of these acts of novation, compensation,
merger or confusion, as well as he who collects the debt, shall be liable to the
others for the share in the obligation corresponding to them.

Article 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully collected.
(1144a)

In Imperial Insurance, Inc. vs. David,24 the husband and the wife bound
themselves jointly and severally in favor of the obligee for a sum of money and
when the husband died, the obligee demanded payment from the wife who
resisted payment, claiming that the obligee’s claim is barred by its failure to
file a claim in the intestate proceeding of the deceased husband. The Supreme
Court ruled that the obligee can properly claim from the wife as the nature of
the obligation is solidary and further said:
x x x Under the law and well settled jurisprudence, when the obligation is
a solidary one, the creditor may bring his action in toto against any of the
debtors obligated in solidum. Thus, if husband and wife bound themselves
jointly and severally, in case of his death her liability is independent of and
separate from her husband’s; she may be sued for the whole debt and it
would be error to hold that the claim against her as well as the claim against
her husband should be made in the decedent’s estate (Agcaoili vs. Vda. De
Agcaoili, 90 Phil. 97).
In the case at bar, appellant signed a joint and several obligation with her
husband in favor of herein appellee; as a consequence, the latter may
demand from either of them the whole obligation. As distinguished from a
joint obligation where each of the debtor is liable only for a proportionate
part of the debt and the creditor is entitled only to a proportionate part of
the credit, in a solidary obligation the creditor may enforce the entire
obligation against one of the debtors.
“Where the obligation assumed by several persons is joint and several,
each of the debtors is answerable for the whole obligation with the right to
seek contribution from his co-debtors.”
(Philippine International Surety Co. vs. Gonzales, 3 SCRA 391)

G.R. No. 96405, June 26, 1996, 71 SCAD 287, 257 SCRA 578.
. 1216
158 ObligatiOns and COntraCts art
Text and Cases
And, in Manila Surety and Fidelity Co., Inc. vs. Villarama, et al., 107 Phil.
891, this Court ruled that the Rules of Court provide the procedure should
the creditor desire to go against the deceased debtor, “but there is nothing
in the said provision making compliance with such procedure a condition
precedent before an ordinary action against the surviving solidary debtors,
should the creditor choose to demand payment from the latter, could be
entertained to the extent that failure to observe the same would deprive the
court jurisdiction to take cognizance of the action against the surviving
debtors. Upon the other hand, the Civil Code expressly allows the creditor
to proceed against any one of the solidary debtors or some or all of them
simultaneously. Hence, there is nothing improper in the creditor’s filing of
an action against the surviving solidary debtors alone, instead of instituting
a proceeding for the settlement of the estate of the deceased debtor wherein
his claim could be filed.”
In Guerrero vs. Court of Appeals,25 the creditor filed a suit against one of the
solidary debtors. The suit was compromised without novating the solidary
debt. The said solidary debtor defaulted in making payment, resulting in the
creditor demanding payment from the other solidary debtor. The Supreme
Court rejected the contention of the other solidary debtor that there was already
a waiver by the creditor to go against him considering that he already
compromised the case with his other solidary debtor, to wit:
We fail to see any incompatibility between the two obligations that would
sustain the defense of novation. The fact that in the compromise agreement
and subsequently in the execution sale, ALTO chose first to realize its
credit from Robles, did not imply waiver of its right to proceed against any
of the solidary debtors or some or all of them simultaneously, and the
demand made against one of them is not an obstacle to demands which may
subsequently be directed against the others so long as the debt or any part
of it remains outstanding and unpaid.
The solidary creditor has a right not to accept partial payment from the solidary
debtors. However, if he does accept partial payment from some of them, this
will not prevent him from demanding or claiming from the others who have
not actually paid. In Inciong, Jr. vs. Court of Appeals,26 the Supreme Court
ruled that if a claim from one of the solidary debtors has been dismissed by a
court on grounds other than the extinguishment of the whole obligation or that
the claim has prescribed, it does not necessarily mean that the solidary

Dimayuga vs. Philippine Commercial Bank, G.R. No. 42542, August 5, 1991, 200 SCRA 143;
Philippine National Bank vs. Independent Planters Association, Inc., . 1217

indebtedness cannot be claimed against the other solidary debtors who were
not impleaded in the case or against those who were impleaded but whose
liability was found by the court as proper.
art ObligatiOns 159
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
Article 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may
choose which offer to accept.
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.
If the payment is made before the debt is due, no interest for the intervening
period may be demanded.
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, in proportion to the debt of each. (1145a)

The choice is left to the solidary creditor to determine against whom he will
enforce payment.27 If two or more solidary debtors offer to pay, the creditor
may choose which offer to accept. Thus, if A, B and C are solidarily indebted
to D for P1,500 to be paid on March 1, 1997 and A, B and C offer to pay D on
the due date, D may choose from whom to accept. If D accepts payment from
one of the solidary debtors, let’s say A, the obligation shall be completely
extinguished. Having paid the whole P1,500, A has the right to claim P500
from B and another P500 C, which are their respective shares in the
indebtedness. If A paid interest on the indebtedness, B and C must likewise
share in the payment of the interest. However, the law also says that if payment
is made before the debt is due, no interest for the intervening period may be
demanded. Hence, if A pays the indebtedness on February 1, 1997, no interest
can be claimed by A for the period beginning February 1, 1997 up to March 1,
1997, the due date of the obligation.

In the event that C cannot pay his share because he is insolvent, his share shall
be borne by A and B in proportion to the debt of each. Hence, A and B share
shall share in C’s obligation of P500. A shall be

G.R. No. L-28046, May 16, 1983, 122 SCRA 113.

28
Article 1106 of the 1950 Civil Code.
29
Article 1139 of the 1950 Civil Code.
30
Article 1144 of the 1950 Civil Code.
. 1218

liable for P250 and B shall also be liable for P250. Considering that A, in effect,
initially shouldered C’s obligation of P500 when A paid the whole obligation
in full in favor of D, A can ask reimbursement of P250 from B.
160 ObligatiOns and COntraCts art
Text and Cases
Article 1218. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or become illegal. (n)

By prescription, one acquires ownership and other real rights through the lapse
of time in the manner and under the conditions laid down by law. In the same
way, rights and actions are lost by prescription. 28 Actions prescribe by mere
lapse of time fixed by the law.29 The prescriptive periods for filing an action
for different causes of action are contained in different parts of the Civil Code
but the main provisions are from Article 1139 up to Article 1155. For example,
an action based on a written agreement must be brought within 10 years from
the time the cause of action accrues.30 Hence, if A and B, solidary debtors
pursuant to a written loan agreement, are bound to pay the creditor on May 2,
1997 and on the said date the creditor makes a demand on them, but does not
collect until after 12 years from the demand, the claim clearly has prescribed.
However, if A pays the creditor despite prescription of the claim, B can refuse
to pay A his share in the indebtedness because technically the debt has
prescribed.
Article 1219. The remission made by the creditor of the share which affects
one of the solidary debtors does not release the latter from his responsibility
towards the co-debtors, in case the debt had been totally paid by anyone of
them before the remission was effected. (1146a)

Article 1220. The remission of the whole obligation, obtained by one of the
solidary debtors, does not entitle him to reimbursement from his co-debtors.
(n)

The consequences of remission in favor of anyone of the solidary

debtors depend upon the time when the remission was in fact given by the
creditor. For example, A, B and C are solidary debtors of D in the amount of
P1,500. A persuades D to condone the debt. This remission
161 ObligatiOns and COntraCts
Text and Cases
arts. 1219-1221

extinguishes the whole obligation and benefits not only A but also B and C. A
therefore cannot collect P500 each from B and C as he (A) never paid anything
to D. However, if C, after the debt becomes due, pays the whole indebtedness
and A, after such payment made by C, convinces D to condone the debt, the
said condonation or remission has no effect because by the time the remission
was made, D’s credit has already been extinguished. C can still claim from A,
the latter’s share of the indebtedness.

It must be pointed out that, in so far as Article 1219 is concerned, it is

applicable only when there is one creditor. If there are many solidary creditors
involved, remission of the debt by one of the said creditors without the consent
of the others will constitute an act which is prejudicial to the other solidary
creditors and therefore, according to Article 1212, cannot be done. If the
remission is done, the solidary creditor who made the remission shall be liable
for the share which the other creditors should receive and also for damages
which the other solidary creditors may suffer as a result of the remission. For
example, if A, B and C are solidary creditors of X in the amount of P1,500
payable on December 30, 2001 with an interest of 15% per annum, and B
remitted or condoned the debt on April 1, 2001 just one day after it was
incurred, B shall be liable to A in the amount of P500 and to C in the amount
of P500 also plus damages equivalent to the interest which A and C would have
gotten had the obligation not been condoned and had it been paid on December
30, 2001.

Article 1221. If the thing has been lost or if the prestation has become
impossible without the fault of the solidary debtors, the obligation shall be
extinguished.
If there was fault on the part of any one of them, all shall be responsible to
the creditor, for the price and the payment of damages and interest, without
prejudice to their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become
impossible after one of the solidary debtors has incurred in delay through
the judicial or extrajudicial demand upon him by the creditor, the provisions
of the preceding paragraph shall apply. (1147a)

The solidary debtors will be relieved from their obligation if the thing is lost
or the prestation becomes impossible without their fault. However, if anyone
of them is at fault or if there is previous delay on the part of anyone of the
solidary debtors before the loss or
. 1222
impossibility of the prestation due to fortuitous event, all the solidary debtors
will still be held liable. If A, B, and C are solidarily bound to deliver to G a
computer with serial number 7777 on January 3, 1997 and before such date
arrives, the said computer is hit by lightning without the negligence or fault on
the part of the solidary debtors, the obligation is extinguished. If on January 3,
1997, G demands delivery from A and the computer is not delivered and the
computer is subsequently hit by lightning, all of them shall be solidarily liable
to pay the price, damages and interest. B and C however have the right to claim
against A for the damages they have suffered since A should have delivered
the computer, or at least informed B and C of the demand.

Article 1222. A solidary debtor may, in actions filed by the creditor, avail
himself of all defenses which are derived from the nature of the obligation
and of those which are personal to him, or pertain to his own share. With
respect to those which personally belong to the others, he may avail himself
thereof only as regards that part of the debt for which the latter are
responsible. (1148a)

While the whole debt may be collected from one of the solidary debtors, he
can nevertheless pay less than the whole amount of indebtedness to the creditor
in the event that there are defenses he can set up. He may set up defenses
personal to him or to his co-debtor with respect to the whole obligation or to
only a part thereof which pertains to the respective share(s) of the co-debtor(s)
in the obligation. Also, defenses relative to the nature of the obligation can be
set up. Thus if A, B, and C are indebted to G in the amount of P1,500 but B
shall only pay if he passes the bar examination for lawyers in 1996 and C shall
pay only on January 2, 1997, and A when he reaches the age of 18, and if G
sues B in 1996 after he passes the bar, B can set up the defense that C’s
obligation is subject to a period which has not yet arrived, and also the defense
that A’s contract is voidable considering that he was a minor at the time he (A)
contracted the solidary obligation. If B is successful in claiming said defenses,
he will nevertheless pay the amount of P500 which pertains to his share
because there is no impediment in collecting the same from him.
166 ObligatiOns and COntraCts art. 1222
Text and Cases
 167

SECTION 5. — Divisible and Indivisible Obligations

Article 1223. 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 provisions of Chapter 2 of this Title. (1149)

The nature and effect of obligations are very much different from and do not
affect the divisibility or indivisibility of the things that are the object of
obligations in which there is only one debtor and only one creditor.

Article 1224. A joint indivisible obligation gives rise to indemnity for

damages from the time anyone of the debtors does not comply with his
undertaking. 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. (1150)

Joint debtors are only bound to perform their respective portion in a particular
indebtedness. Their obligation can be divisible, in which case it is so easy to
demand from each joint obligor payment of his respective share of the
obligation. However, if the obligation is indivisible, each debtor must
coordinate with the rest of the debtors for the fulfillment of the obligation.
Thus, if A, B and C are jointly bound to deliver a computer worth P30,000 to
D and the latter, on due date, demands payment from them, all of them must
fulfill the obligation. If A and B are ready to deliver but C, for no justifiable
reason, refuses to deliver, said debtors’ joint obligation is converted into a
claim for damages on the part of the aggrieved creditor. The creditor can file a
case against all the debtors for the amount of the computer which is P30,000.
He can likewise demand for damages he suffered due to the non-delivery of
the computer, such as exemplary damages, moral damages, or attorney’s fees.
A and B however should not be held liable for these other damages as they
were willing to

167
168 ObligatiOns and COntraCts art. 1225
Text and Cases

deliver the computer. It will only be C who should shoulder these other
damages.
 Article 1225. For the purposes of the preceding articles, obligations to give
definite things and those which are not susceptible of partial performance
shall be deemed to be indivisible.
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.
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.
In obligations not to do, divisibility or indivisibility shall be determined by
the character of the prestation in each particular case. (1151a)

An obligation which is not susceptible of partial performance is generally an

indivisible obligation. Thus, an obligation to give a house or a car is an
indivisible obligation. A contract stipulating that an actor has to sing and dance
simultaneously, is also indivisible. 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. However, the parties themselves may
stipulate whether or not the object or service shall, for purposes of their
contract, divisible or indivisible. The wording of the contract therefore will be
very material to show the characterization of the obligation. In the case of
Government vs. CFI91 where the compromise agreement stated, among others,
that the work was to be done in stages to be determined by the City Engineer,
that the contractor was to advance the necessary amount needed for each stage
of the work to be reimbursed by the Pasay City Government, and that the
contractor was to furnish in favor of the Pasay City Government a new
performance bond in the amount required by law and regulations in proportion
to the remaining value or cost of the unfinished work of the construction per
approved plans and specifications, the Supreme Court said that the provisions
in the compromise agreement read
. 1225

Sec. 5 — Divisible and Indivisible Obligations

together clearly show a divisible obligation. The Supreme Court further said
that:
What is crucial in sub-paragraph B of paragraph 1 of the compromise
agreement are the words “in proportion.” If the parties really intended the
legal rate of 20% performance bond to refer to the whole unfinished work,
then the provisions should have required the plaintiff contractor to submit
and file a new performance bond to cover the remaining value/cost of the
unfinished work of the construction. Using the words in proportion then

91
G.R. No. L-32162, September 28, 1984, 132 SCRA 156.
art ObligatiOns 165
Different Kinds of Obligations
significantly changed the meaning of the paragraph to ultimately mean a
performance bond equal to 20% of the next stage of the work to be done.
The law also provides that, in obligations not to do, divisibility or indivisibility
shall be determined by the character of the prestation in each particular case.
170 ObligatiOns and COntraCts Text
and Cases

SECTION 6. — Obligations with a

Penal Clause

Article 1226. In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of non-
compliance, if there is no stipulation to the contrary. Nevertheless, damages
shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in
the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with
the provisions of this Code. (1152a)

In SSS vs. Moonwalk,92 the Supreme Court upheld the decision of the Court of
Appeals in stating that, if the principal obligation has been complied with, the
penal clause has lost its efficacy or applicability, and the Supreme Court
adopted the Court of Appeal’s explanation including the definition quoted by
the latter from Spanish authorities that 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
money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled (3 Castan, Eighth Edition, Page 118).
The application of the penal clause may be governed by the stipulation of the
parties. Hence, if there is nothing stipulated as to how it shall be applied, then
the law will come in: the penalty shall substitute the indemnity for damages
and the payment of interest in case of non-compliance. However, in certain
foreign jurisdictions (United Kingdom, Australia, New Zealand and some
states in the United States), a penalty is different from liquidated damages in
that, in the former, there is need of proof of loss, but in the latter, payment may
be made without proof of loss. In the Philippines however, the

170

92
G.R. No. L-73345, April 7, 1993, 221 SCRA 119.
art ObligatiOns 167
Different Kinds of Obligations
Sec. 6 — Obligations with a Penal Clause
. 1227 93

Supreme Court, in Lambert vs. Fox,2 stated that:

there is no difference between a penalty and liquidated damages, so far as
legal results are concerned. Whatever difference exist between them as a
matter of language, they are treated the same legally. In either case, the
party to whom payment is to be made is entitled to recover the sum
stipulated without the necessity of proving damages. Indeed one of the
primary purposes in fixing a penalty or in liquidating damages, is to avoid
such necessity.
Imposition of the liquidated for breach of contract, such as in a building
contract, bars any award for additional damages at large for the same breach.94

If the parties stipulate that the award of the penalty pursuant to the penalty
clause shall not constitute a bar to the recovery of other damages, and in the
payment of interest, then it shall be so. The penalty is clearly an onerous and
harsh stipulation providing for increased liability for the purpose of
highlighting the mandatory and important character of an obligation which
should be fulfilled. The penalty clause may be in any form which is determined
or liquidated. In any event however, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.

The penalty may be enforced only when it is demandable in accordance with

the provisions of the Civil Code. An obligor is in delay only upon judicial or
extra-judicial demand unless legally excused as provided by law. 95 Hence, the
penalty may be claimed only when there is demand, whether judicial or extra-
judicial, unless the law, the stipulation of the parties or the nature of the
contract (time is of the essence) otherwise demands.

Article 1227. The debtor cannot exempt himself from the performance of the
obligation by paying the penalty, save in the case where this right has been
expressly reserved for him. Neither can the creditor demand the fulfillment
of the obligation and the satisfaction of the penalty at the same time, unless
this right has been clearly granted him. However, if after the creditor has
decided to require the fulfillment of the obligation, the performance thereof
should become impossible
172 ObligatiOns and COntraCts art. 1228

93
Phil. 588.
94
Navarro vs. Mallari, 45 Phil 242.
95
Article 1169 of the Civil Code; SSS vs. Moonwalk, G.R. No. L-73345, April 7, 1993 , 221 SCRA
119. 5Id., Page 127.
 Text and Cases

without his fault, the penalty may be enforced. (1153a)

The payment of the penalty is merely an accessory obligation. It is not the

principal obligation. Hence, the debtor cannot merely substitute the
performance of the principal obligation by the mere payment of the penalty.
However, the parties can stipulate otherwise. Likewise the creditor cannot
demand fulfillment of the obligation and payment of the penalty at the same
time. Once the obligation has been complied with and extinguished, the penal
clause has lost its raison d’etre.5 Nevertheless, the parties can stipulate in their
contract that payment of the penalty, and satisfaction of the obligation can be
demanded at the same time.

In the event that the creditor demands fulfillment of the obligation and the
same has become impossible without his fault, the penalty may be enforced.
For example, A is to deliver a particular computer to B on March 7, 1997. It
was stipulated that in the event he fails to deliver on time, he shall be liable for
liquidated damages in the amount of P200,000. B demands delivery of the
particular computer on the due date but A fails to deliver. Thereafter, the
computer is hit by lightning after his default. B can demand payment of the
P200,000 penalty.

Article 1228. Proof of actual damages suffered by the creditor is not

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

Normally, because the particular penalty in the penalty clause is already

specified and hence liquidated, there is no need to prove actual damages. The
person is mandated to pay the amount or perform the penalty specified in the
agreement of the parties for as long as there is irregular or no compliance with
the principal obliga-tion regardless of whether or not the person seeking it
suffers damages.96

In Allen vs. Province of Albay,9798 the Supreme Court ruled that, if through the
act of the owner in a construction contract, the contractor has been or will be
prevented from finishing the works on the contractual completion date, the
owner shall be deemed to have waived the time limit or the period and the
contractor is bound

96
Lambert vs. Fox, G.R. No. L-7991, January 29, 1914, 26 Phil. 588; Manila Racing Club vs.
Manila Jockey Club, G.R. No. L-46533, October 28, 1939, 69 Phil. 55; Palacios vs. Municipality,
G.R. No. 1598, November 30, 1908, 12 Phil. 140.
97
G.R. No. 11433, December 20, 1916, 35 Phil. 826.
98
State Investment House vs. Court of Appeals, G.R. No. 112590, July 12, 2001,
art ObligatiOns 169
Different Kinds of Obligations
Sec. 6 — Obligations with a Penal Clause
. 1229

only to finish the construction within a reasonable time, and if there are
liquidated damages provided for in the contract in case of delay, a claim for
such damages cannot be sustained; and neither could the liquidated damages
be restored to be made applicable to an unreasonable length of time.

Article 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even
if there has been no performance, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable. (1154a)

A contract is a source of obligation. It is the law between the parties. Hence,

“neither the law nor the courts will extricate a party from an unwise or
undesirable contract he or she entered into with all the required formalities and
with full awareness of its consequences.”8 One exception to this rule however
is the matter of penalties. If the penalty provision is unconscionable, the court
may temper, reduce or, in some cases, delete it.9
In Barons Marketing Corp. vs. Court of Appeals,10 the Court reduced the
25% penalty charge to cover the attorney’s fees and collection fees, which
was in addition to the 12% annual interest, to 10% for being manifestly
exorbitant. Likewise in Palmares vs. Court of Appeals,11 the Court
eliminated altogether the payment of the penalty charge of 3% per month
for being excessive and unwarranted under the circumstances. It ruled in
that case:
Upon the matter of penalty interest, we agree with the Court
of Appeals that the economic impact of the penalty interest
of three percent (3%) per month on total amount due but
unpaid should be equitably reduced. The purpose for which
the penalty interest is intended — that is, to punish the
obligor — will have been sufficiently served by the effects of
compounded interest. Under the exceptional cir-cumstances
in the case at bar, e.g., the original amount loaned was only
P15,000; partial payment of P8,600.00 was made on due
date; and the heavy (albeit still lawful) regular

151 SCAD 411; Development Bank of the Philippines vs. Court of Appeals, G.R. No. 137557,
October 30, 2000, 137 SCAD 361, 344 SCRA 492; Opulencia vs. Court of Appeals, 96 SCAD
793, 293 SCRA 385.
Spouses Solangon vs. Salazar, G.R. No. 125944, June 29, 2001.
10
91 SCAD 509, 286 SCRA 96.
11
93 SCAD 209, 288 SCRA 422.
G.R. No. L-45349, August 15, 1988, 164 SCRA 339.
174 ObligatiOns and COntraCts art. 1229
Text and Cases
 compensatory interest, the penalty interest stipulated in the
parties’ promissory note is iniquitous and unconscionable
and may be equitably reduced further by eliminating such
penalty interest altogether.
In Jison vs. Court of Appeals,12 the obligor, in a sale of land, was clearly liable
to pay penalty charges. The Supreme Court reduced from P47,312.64 to
P23,656.32 the penalty imposed by the Court of Appeals. The Supreme Court
said:
While the resolution of the contract and the forfeiture of the amounts
already paid are valid and binding upon petitioners, the Court is convinced
that the forfeiture of the amount of P47,312.64, although it includes the
accumulated fines for petitioners’ failure to construct a house as required
by the contract, it is clearly iniquitous considering that the contract price is
only P55,000.00. The forfeiture of fifty percent (50%) of the amount
already paid, or P23,656.32, appears to be a fair settlement. In arriving at
this amount the Court gives weight to the fact that although petitioners have
been delinquent in paying their amortizations several times to the prejudice
of private respondent, with the cancellation of the contract, the possession
of the lot reverts to private respondent who is free to resell it to another. x
xx
The Court’s decision to reduce the amount forfeited finds support in the
Civil Code. As stated in paragraph 3 of the contract, in case the contract is
cancelled, the amounts already paid shall be forfeited in favor of the vendor
as liquidated damages. The Code provides that liquidated damages,
whether intended as an indemnity or a penalty, shall be equitably reduced
if they are iniquitous or unconscionable [Art. 2227].
Further, in obligations with a penal clause, the judge shall equitably reduce
the penalty when the principal obligation has been partly or irregularly
complied with by the debtor [Art. 1229; Hodges vs. Javellana, G.R. No. L-
17247, April 28, 1962, 4 SCRA 1228] . In this connection, the Court said :
It follows that, in any case wherein there has been a partial or irregular
compliance with the provisions in a contract for special indemnification in
the event of failure to comply with its terms, the courts will rigidly apply
the doctrine of strict construction and against the enforcement in its entirety
of the indemnification, where it is clear from the terms of the contract that
the amount or character of the indemnity is fixed without regard to the
probable damages which might be anticipated as a result of a breach of the
terms of the contract; or, in other words,

Pamintuan vs. Court of Appeals, 94 SCRA 556.

. 1230

where the indemnity provided for is essentially a mere penalty having for
its principal object the enforcement of compliance with the contract . . .
[Laureano v. Kilayco, 32 Phil. 194 (1915)].
art ObligatiOns 171
Different Kinds of Obligations
Sec. 6 — Obligations with a Penal Clause
This principle was reiterated in Makati Development Corp. vs. Empire
Insurance Co. [G.R. No. L-21780, June 30, 1967, 20 SCRA 557], where
the Court affirmed the judgment of the Court of First Instance reducing the
subdivision lot buyer’s liability from the stipulated P12,000.00 to
P1,500.00 after finding that he had partially performed his obligation to
complete at least fifty percent (50%) of his house within two (2) years from
March 31, 1961, fifty percent (50%) of the house having been completed
by the end of April 1961.
If the penalty clause, which is construed against the one enforcing it, 13 is so
unconscionable that its enforcement, in effect, constitutes an undue deprivation
or confiscation of the property of the obligor, the courts can strike it down as
an invalid one.99

Article 1230. The nullity of the penal clause does not carry with it that of the
principal obligation.
The nullity of the principal obligation carries with it that of the penal clause.

The penal clause, being merely an accessory obligation, does not invalidate
the principal obligation in the event that such penal clause is void or without
effect. Being merely accessory to enforce the main obligation, such penal
clause could never exist if the main obligation does not exist.100 Hence, the
nullity of the principal obligation carries with it that of the penal clause.
176 ObligatiOns and COntraCts Text
and Cases

Chapter 4

EXTINGUISHMENT OF OBLIGATIONS
General Provisions

Article 1231. Obligations are extinguished:

(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;

99
Ibarra vs. Aveyro, 37 Phil. 273.
100
SSS vs. Moonwalk, G.R. No. L-73345, April 7, 1993, 221 SCRA 119.
(4) By the confusion or merger of the rights of creditor and debtor; (5) By
compensation;

(6) By novation.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code. (1156a)

Obligations are extinguished through a number of ways. The above provision

enumerates the modes provided in the Civil Code. As to the fulfillment of a
resolutory condition and rescission based on breach of trust, these have been
taken up in Chapter 3, Book IV, Title I of the Civil Code. Prescription is
generally provided for from Articles 1106 up to 1155 of the Civil Code but
there are other provisions on prescription spread out in other parts of the Civil
Code such as in Persons and Family Relations, Donations, Property, and Wills
and Succession. Annulment of Contracts is principally discussed in Chapter 7,
Title II, Book IV of the Civil Code.

Death of a party, however, does not extinguish an obligation unless the

obligation is personal in nature or intransmissible. Hence, the lessor’s heirs
who inherit the leased property from the deceased lessor cannot set up the claim
that the obligation to allow the property under the lease contract in the
possession of the lessee has been

176
art ObligatiOns 173
. 1231
Extinguishment of Obligations

extinguished by the death of the lessor, and therefore, being the new owners of
the property, they can now eject the lessee. In such a case,
death of a party does not excuse non-performance of a contract which
involves a property right, and the rights and obligations thereunder pass to
the personal representatives of the deceased. Similarly, nonperformance is
not excused by the death of the party when the other party has a property
interest in the subject matter of the contract.101
When a person commits a crime and when civil liability arises from the
commission of the said crime as its only basis, the death of the offender
generally extinguishes the crime which, in turn, extinguishes the civil liability.
Stated differently, where the civil liability does not exist independently of
the criminal responsibility, the extinction of the latter by death ipso facto
extinguishes the former, provided, of course, that death supervenes before
final judgment.102
Thus, in People vs. Jose,103 the accused forcibly abducted and thereafter raped
the victim and was properly convicted in the trial court of the complex crime
of forcible abduction with rape and was ordered to pay moral and exemplary
damages to the victim. He appealed the decision and therefore the judgment of
conviction did not become final. While the case was pending appeal, the
accused died. The Supreme Court dismissed the case against him and he was
relieved of all personal and pecuniary penalties attendant to his crime.

However, if the civil liability neither solely nor originally springs from the
crime, the civil liability shall persist despite the extinction of the criminal
liability. Hence, in Torrijos vs. Court of Appeals104 where a person bought a
property from the accused, and thereafter the accused again sold the property
to another person, the accused was charged and convicted of the crime of
estafa. He was likewise ordered to pay back as indemnity the amount paid to
him by the first buyer plus damages. The accused appealed but died while the
case was pending appeal. The Supreme Court said that while his criminal
art. 1231

liability was extinguished, his civil liability was not extinguished. In this case,
the civil liability did not arise solely or originally from the crime itself but also

101
DKC Holdings Corporation vs. Court of Appeals, G.R. No. 118248, April 5, 2002, 329 SCRA
666; Torrijos vs. Court of Appeals, G.R. No. 40336, October 24, 1975, 67 SCRA 394.
102
Torrijos vs. Court of Appeals, G.R. No. L-40336, October 24, 1975, 67 SCRA 394.
103
G.R. No. 28397, June 17, 1976, 71 SCRA 273.
104
G.R. No. L-40336, October 24, 1975, 67 SCRA 394.
174 ObligatiOns and COntraCts
Text and Cases
from the contract of sale of the property which was not implemented and also
from his deceitful acts which violated the provisions of the Civil Code on
Human Relations, namely Articles 19, 20 and 21. The appeal as to the civil
liability therefore should be allowed to proceed subject to the pertinent
provision of the Rules of Court on substitution of parties.
 179

SECTION 1. — Payment or Performance

Article 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. (n)

Obligation to pay by the delivery of money means obligation to pay by

delivering that which the law recognizes as money at the time of payment. 105
Under the Civil Code, payment is not exclusively limited 106to the giving of
money. It also includes any manner of performing the obligation with the end
in view of extinguishing it. Hence, if A purchases a car from seller B, the
former can pay not only in money but also in services provided that B agrees.
Also, it must be noted that there are certain presumptions made by law in favor
of payment. Thus, the receipt of the principal by the creditor, without
reservation with respect to the interest, shall give rise to the presumption that
said interest has been paid.107 Also, the receipt of a later installment of a debt,
without reservation as to prior installments, shall likewise give rise to the
presumption that such installments have been paid. 108 These presumptions
however can be rebutted by evidence. If the presumption is successfully
overturned, the burden of proving that there has been payment rests on the
obligor. Hence, it has also been consistently held that the burden of proof to
show payment once the debt has been fully established by evidence is on the
debtor. Thus in Biala vs. Court of Appeals 109 where the plaintiff presented
promissory notes which were not fully rebutted, the Supreme Court upheld the
indebtedness of the obligor by saying:
x x x When the existence of a debt is fully established by the evidence
contained in the record, the burden of proving that it has been extinguished
by payment devolves upon the debtor who offers such a defense to the

105
Haw Pia vs. China Banking Corporation, G.R. No. L-554, April 9, 1948, 80 Phil.
106
.
107
Article 1176 of the 1950 Civil Code.
108
Id.
109
G.R. No. 43503, October 31, 1990, 191 SCRA 50.
176 ObligatiOns and COntraCts
Text and Cases
claim of the creditor (Chua Chienco vs. Vargas, 11 Phil. 219, cited in
Servicewide Specialists, Inc. vs. Hon.

179
arts. 1233-1234

Intermediate Appellate Court, et al., G.R. No. 74553, June 8, 1989, 174
SCRA 80). In the case at bar, all the documents evidencing petitioner’s
debts are still in the possession of respondent Lee. No receipt or other
satisfactory evidence was presented by the petitioner to prove the alleged
payment to respondent. Promissory notes in the hands of the creditor are
proofs of indebtedness rather than proofs of payment (First Integrated
Bonding and Insurance Company vs. Isnani, G.R. No. 70246, July 31,
1989, 175 SCRA 753) . x x x

Article 1233. A debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be. (1157)

Payment contemplates full satisfaction of the debt or the obligation. Complete

delivery or service must comprise everything that is necessary to satisfy the
obligation consistent with the object of the same. Hence, the obligation to give
a determinate thing includes the delivery of all its accessions and accessories,
even though they may not have been mentioned. 110 Payment of a loan with
stipulated interest is complete only upon payment of the principal and the
interest. Anything less than a complete performance may essentially be
considered a breach of the obligation. In Philippine National Bank vs. Court of
Appeals111 where the PNB paid an alleged attorney-in-fact of the creditor and
where there was no proof that the alleged attorneyin-fact was the representative
of the creditor, the Supreme Court considered the payment to such person as
not effective and further stated:
There is no question that no payment had ever been made to private
respondent as the check was never delivered to him. When the court
ordered petitioner to pay private respondent the amount of P32,480.00, it
had the obligation to deliver the same to him. Under Article 1233 of the
Civil Code, a debt shall not be understood to have been paid unless the

110
Article 1169 of the 1950 Civil Code.
111
G.R. No. 108630, April 2, 1996, 78 SCAD 37, 256 SCRA 44.
 thing or service in which the obligation consists had been completely
delivered or rendered, as the case may be.

Article 1234. If the obligation has been substantially performed in good

faith, the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee. (n)
178 ObligatiOns and COntraCts
Text and Cases
art. 1234

Substantial performance of the obligation is not complete performance. It

constitutes a breach of the obligation if not for the legal treatment that when
such performance occurs, the obligor may recover as though there had been
strict and complete fulfillment, less damages suffered by the obligee. In giving
the obligee the right to be given damages, the law recognizes the fact that the
obligee has been injured and damaged, and that there has been no waiver of
such injury or damage by the said obligee. However, the breach in this case is
not a material one enough to compel the obligor to rescind the whole
obligation. Hence, for the doctrine of substantial per-formance to apply, the
part unperformed must not destroy the value or purpose of the contract. 112 The
substantial performance however must have been done in good faith and, in
this regard, it has been opined that
the contemporary view, however, is that even a conscious and intentional
departure from the contract specifications will not necessarily defeat
recovery, but may be considered as one of the several factors involved in
deciding whether there has been full performance. The pertinent inquiry is
not simply whether the breach was wilfull but whether the behavior of the
party in default comports with the standards of good faith and fair dealing.
Even an adverse conclusion on this point is not decisive but is to be
weighed by other factors, such as the extent to which the owner will be
deprived of a reasonably expected benefit and the extent to which the
builder may suffer forfeiture, in deciding whether there has been
substantial performance.113
In Pagsibigan vs. Court of Appeals114 where the debtor had, in effect, paid the
creditor already more than the original amount of the loan (which was secured
by a mortgage) due to the imposition of a high interest rate plus penalty charges
and where the debtor, as payment of the remaining balance of P3,558.20, had
in effect paid P8,650.00 in addition to the P1,000 it also paid, the Supreme
Court ruled that there was substantial compliance on the basis of Article
1234 warranting the cancellation and release of the mortgage. It

112
John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition, 1987, West
Publishing Company, St. Paul Minn., Page 462, citing Mac Pon Co. vs. Vinsoni Painting &
Decorating Co., 423 So.2d 216 (Ala. 1982); E. Martin Schaeffer vs. Kelton, 95 N.M. 182, 619
P.2d 1226 (1980); Klug & Smith Co. vs. William Sommer and Richard Gebhardt, 83 Wis. 2d 378,
265 N.W. 2d 269 (1978).
113
Id., Page 463, citing Vencenzi vs. Cerro, 186 Conn. 612, 442 A.2d. 1352, 1354 (1982).
114
G.R. No. 90169, April 7, 1993, 221 SCRA 202.
 ObligatiOns 179
Extinguishment of Obligations
Sec. 1 — Payment or Performance
art. 1234

likewise quoted the ruling in Angeles vs. Calasanz115 where rescission was not
allowed due to substantial compliance by the debtor on the basis again of
Article 1234, thus:
The breach of the contract adverted to by the defendantsappellants is so
slight and casual when we consider that apart from the initial downpayment
of P392.00 the plaintiff-appellees had already paid the monthly
installments for a period of almost nine (9) years. In other words, in only a
short time, the entire obligation would have been paid. Furthermore,
although the principal obligation was only P3,920.00 excluding the 7
percent interest, the plaintiffs-appellees had already paid an aggregate
amount of P4,533.38. To sanction the rescission made by the defendants-
appellants will work injustice to the plaintiffsappellees. It would unjustly
enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that if the obligation has
been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages
suffered by the obligee, also militates against the unilateral act of the
defendants-appellants in cancelling the contract.
The obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee. Thus in the Pagsibigan116
case, the substantial compliance in the payment of the loan warranted the
cancellation and release of his mortgaged properties after he was still required
to pay some penalties. Also, it has been held that the difference between the
value of the house as built and the value it would have had had it been
constructed strictly according to the contract was the measure of damages. 117
Other cases state that the defaulting party will be allowed to recover the
contract price less the cost of correction of the defects of the unfinished
work.118

In J.M. Tuason & Co., Inc. vs. Javier,14 the Supreme Court upheld the decision
of the lower court in giving the defaulting-purchaser an extension of time to

115
G.R. No. L-42283, March 18, 1985, 135 SCRA 323.
116
G.R No. 90169, April 7, 1993, 221 SCRA 202.
117
John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition, 1987, West
Publishing Company, St. Paul, Minn., Page 463 in footnote 75, citing White vs. Mitchell, 123
Wash. 630, 213 P. 10 (1923); Venzke vs. Magdanz, 243 Wis. 155, 9 N.W.2d 604 (1943).
118
Id., Page 464 in footnote 75, citing Bellizzini vs. Huntley Estates, Inc., N.Y.2d 112 , 164
N.Y.S.2d 395, 143 N.E. 2d 802 (1957).
180 ObligatiOns and COntraCts
Text and Cases
pay all his obligations to the seller-plaintiff by applying Article 1234 to the
situation of the defaulting purchaser, to wit:
art. 1235

In this connection, it should be noted that, apart from the initial installment
of P396.12, paid upon the execution of the contract, on September 7, 1954,
the defendant religiously satisfied the monthly installments accruing
thereafter, for a period of almost eight (8) years, or up to January 5, 1962;
that, although the principal obligation under the contract was P3,691.20,
the total payments made by the defendant up to January 5, 1962, including
stipulated interest, aggregated P4,134.08; that the defendant has offered to
pay all of the installments overdue including the stipulated interest, apart
from reasonable attorney’s fees and the costs; and that, accordingly, the
trial court sentenced the defendant to pay all such installments, interest,
fees and costs. Thus, plaintiff will thereby recover everything due thereto,
pursuant to its contract with the defendant, including such damages as the
former may have suffered in consequence of the latter’s default. Under the
circumstances, We feel that, in the interest of justice and equity, the
decision appealed from may be upheld upon the authority of Article 1234
of the Civil Code.

Article 1235. When the obligee accepts the performance knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with. (n)

Unlike in Article 1234, the substantial compliance contemplated in Article

1235 connotes the waiver of the obligee of damages arising from the breach of
contract which resulted in the incompleteness or irregularity of the obligation.
By not expressing any protest or objection, the obligee accepts the performance
of the obligation as fully complied with despite his knowledge of such
irregularity or incompleteness.

In Esguerra vs. Villanueva15 where the debtor claimed that, because the
creditor received his partial payments, the creditor was to be considered to have
accepted the incompleteness of the performance, and therefore the obligation
should have been considered complied with pursuant to Article 1235, the
Supreme Court said that such interpretation was wrong and explained:
Respondents maintain, and the lower court held, that the “receipt” of said
sums of P800.00 and P1,400.00 by the Esguerras constituted “acceptance”
of the incomplete and irregular

G.R. No. L-28569, February 27, 1970, 31 SCRA 829; See also Legarda Hermanos vs. Saldana,
G.R. No. L-26578, January 28, 1974, 55 SCRA 324.
 ObligatiOns 181
Extinguishment of Obligations
Sec. 1 — Payment or Performance
G.R. No. L-23191, December 19, 1967, 21 SCRA 1314.
art. 1235

performance of respondents’ obligation under the judgment in cases Nos.

1074 and 1075, and that this “acceptance” having been made without any
“protest or objection” on the part of the Esguerras, said obligation must be
“deemed fully complied with,” pursuant to Article 1235 of the Civil Code
of the Philippines.
This theory is based upon the premise that “receipt” of a partial payment
is necessarily an “acceptance” therefor, within the purview of said
provision, and that the Esguerras had not protested or objected to said
payment. Such premise is untenable. The verb “accept,” as used in Article
1235, means to take as “satisfactory or sufficient,” or to “give assent to,”
or to “agree” or “accede” to an incomplete or irregular performance. The
circumstances obtaining in the case at bar clearly show that the Esguerras
had neither acceded or assented to said payment, nor taken the same as
satisfactory or sufficient compliance with the judgment aforementioned.
Indeed, the day immediately following that of the first payment of P800.00
or on December 13, 1962, the Esguerras asked Judge Villanueva to issue
the corresponding writs of execution in the two (2) cases. Thus, the
Esguerras patently manifested their dissatisfaction with — which
necessarily implied an objection or protest to — said partial payment.
Moreover, Judge Villanueva must have so understood the reaction of the
Esguerras to the same payment, for he was present when it was made, and
still he caused the writs to be issued. What is more, the respondents
evidently had the same impression, for, otherwise, they would not have
paid the additional sum of P1,460.00 on January 5, 1963. Then, again, the
insistence of the Esguerras in causing the attached properties of
respondents herein to be disposed of, pursuant to the writs of execution,
despite said additional payments, leave no room for doubt that the former
had never regarded the partial payment as satisfactory compliance with the
latter’s obligation under said judgment.
After all, the law does not require the protest or objection of the creditor
to be made in a particular manner or at a particular time. So long as the acts
of the creditor, at the time of the incomplete or irregular payment by the
debtor, or within a reasonable time thereafter, evince that the former is not
satisfied with or agreeable to said payment or performance, the obligation
shall not be deemed fully extinguished. In the case at bar, the Esguerras
had performed said acts within such time.
In Tayag vs. Court of Appeals16 where the sellers accepted from the purchaser
numerous payments in installment of the purchase price of a particular piece
of land after the due date and posterior to
arts. 1236-1238
182 ObligatiOns and COntraCts
Text and Cases
the grace periods provided in the contract without any protest as to the delayed
payments and where it was even the purchaser who filed a case for specific
performance relative to the sale, and who consigned at the same time the
balance of the purchase price, the Supreme Court said that the actuation of the
sellers was clearly a waiver of his right to rescind the contract and that, on the
basis of Article 1235 of the Civil Code, he was likewise estopped from
reneging their commitment on account of acceptance of benefits arising from
overdue accounts of the purchaser.

Pertinently, if a party fails to interpose any objection to the entries or

conditions in an invoice furnished to him by the other party, such failure can
be considered as implied acceptance and therefore he will be liable to pay the
amount stated therein.17

Article 1236. The creditor is not bound to accept payment or performance

by a third person who has no interest in the fulfillment of the obligation,
unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been beneficial to the debtor.
(1158a)

Article 1237. Whoever pays on behalf of the debtor without the knowledge
or against the will of the latter, cannot compel the creditor to subrogate him
in his rights, such as those arising from a mortgage, guaranty, or penalty.
(1159a)

Article 1238. Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires the
debtor’s consent. But the payment is in any case valid as to the creditor who
has accepted it. (n)

Payment made by a third person and accepted by the creditor can extinguish
an indebtedness or an obligation. The good faith or the bad faith of the third
person is immaterial. However, whether or not the one who paid completely
acquires the rights of the creditor as against the debtor depends on whether or
not the payment has been
G.R. No. 96053, March 3, 1993, 219 SCRA 480.
Naga Development Corporation vs. Court of Appeals, G.R. No. L-28173, September 30, 1971, 41
SCRA 105; Pan Pacific Company vs. Philippine Advertising Corporation, G.R. No. L-22050, June
13, 1968; Brillo Handicrafts, Inc. vs. Court of Appeals, 73 SCAD 122, 260 SCRA 383.
arts. 1236-1238
 ObligatiOns 183
Extinguishment of Obligations
Sec. 1 — Payment or Performance
made without knowledge or against the will of the debtor. Hence, the following
situations can arise:
1) If a third person pays the creditor without the knowledge or against
the will of the debtor, the third person can only recover from the
debtor to the extent that the debtor has been benefited. As to what is
beneficial to the debtor can be invoked only by such debtor and not
the creditor. Whether or not it is beneficial to the debtor is
determined by the law and not the will of the debtor. The beneficial
effects must be determined at the time the payment was made. 119 The
third person cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage, guaranty or penalty.
Hence, if A is indebted to B in the amount of P500,000 secured by a
real estate mortgage on the house of A, and X pays B the said
indebtedness in the amount of P500,000 without the knowledge or
against the will of A, X can only recover the amount of P500,000
but he cannot compel the creditor to transfer the mortgage to him.
Hence, in case A does not pay X, X cannot fore-close on the
mortgage to satisfy his claim. However, if the third party who paid
is interested in the obligation, such as a gua-rantor, surety, or co-
debtor, legal subrogation is presumed 120 and therefore such
interested third party-payor can have the right even as to the
accessory obligations such as a mortgage. However, the presumption
is rebuttable. Legal subrogation transfers to the person subrogated
the credit with all the rights thereto appertaining, either against the
debtor or against third persons, be they guarantors, or possessors of
mortgages.121
2) If a third person pays the creditor with the know-ledge of the debtor,
but over the latter’s objection, then the effect is the same as in No. 1
because the situation is clearly against the will of the debtor.
3) If the third person pays the creditor with the knowledge and consent
of the debtor, the third person can recover from the debtor the
amount he paid to the creditor. He can likewise compel the creditor
to transfer to him any mortgage, guaranty or penalty. In this case
there is legal subrogation which transfers to the person subrogated
the credit with all the rights thereto appertaining, either against the
debtor or against third persons, be they guarantors, or possessors of
mortgages.21 In the example given in No. 1, X can recover P500,000.
X can likewise compel the creditor to transfer to him the real estate
mortgage of A so that, if the latter does not pay, X can foreclose on
the mortgage

119
RFC vs. Court of Appeals, 94 Phil. 984.
120
Article 1302(3) of the 1950 Civil Code.
121
Article 1303 of the 1950 Civil Code.
184 ObligatiOns and COntraCts
Text and Cases
arts. 1236-1238

to satisfy his claim.

4) If the creditor accepts payment from a third person because this has
been allowed in his contract with the debtor, then clearly the debtor
agrees with such payment beforehand, and therefore the effect is the
same as in No. 3.
5) If the third person pays the creditor without
inten-ding to be reimbursed by the debtor, the obligation is extinguished
whether or not the consent of the debtor is obtained. The payment will be
treated as a donation which requires the debtor’s consent. A is indebted to
B. X pays B the said indebtedness without intending to be paid back by A.
This will be treated as a donation and hence A should accept the payment
made by X. If A does not consent or accept the payment made by X, the
obligation nevertheless will be extinguished in so far as B is concerned.
In Tanguilig vs. Court of Appeals22 where respondent was sued by the
petitioner for non-payment of the windmill the latter constructed for the
former, and where the respondent claimed that he made payment to another
contractor who built the deep well to which the windmill system was connected
and therefore such pay-ment must be credited as payment to the petitioner, the
Supreme Court ruled that the only contract that existed between the res-
pondent and the petitioner was the construction of a windmill and therefore any
payment to the contractor of the deep well was ineffective. Moreover, the
Supreme Court said that any notion of payment pursuant to Articles 1236 and
1237 cannot be accepted, thus:
Respondent cannot claim the benefit of the law concerning “payments
made by a third person.” The Civil Code provisions do not apply in the
instant case because no creditor-debtor relationship between petitioner and
Guillermo Pili and/or SPGMI has been established regarding the
construction of the deep well. Specifically, witness Pili did not testify that
he entered into a contract with petitioner for the construction of res-
pondent’s deep well. If SPGMI was really commissioned by petitioner to
construct the deep well, an agreement particularly to this effect should have
been entered into.

Article 1239. In obligations to give, payment made by one who does not have
the free disposal of the thing due and capacity to alienate it shall not be valid,
without prejudice

Article 1303 of the 1950 Civil Code.

G.R. No. 117190, January 2, 1997, 77 SCAD 647.
 ObligatiOns 185
Extinguishment of Obligations
Sec. 1 — Payment or Performance
. 1239

to the provisions of Article 1427 under the Title on “Natural Obligations.”

(1160a)

Normally, one has the free disposal of the thing due and capacity to alienate it
only if he is the owner of the thing or at least he has been given authority by
the owner to use the property as payment for the obligation “to give.” Article
1239 contains a clause which says “without prejudice to the provisions of
Article 1427 under the Title on “Natural Obligations.” This article provides
that

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,
voluntarily pays a sum of money or delivers a fungible thing in fulfillment
of the obligation, there shall be no right to recover the same from the
obligee who has spent or consumed it in good faith.
Even if a minor owns something, especially those which have significant
value, he does not, on his own, have the free disposal of it without the consent
of his parents and the courts. As a general rule, any contract entered into by a
minor with respect to the alienation of something which he owns is annullable.
Article 1427 however states that “a minor between the ages of 18 and 21 years
of age” has no right to recover any fungible thing used as payment for an
obligation from the creditor who has spent or consumed it in good faith. Under
Article 1427 therefore, payment is legally effected even if the said minor has
no free disposal of the thing. Article 1427 must be considered repealed by
Articles 234 and 236 of the Family Code of the Philippines, 122 as amended by
Republic Act No. 6809, which lowered the age of majority and emancipation
to 18 years of age and which likewise provide that emancipation shall terminate
parental authority over the person and property of the child who shall then be
qualified and responsible for all acts of civil life, save the exceptions
established by existing laws in special cases. Accordingly, a minor must
necessarily be 17 years of age or below. There is no more “minor between the
ages of 18 and 21 years of age.” If ever the effects of Article 1427 is still to
apply, it shall apply only to those 17 years of age and below.

Article 1240. Payment shall be made to the person in whose favor the
obligation has been constituted, or his successors-ininterest, or any person
authorized to receive it. (1162a)

122
Executive Order No. 209 which took effect on August 3, 1988.
186 ObligatiOns and COntraCts art
Text and Cases
art. 1240

Payment should only be paid to the creditor or the obligee, or his successors-
in-interest, or any person authorized to receive it. The phrase “any person
authorized to receive it”
means not only a person authorized by the same creditor, but also a person
authorized by law to do so, such as a guardian, executor or administrator
of estate of a deceased, and assignee or liquidator of a partnership or
corporation, as well as any other who may be authorized to do so by
law.123124
In Panganiban vs. Cuevas,25 the Supreme Court said that payment made to a
third person, even through error and in good faith, shall not release the debtor
of the obligation to pay and will not deprive the creditor of his right to demand
payment. If it becomes impossible to recover what was unduly paid, any loss
resulting therefrom shall be borne by the deceived debtor, who is the only one
responsible for his own acts unless there is a stipulation for the wrongful
payment.

In Philippine National Bank vs. Court of Appeals 125 where payment was made
to a person claiming to be the attorney-in-fact of the creditor but no evidence
of his authority was ever presented, the Supreme Court ruled that payment was
not effected. Also in Bank of the Philippine Islands vs. Court of Appeals126
where the bank, as debtor and despite knowledge of a dispute involving the
ownership of the subject deposit, allowed the withdrawal of the said deposit by
the heirs of the deceased, who claimed that the money was the deposit of their
deceased father and who successfully obtained a judicial resolution from the
probate court allowing the withdrawal of the said money, although said
resolution did not specifically order the bank to release the money, and where
the bank, relying on the judicial resolution, released in good faith the money
which turned out as belonging to another, the Supreme Court, in considering
that any determination by a probate court that a property was included in the
deceased’s estate was only provisional in character and cannot be subject to
execution, and that the relationship between a bank and its depositor was one
of creditor and debtor (the depositor being the creditor and the bank being the
debtor), and hence any with-drawal by the depositor was in effect payment of
a debt by a bank, and that the ownership of the subject money was in dispute,
and that the debt

123
Haw Pia vs. China Banking Corporation, G.R. No. L-554, April 9, 1948, 80 Phil. 605, citing
Manresa, Civil Code, 4th ed., p. 254.
124
Phil 477.
125
G.R. No. L-108630, April 2, 1996, 70 SCAD 37, 256 SCRA 44.
126
G.R. No. 104612, May 10, 1994, 51 SCAD 188, 232 SCRA 302.
 ObligatiOns 187
Extinguishment of Obligations
Sec. 1 — Payment or Performance
. 1241

herein was paid to persons who were not the creditors or at least successors-in-
interest of the same, ruled that there was therefore no payment effected to
extinguish the obligation as the withdrawal was not proper. Specifically, the
Supreme Court said:
Because the ownership of the deposit remained undetermined, BPI, as the
debtor with respect thereto had no right to pay persons other than those in
whose favor the obligation was constituted or whose right or authority to
receive payment is indisputable. The payment of the money deposited with
BPI that will extinguish its obligation to the creditor-depositor is payment
to the person of the creditor or to one authorized by him or by the law to
receive it. Payment made by the creditor to the wrong party does not
extinguish the obligation as to the creditor who is without fault or
negligence, even if the debtor acted in utmost good faith and by mistake as
to the person of the creditor, or through error induced by fraud of a third
person. The payment then by BPI to the heirs of Velasco, even if done in
good faith, did not extinguish its obligation to the true depositor, Eastern.

Article 1241. Payment to a person who is incapacitated to administer his

property shall be valid if he has kept the thing delivered, or insofar as the
payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has
redounded to the benefit of the creditor. Such benefit to the creditor need not
be proved in the following cases:
(1) If after the payment, the third person acquires the creditor’s
rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor’s conduct, the debtor has been led to believe
that the third person had authority to receive payment. (1163a)

For an incapacitated person, such as a minor or an insane, to be able to

administer his property and to be able to transact business, there must be a
guardian appointed by the courts to handle his affairs. However, the father and
the mother shall be the legal guardian of the property of the unemancipated
common child without the necessity of a court appointment.28 In the event that
payment is made to an incapacitated person who cannot administer his
property, the law says that such payment is effective in two situations: first,
when he has kept the thing delivered, and, second, in so far as the payment is
beneficial to him. Hence, if a minor receives payment from a debtor
188 ObligatiOns and COntraCts art
Text and Cases
a127rt. 1241

arising from a contract, payment should be made to his guardians. If the

payment is made directly to the minor, such payment shall be voidable.
However if the minor, by the time he reaches the age of majority, still has in
his possession the thing delivered for payment, then such payment will become
valid. This act of still holding on to the thing delivered as payment at the time
when the person is already capacitated can be considered as ratification of the
payment which cures the irregularity of the same. Also, if the minor uses the
payment for activities beneficial to him, such as making use of the money to
pay his school tuition fees, then the payment is valid to the extent that he has
been benefited. It must be noted that, in paying to an incapacitated person under
a voidable contract, the capacitated person, who may have even acted in good
faith, is at a disadvantage in that, generally, the capacitated person cannot ask
for the annulment of the contract on the basis of the incapacity of the other
party128 and, in the event that the contract is annulled, the incapacitated person
is not obliged to make restitution except in so far as he has been benefited by
the thing or price received by him. 129

Payment made to a person who is not the creditor, his successorin-interest, or

a person who is authorized to receive payment is not effective payment which
will bind the creditor.31 However, if such payment to a third person
nevertheless benefits the creditor, such payment shall be effective in so far as
it has redounded to the benefit of the creditor. Hence, if A is the debtor of Mr.
B, and A, instead of paying B directly, pays half of the indebtedness to B’s
brother who is not authorized by B to receive payment, such payment is not
valid. However, if the brother of B uses the money to pay B’s indebtedness to
somebody, then the payment will become valid because it benefits B. It will
extinguish A’s indebtedness in so far as the payment has redounded to the
benefit of B which, in this case, is half of the indebtedness.

The benefit to the creditor for payment made by the debtor to a third person
must always be proven except in three cases. First, if after the payment, the
third person acquires the creditor’s rights. Hence, if A is indebted to B for
P1,000, and A does not pay B on due date despite proper demand, such that the
stipulated interest on the indebtedness accrues in the amount of P100, and A
(the debtor)

127
Article 225 of Executive Order No. 209 which took effect on August 3, 1988, otherwise known
as the Family Code of the Philippines.
128
Article 1387 of the 1950 Civil Code.
129
Article 1399 of the 1950 Civil Code.
 ObligatiOns 189
Extinguishment of Obligations
Sec. 1 — Payment or Performance
. 1241

pays X (a third person) the principal amount, such payment is not effective.
However, if there is concrete proof that interest has not yet been paid, and later
B (the real creditor) empowers X to also collect the interest of P100 for himself
(X) and not for B, then the benefit to the creditor need not be proven. The fact
that X acquires the creditor’s right to collect the interest is enough to show that
payment to the third person X benefited the creditor B. The P1,000 principal
indebtedness therefore must be considered extinguished. If A pays the interest
to X, the totality of the obligation is extin-guished. The second instance when
benefit to the creditor need not be proven is when the creditor ratifies the
payment to the originally unauthorized third person. If, in the same example,
B, after learning that payment was made to X (a third person) approves of the
payment to the latter, the debt is extinguished. The third instance when benefit
to the creditor need not be proven is when, by the creditor’s conduct, the debtor
has been led to believe that the third person has authority to receive the
payment. Hence, in the same example, if B tells A that he can transact any
business or any of his concerns with X, including the P1,000 indebtedness, and
later A pays X the indeb-tedness, the obligation is extinguished, as B cannot
disclaim the payment to X. By his representation to A, B is estopped from
claiming that X had no authority to accept payment.

Article 1242. Payment made in good faith to any person in possession of the
credit shall release the debtor. (1164)

A person in possession of the credit is presumed to own the credit and hence,
a debtor who pays such person in good faith shall be released from the debt.
Whether the creditor willfully, unintentionally or negligently allowed a third
person to possess the credit does not matter in so far as the debtor who paid in
good faith is concerned. The risk is always on the creditor provided payment
is made by the debtor in good faith. If payment is made to a person who is not
in possession of the credit, the debtor will not be released from his obligation
regardless of whether or not payment was made in good faith.

Article 1243. Payment made to the creditor by the debtor after the latter has
been judicially ordered to retain the debt shall not be valid. (1165)

Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 104612, May 10, 1994 , 51 SCAD
188, 232 SCRA 302.
arts. 1242-1244
190 ObligatiOns and COntraCts art
Text and Cases
In order to protect other creditors of the debtor and to prevent any transaction
which might be intended to defraud said creditors, the debtor is prohibited from
paying a particular creditor during the effectivity of a court order prohibiting
him to make such payment to that particular creditor. In the event that the
debtor makes such payment, it shall not extinguish the obligation as the law
considers such payment as invalid.

Article 1244. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more
valuable than that which is due.
In obligations to do or not to do, as act or forbearance cannot be substituted
by another act or forbearance against the obligee’s will. (1166a)

Unless the prestation is subject to an alternative or facultative condition, a

debtor has no choice in the payment of his obligation except by giving what
has been agreed upon by the parties. Hence he cannot pay by giving a particular
car if the agreement is to give a particular jeep even if the car is more expensive
than the jeep. Likewise, if one has been engaged to sing for one night in
exchange for an airplane ticket, the obligor cannot fulfill the obligation by
dancing for one week even if such dancing is worth more than the singing.
Article 1245. Dation in payment, whereby property is alienated to the creditor
in satisfaction of a debt in money, shall be governed by the law on sales. (n)

Dation in payment or Dacion en Pago is the delivery and transmission of

ownership of a thing by the debtor to creditor as an accepted equivalent of the
performance of an obligation.32 Thus in Philippine National Bank vs. Pineda,33
the Supreme Court ruled that the mere repossession of the machinery and
equipment for purposes of securing payment of an obligation and not for the
purpose of transferring ownership is not dation in payment. 34 In Caltex vs.
Intermediate Appellate Court,35 the Supreme Court also noted the requisites for
a valid dation in payment, thus:
In order that there be a valid dation in payment, the following are the
requisites: (1) There must be the performance of the prestation in lieu of
payment (animo solvendi) which may consist in the delivery of a corporeal
thing or a real right or a credit against the third person; (2) There must be
some difference between the prestation due and that which is given
. 1245

in sub-stitution (aliud pro alio); (3) There must be an agreement between

the creditor and debtor that the obligation is immediately extinguished by
reason of the performance of a prestation different from that due. (3
 ObligatiOns 191
Extinguishment of Obligations
Sec. 1 — Payment or Performance
Castan, Vol. I, 8th Ed., page 283, cited in IV Caguioa, ‘Comments and
Cases in Civil Law’ s/s263, page 325; italics supplied)
Also, in the Caltex case36 where the debtor assigned to the creditor its
receivables or refunds from the Special Fund Import Payments due from the
National Treasury of the Philippines to be applied as payment of the amount
of P4,072,683.13 it owed to the creditor and where the amount actually
received from the Special Fund by the debtor was more than P4,072,683.13
and where, after the creditor sought the excess of the amount obtained, the
debtor released some of the excess minus P510,550.63 which the debtor
claimed as interest on the indebtedness, the Supreme Court, in overturning the
decision of the Court of Appeals to the effect that the dacion en pago
completely extinguished the obligation of the debtor and therefore the amount
of P510,550.63 should be returned to the creditor, ruled:
The then Intermediate Appellate Court ruled that the three (3) requisites of
dacion en pago are all present in the instant case, and concluded that the
Deed of Assignment of July 31, 1980 x x x constitutes a dacion in payment
provided for in Article 1245 of the Civil Code which has the effect of
extinguishing the obligation, thus supporting the claim of private
respondent for the return of the amount retained by peti- tioner.
This Court, speaking of the concept of dation in payment in the case of
Lopez vs. Court of Appeals (114 SCRA 671, 685 [1982]), among others,
stated:
“The dation in payment extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon by the parties or as may
be proved, unless the parties by agreement, express or implied, or by their
silence, consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished.” (8 Manresa 324; 3 Valerde 174 fn.)
From the above, it is clear that a dation in payment does not necessarily mean
total extinguishment of the obligation.

Philippine National Bank vs. Pineda, G.R. No. L-46658, May 13, 1991, 197 SCRA 1.
Id.
See also Development Bank of the Philippines vs. Court of Appeals, G.R. No.
, January 5, 1998, 90 SCAD 12.
G.R. No. 72703, November 13, 1992, 215 SCRA 580.
Id.
192 ObligatiOns and COntraCts art
Text and Cases
. 1245

The obligation is totally extinguished only when the parties, by agreement,

express or implied, or by their silence, consider the thing as equivalent to
the obligation.
In the instant case, the then Intermediate Appellate Court failed to take into
account the following express recitals of the Deed of Assignment —
“That Whereas, ASSIGNOR has an outstanding obliga-tion with
ASSIGNEE in the amount of P4,072,682.13 as of June 30, 1980, plus any
applicable interest on overdue account. (p. 2, Deed of Assignment)
“Now therefore in consideration of the foregoing premises, ASSIGNOR
by virtue of these presents, does hereby irrevocably assign and transfer unto
ASSIGNEE any and all fund and/or Refund of Special Fund Payments,
including all its rights and benefits accruing out of the same, That
ASSIGNOR might be entitled to, by virtue of and pursuant to the decision
in BOR Case No. 80-123, in payment of ASSIGNOR’s outstanding
obligation plus any applicable interest charges on overdue account and
other avturbo fuel lifting and deliveries that ASSIGNOR may from time to
time receive from the ASSIGNEE, and ASSIGNEE does hereby accepts
such assignment its favor.” (p. 2, Deed of Assignment) (Italics supplied)
Hence, it could easily be seen that the Deed of Assignment speaks of three
(3) obligations — (1) the outstanding obligation of P4,072,682.13 as of
June 30, 1980; (2) the applicable interest charges on overdue accounts; and
(3) the other avturbo fuel lifting and deliveries that assignor (private
respondent) may from time to time receive from assignee (Petitioner). As
aptly argued by petitioner, if it were the intention of the parties to limit or
fix respondent’s obligation to P4,072,682.13; they should have so stated
and there would have been no need for them to qualify the statement of
said amount with the clause “as of June 30, 1980 plus any applicable
interest charges on overdue account” and the clause “and other avturbo fuel
lifting and deliveries that ASSIGNOR may from time to time receive from
the ASSIGNEE.” The terms of the Deed of Assignment being clear, the
literal meaning of its stipulations should control (Article 1370, Civil Code).
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. (Rule 130, Sec. 9, Rules of Court)
Likewise, the then Intermediate Appellate Court failed to take into
consideration the subsequent acts of the parties which clearly show that
they did not intend the Deed of Assignment to totally extinguish the
obligation — (1) After the execution of
. 1245
art ObligatiOns 193
Extinguishment of Obligations
Sec. 1 — Payment or Performance
the Deed of Assignment on July 31, 1980, petitioner continued to charge
respondent with interest on its overdue account up to January 31, 1981.
This was pursuant to the Deed of Assignment which provides for
respondent’s obligation for “applicable interest charges on overdue
account.” The charges for interest were made every month and not once
did respondent question or take exception to the interest; and (2) In its letter
of February 16, 1981, respondent addressed the following request to the
petitioner:
“Moreover, we would also like to request for a consideration in the
following:
1) Interest charges be limited to December 31, 1980 only; and
2) Reduction of 2% on 18% interest rate p.a.
“We are hoping for your usual kind consideration on this matter.”
In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered (Art.
1253, Civil Code). The foregoing subsequent acts of the parties clearly
show that they did not intend the Deed of Assignment to have the effect of
totally extinguishing the obligations of private respondent without payment
of the applicable interest charges on the overdue account.
Dacion en pago is different from pactum commisorium. In dacion en pago,
before the creditor becomes the owner of the property collateralized to secure
the debt, an intervening agreement subsequent and independent from the
original contract is entered into by the creditor and the debtor to have the
property collateralized in the original agreement as payment of the debt,
thereby extinguishing the obligation. In pactum commisorium, the parties
agree, generally in one single contract, that, in the event that the debtor fails to
pay the debt, the mortgaged or pledged property of the debtor shall
automatically be appropriated or owned by the creditor. Pactum commisorium
is void in accordance with Article 2088 of the Civil Code which provides: “The
creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.” This is in
accordance with the rule that any property made as security for a loan must
always be foreclosed or subjected to a sale by public bidding in case it shall be
used to satisfy the debt wholly or partially of the debtor. The elements of
pactum commissorium are: 1) there must be a creditor-debtor relationship
between the parites; 2) the property of the debtor was used as security for the
loan, either as a mortgage or a pledge; and
. 1245
194 ObligatiOns and COntraCts art
Text and Cases
3) there was automatic appropriation of the property upon failure of the debtor
to pay the obligation as provided in their agreement. 130

In Bustamante vs. Rosel, 131 the debtor and the creditor entered into a loan
agreement where it was stipulated that, in case of the default of the debtor, the
creditor has the option to buy the collateral for a total consideration of
P200,000 inclusive of the borrowed amount and interest thereon. The Supreme
Court said that the stipulation is void and said:
In this case, the intent of the creditor appears to be evident, for the debtor
is obliged to dispose of the collateral at the preagreed consideration
amounting to practically the same amount as the loan. In effect, the creditor
acquires the collateral in the event of non-payment of the loan. This is
within the concept of pactum commissorium. Such stipulation is void.
In Development Bank of the Philippines vs. Court of Appeals 39 where the
debtor executed deeds of assignment of leasehold rights on certain properties,
the Supreme Court said that such assignments were not dacion en pago because
they were not designed to directly extinguish an obligation but was furnished
to constitute as a security. Neither were the assignments pactum commissorium
as they did not provide for the automatic ownership of the properties in case of
non-payment. They were likewise not payment by cession because there was
only one creditor. The Supreme Court ruled that such assignments were in
effect mortgages.

Article 1246. When the obligation consists in the delivery of an

indeterminate or generic thing, whose 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. The purpose of the
obligation and other circumstances shall be taken in consideration. (1167a)

Obligations must be complied with in good faith and any act which tends to
implement an obligation in a manner which is not consistent with its goals or
purposes should always be discouraged. Hence, if an obligor, who is not rich,
is bound to deliver any rented car

130
Bustamante vs. Rosel, G.R. No. 126800, November 29, 1999, 116 SCAD 390, 319 SCRA 413;
Nakpil vs. Intermediate Appellate Court, 44 SCAD 71, 225 SCRA 456; Development Bank of the
Philippines vs. Court of Appeals, 90 SCAD 12, 284 SCRA 14 ; Uy Tong vs. Court of Appeals,
161 SCRA 383.
131
G.R. No. 126800, November 29, 1999, 116 SCAD 390, 319 SCRA 413.
195 ObligatiOns and COntraCts
Text and Cases
arts. 1246-1247

to be used at a very simple wedding ceremony and the obligee knows the
financial capacity of the obligor, such obligee cannot demand that the obligor
comply with his obligation by delivering a multi-million Rolls Royce which
could only be rented at such amount which the obligor cannot afford. On the
other hand, the obligor cannot deliver a car which is so old that it would not
start unless it is pushed.

Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses

required by the payment shall be for the account of the debtor. With regard
to judicial costs, the Rules of Court shall govern. (1168)

The creditor usually benefits from the obligation. It is always in his favor that
the debtor gives, does some service or not do some service. As such, the
creditor must, as much as possible, fully take the benefit by not spending in the
extra-judicial expenses for the payment or performance of the obligation. With
respect to judicial cost, the Rules of Court shall apply.
Article 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the prestation in which the
obligation consists. Neither may the debtor be required to make partial
payments.
However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter. (1169a)

In the case of Nasser vs. Cuevas40 where, on the basis of a compromise

agreement, a number of obligors agreed to pay a lawyer his legal fees by way
of real property and cash and for this purpose, it was expressly stipulated that
a charging lien for attorney’s fees would be established on the properties to
secure payment of the legal fees “provided that upon full payment of the
corresponding liability of a party, the lien on his/her share is extinguished” and
where, upon demand of the lawyer for payment, the obligors contended that
the aforequoted clause gave them the right to pay in installment, the Supreme
Court rejected this interpretation and ruled that the said clause
evidently contemplates the probability that the heirs obliged to pay Canlas’
fees, the lien on his share of the estate is thereby extinguished — a quite
obvious proposition, to be sure. The
G.R. No. 118342, January 5, 1998, 90 SCAD 12, 284 SCRA 14.
. 1248
196 ObligatiOns and COntraCts art
Text and Cases
clause cannot be construed as granting to any of the obligors, by
implication, the option to pay in installments, or as impliedly binding the
obligee to accept payment by parts.
The legal principle, in any event, is that “the creditor cannot be compelled
partially to receive the prestations in which the obligation consists” unless
“there is an express stipulation to that effect,” in much the same way that
the debtor may not “be required to make partial payments.”
Partial payment however can be made if there is an express stipulation by the
parties allowing the same or if the debt is partially liquidated and partially
unliquidated. For example, a debtor is bound to perform an obligation by
making payment in the amount of P1,000 and by also delivering whatever
money he will get from the estate of his already deceased father, the creditor
may demand and the debtor may pay the P1,000 without waiting for the
determination of the amount of money the debtor will get from the deceased
father’s estate. Even if there is no express stipulation, partial payment can
likewise be effective if the creditor accepts such partial payment and benefits
from it. In Barons Marketing vs. Court of Appeals,41 the Supreme Court said
that a creditor cannot be considered in delay if he refuses to accept partial
performance because, unless otherwise provided by law or stipulated by the
parties, a creditor cannot be compelled to accept partial performance; however,
if good faith necessitates acceptance or if the creditor abuses his right in not
accepting, the creditor will incur in delay if he does not accept such partial
perfor-mance.

Article 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be
held in abeyance. (1170)

Under the old Republic Act 529, otherwise known as the Uniform Currency
Act, it was prohibited to use foreign currency in connection with certain
contracts in the Philippines. In General Insurance

G.R. No. L-41607, August 21, 1990, 188 SCRA 812.

. 1249
art ObligatiOns 197
Extinguishment of Obligations
Sec. 1 — Payment or Performance
& Surety Corporation vs. Union Insurance Society of Canton, Ltd.,42 it was
held that though the stipulation for the use of foreign currency was void, the
contract or transaction was nevertheless valid. Republic Act No. 529 has
already been repealed by Republic Act Number 8183 which took effect on July
6, 1996. This law specifically provides that
all monetary obligations shall be settled in Philippine currency which is
legal tender in the Philippines. However, the parties may agree that the
obligation or transaction shall be settled in any other currency at the time
of payment.
A promissory note is a document where a promise to pay is made by the debtor
to the creditor. Under the Negotiable Instruments Law, a promissory note is an
unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand or at a fixed or determinable future time, a
sum certain in money to order or to bearer. 43 A bill of exchange is an
unconditional order in writing addressed by one person to another signed by
the person giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in money to
order to bearer.44 A check is a bill of exchange drawn on a bank payable on
demand.45 The law is very specific that, in fulfillment of an obligation by
payment of money, only payment in cash will extinguish the obligation. If
promissory notes, bills of exchange or checks are given to pay a debt, such debt
will not be extinguished unless these mercantile documents are encashed.
Since a negotiable instrument is only a substitute for money and not
money, the delivery of such an instrument does not, by itself, operate as
payment (Citing Sec. 189, Act 2031 on Neg. Insts.; Art. 1249, Civil Code;
Bryan London Co. vs. American Bank, 7 Phil. 225; Tan Sunco vs. Santos,
9 Phil 44; 21 R.C.L. 60, 61). A check, whether a manager’s check or
ordinary check, 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.46
However, in Far East Bank and Trust Company vs. Diaz Realty Inc.,47 the
Supreme Court said that, if payment by way of a fullyfunded check were
offered or tendered and the obligee accepts the check as payment after the
obligor’s manifestation that it had been given to settle an obligation, such
obligee shall be estopped from later on denouncing the efficacy of such tender
of payment. This is especially

G.R. No. 126486, February 9, 1998, 91 SCAD 509, 286 SCRA 96.
G.R. Nos. 30475-76, November 22, 1989, 179 SCRA 530.
. 1249
198 ObligatiOns and COntraCts art
Text and Cases
true when the said check was in fact deposited by the obligee and was converted
in cash.

In National Marketing Corporation vs. Federation of United Namarco

Distributors, Inc.,48 the phrase “when through the fault of the creditor they have
been impaired” was explained by the Supreme
Court, thus
x x x The clause of Article 1249 relative to the impairment of the
negotiable character of the commercial paper by the fault of the creditor, is
applicable only to instruments executed by 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.
Also, a check must be presented for payment within a reasonable time after its
issue or the drawer will be discharged from liability thereon to the extent of the
loss caused by the delay.49 Under normal banking practice, a check becomes
stale if it has not been presented to the bank for a period of six months from
the date of the said check. However, if a creditor allows his checks to become
stale, it does not mean that the debtor who drew the check will necessarily be
discharged from his debt, or that his obligation will be extinguished. It is only
when the creditor does not present the check for payment and thereafter the
bank upon which the check has been drawn collapses or fails to the point that
it cannot meet demands for payment, will the debtor be discharged.
“If a bank or banker still remains in good credit and is able to pay the
check, the drawer will still remain liable to pay the same, notwithstanding
many months may have elapsed since the date of the check and before the
presentment for payment and notice of the dishonor. So, if the drawer, at
the date of the check or at the time of the presentment of it for payment,
had no funds in the bank or banker’s hands, or if, after drawing the check
and before its presentment for payment and dishonor, he had withdrawn his
funds, the drawer would remain liable to pay the check, notwithstanding
the lapse of time.”50
Section 184, Act No. 2031 otherwise known as the Negotiable Instruments Law.
Id., Section 126.
Id., Section 185.
Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, G.R. No. 72110,
November 16, 1990, 191 SCRA 411; Philippine Airlines vs. Court of Appeals, G.R. No. L-49188,
January 30, 1990.
G.R. No. 138588, August 23, 2001; see also Gutierrez vs. Carpio, 53 Phil. 334.
G.R. No. L-22578, January 31, 1973, 49 SCRA 238.
Section 186, Act No. 2301 otherwise known as the Negotiable Instruments Law.
. 1250
art ObligatiOns 199
Extinguishment of Obligations
Sec. 1 — Payment or Performance
Article 1250. In case an extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary. (n)

In Filipino Pipe and Foundry Corp. vs. NAWASA,51 the Supreme Court
explained the application of Article 1250, to wit:
The only issue before Us is whether, on the basis of the continuously
spiraling price index indisputably shown by the plaintiff, there exists an
extraordinary inflation of the currency justifying an adjustment of
defendant appellee’s unpaid judgment obligation to the plaintiff-appellant.
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 decrease or
increase could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the
obligation. (Tolentino, Commentaries and Jurisprudence on the Civil
Code, Vol. IV, P. 284)
An example of extraordinary inflation is the following description of what
happened to the Deutschmark in 1920:
“More recently, in the 1920’s Germany experienced a case of
hyperinflation. In early 1921, the value of the German mark was 4.2 to the
U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S.
Dollar. And as prices went up rapidly, so that by October 1923, it had
reached 4.2 trillion to the U.S. Dollar!” (Bernardo M. Villegas & Victor R.
Abola, Economics, An Introduction [Third Edition]).
As reported, “prices were going up every week, then every day, then every
hour. Women were paid several times a day so that they could rush out and
exchange their money for something of value before what little purchasing
power was left dissolved in their hands. Some workers tried to beat the
constantly rising prices by throwing their money out of the windows to
their waiting

Story on Promissory Notes, Sec. 498, cited in Aguedo F. Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Volume 1, 1978 edition, Philippine
Graphic Arts, Inc., Caloocan City, page 425.
G.R. No. L-43446, May 3, 1988, 161 SCRA 32; Serra vs. Court of Appeals, G.R. No. 103338,
January 4, 1994, 47 SCAD 55, 229 SCRA 60.
Singson vs. Caltex, G.R. No. 137798, October 4, 2000, 134 SCAD 219, 342 SCRA 91; Lantion
vs. National Labor Relations Commission, 181 SCRA 513; Commissioner of Public Highways vs.
Burgos, 96 SCRA 831.
. 1250
200 ObligatiOns and COntraCts art
Text and Cases
wives, who would rush to unload the nearly worthless paper. A postage
stamp cost millions of marks and a loaf of bread, billion.” (Sidney Rutberg,
“The Money Balloon,” New York: Simon and Schuster, 1975, p. 19, cited
in Economics, An Introduction by Villegas & Abola, 3rd ed.)
While appellant’s voluminous records and statistics proved that there has
been a decline in the purchasing power of the Philippine peso, this
downward fall of the currency cannot be considered “extraordinary.” It is
simply a universal trend that has not spared our country.
The effects of extraordinary inflation or deflation cannot be applied without
an official declaration thereof by competent authorities, 52 such as the Central
Bank132 or Bangko Sentral. The Department of Finance may likewise make the
declaration. Without such declaration, creditors cannot demand an increase of
what is due them.133

In Velasco vs. Manila Electric Co.55 where the appellant claimed that the
damages awarded to him arising from tort was inadequate considering the
present high cost of living and therefore should be adjusted in accordance with
Article 1250, the Supreme Court rejected the applicability of the said Article
ruling thus:
It can be seen from the employment of the words “extraordinary inflation
and deflation of the currency stipulated” that the legal rule envisages
contractual obligations where a specific currency is selected by the parties
as the medium of payment; hence it is inapplicable to the obligations
arising from tort and not from contract, as in the case at bar, besides there
being no showing that the factual assumption of the article has come into
existence. x x x.
In Commissioner of Public Highways vs. Burgos,56 the Supreme Court, in
ruling that Article 1250 did not apply to expropriations by the government of
property in the exercise of its eminent domain powers explained:
It is clear that the foregoing provision applies only to cases where a
contract or agreement is involved. It does not apply where the obligation to
pay arises from law, independent of contract. The taking of private property
by the Government in the exercise of its power of eminent domain does not
give rise to a contractual obligation. x x x
. 1250

Moreover, the law as quoted, clearly provides that the value of the currency
at the time of the establishment of the obligation shall be the basis of
payment which, in cases of expropriation, would be the value of the peso

132
Ramos vs. Court of Appeals, G.R. No. 119872, July 7, 1997, 84 SCAD 280, 275 SCRA 167.
133
Mobil Oil Philippines, Inc. vs. Court of Appeals, 180 SCRA 651.
art ObligatiOns 201
Extinguishment of Obligations
Sec. 1 — Payment or Performance
at the time of the taking of the property when the obligation of the
Government to pay arises. It is only when there is an “agreement to the
contrary” that the extraordinary inflation will make the value of the
currency at the time of payment, not at the time of the establishment of the
obligation, the basis for payment. In other words, an agreement is needed
for the effect of an extraordinary inflation to be taken into account to alter
the value of the currency at the time of the establishment of the obligation
which, as a rule, is always the determinative element, to be varied by
agreement that would find reason only in the supervention of extraordinary
inflation or deflation.
The phrase “value of the currency” refers to the purchasing power of the
currency. It is often referred to as “par value,” “legal exchange rate,” or “par
of exchange.” In Gonzalo L. Manuel Co. vs. Central Bank,57 the Supreme Court
discussed the significance and meaning of the “par value” of a currency, to wit:
x x x It signifies “the amount it takes one currency (for example, based on
gold) to buy a unit in another currency (also based on gold) that is, how
pieces of the one unit (or their gold content) are necessary to equal the gold
content of the other unit.” “The par value of a currency is the value as
officially defined in terms of gold or, under the silver standard, where there
was such a standard, in terms of silver. The ‘par of exchange’ therefore
applies only between countries having a fixed metallic content for their
currency unit. It would be possible to define a currency’s par value in terms
of another currency such as the dollar or pound sterling, but usage confines
the meaning of par to the official value in terms of gold.”58

Article 1251. Payment shall be made in the place designated in the

obligation.
There being no express stipulation and if the undertaking is to deliver a
determinate thing, the payment shall be made wherever the thing might be at
the moment the obligation was constituted.

G.R. No. L-18390, December 20, 1971, 42 SCRA 556.

G.R. No. L-36706, March 31, 1980, 96 SCRA 831.
G.R. No. L-21789, April 30, 1971, 38 SCRA 533.
See also Del Rosario vs. Shell, G.R. No. L-28776, August 19, 1988, 164 SCRA 556.
. 1251

In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in
delay, the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
(1171a)
202 ObligatiOns and COntraCts art
Text and Cases
To further ensure certainty in the fulfillment of an obligation by way of
payment, the law provides for the place where payment is to be made. The
parties can agree as to where the payment shall be made. If there is no
stipulation and the obligation is to give a determinate thing, payment shall be
made in the place where the thing is located at the time of the constitution of
the obligation. In any other case, the place of payment is the domicile of the
debtor. For the exercise of civil rights and the fulfillment of civil obligations,
the domicile of natural persons is the place of their habitual residence. 59 The
additional expenses attendant in making payment shall be borne by the debtor
in the event that he changes his domicile in bad faith, such as if the change was
made precisely for the creditor not to locate him, or after he has incurred in
delay.

Subsection 1. — Application of Payments

Article 1252. He 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 same must be applied. Unless the parties so stipulate, or when
the application of payment is made by the party for whose benefit the term
has been constituted, application shall not be made as to debts which are not
yet due.
If the debtor accepts from the creditor a receipt in which an application of
payment is made, the former cannot complain of the same, unless there is a
cause for invalidating the contract. (1172a)

The rules contained in Articles 1252 to 1254 of the Civil Code

Article 49 of the 1950 Civil Code.

Magdalena Estates, Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966, 18 SCRA 967.
. 1251

apply to a person owing several debts of the same kind to a single creditor. 60
Similar to a case where the obligation is subject to an alternative obligation or
prestation, the choice as to which debt the payment is to be applied is given to
the debtor. For this purpose, the debtor must make a declaration as to which
debt should the payment be applied.

It must be pointed out that the rule on application of payment by the debtor
must conform to the general rules on payment provided for from Articles 1232
up to 1251. Thus, if the debtor makes a declaration as to the particular debt
art ObligatiOns 203
Extinguishment of Obligations
Sec. 1 — Payment or Performance
(from among a number of debts) to which his payment is to be applied, the
creditor can validly refuse such declaration or application if the payment is to
be applied to a debt

Magdalena Estates, Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966,
 207

which will only partially pay the particular indebtedness. This is so because,
according to Article 1233, payment must, as a general rule, be always
completely delivered or rendered, and, according to Article 1248, the creditor
cannot be compelled partially to receive the prestation in which the obligation
consists. The debtor must apply the payment to an indebtedness which, through
such application, shall be completely extinguished.

Application of payment cannot be made on debts which are not yet due, unless
the parties agree or when the application of payment is made by the party,
which may either be the debtor or the creditor, for whose benefit the term has
been constituted. For example, A is indebted to B in the amount of P1,000,
P2,000 and P900 which will not earn interest if paid on January 2, 1997 but
will earn interest from February 2, 1997, the latter date being the second due
date if the debtor chooses not to pay on January 2, 1997. Clearly the period
prior to January 2, 1997 is for the benefit of the debtor, and therefore, if he
decides to give B P500 before January 2, 1997, the choice of application
belongs to him. If the creditor is agreeable to be partially paid, the debtor can
apply the P500 to the P1,000, P2,000 or P900 depending on his choice even if
the indebtedness is not yet due. It is clear that in such a case, whether he pays
it on or before January 2, 1997 will not make any difference in so far as the
debtor or creditor is concerned because no interest is imposed.

The law likewise provides that if the debtor accepts from the creditor a receipt
in which an application of payment is made, the former cannot complain of the
same, unless there is a cause for invalidating the contract. It must be noted that
the debtor must not only merely receive the receipt but he must accept the
receipt. Thus, if A is indebted to B for P1,000, P2,000, and P900, and A pays
B P500 without mentioning as to which debt the P500 will be applied and if B,
the creditor, is agreeable to any partial payment, and issues a receipt indicating
therein that the P500 shall be applied to the P1,000 debt, and A readily accepts
the said receipt, A cannot later complain that the P500 should have been
applied to the P2,000 debt unless there exists a cause to invalidate the contract
in connection
18 SCRA 967, citing Baltazar vs. Lingayen Gulf Electric Co., G.R. Nos. L-16236-38, June 30,
1965.

207
. 1253
art ObligatiOns 205
Extinguishment of Obligations
with the indebtedness in the amount of P1,000. This is based on the doctrine of
estoppel. However, if the indebtedness has been obtained through fraud or
intimidation which is a cause to annul the contract, the debtor is not estopped
from questioning the application.

Article 1253. If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been covered. (1173)

Article 1253 of the Civil Code is merely directory, and not mandatory. 61
Although interest only attaches to the principal, the payment of both principal
and interest, in effect, constitutes two payments by the debtor. In fact according
to the law, the receipt of the principal by the creditor without reservation with
respect to the interest, shall give rise to the presumption that the interest has
been paid.134 Such is the presumption because it is a rule that payment of the
principal shall not be deemed to have been made until the interests have been
covered. However, the presumption is rebuttable. Also the right to apply
payment to the interest first can be waived as in the case of Pagsibigan vs.
Court Appeals135 where the creditor, in receiving numerous partial payments
from the debtor, applied the said payments to the principal, interest and the
penalties with the principal getting the bulk of the application and where, even
in some of the recent partial payments, the said payments were applied to the
principal despite the fact that the creditor knew that interest was still due, the
Supreme Court said that such action of the creditor is a waiver of his rights
under Article 1253. Also, in Rapanut vs. Court of Appeals, 136 the Supreme
Court said:
After pondering on the meaning of Article 1253, we reach the conclusion
that in a contract involving installment payments with interest chargeable
against the remaining balance of the obligation, it is the duty of the creditor
to inform the debtor of the amount of interest that falls due and that he is
applying the installment payments to cover said interest. Otherwise, the
creditor cannot apply the payments to the interest and then hold the debtor
in default for non-payment of installments on the principal.
In Magdalena Estates, Inc. vs. Rodriguez137 where a surety only bound himself
solidarily liable to the extent of P5,000 only and paid such an amount to the
creditor when the debtor defaulted, and where
. 1253

Subsec. 1 — Application of Payment

the creditor still claimed interest from the debtor who resisted paying such
interest on the ground that, in accepting payment of the principal from the

134
Article 1176 of the 1950 Civil Code.
135
G.R. No. 90169, April 7, 1993, 221 SCRA 202.
136
G.R. No. 109680, July 14, 1995, 62 SCAD 801, 246 SCRA 323.
137
G.R. No. L-18411, December 17, 1966, 18 SCRA 967.
206 ObligatiOns and COntraCts art
Text and Cases
surety in the amount only of P5,000, the creditor waived his right to Article
1253, the Supreme Court allowed the claim of interest by the creditor and stated
that Article 1253 is not applicable in the case as the liability of the surety does
not extend beyond the terms of the agreement and that the provision on
application of payment
cannot be made applicable to a person whose obligation as a mere surety is
both contingent and singular; his liability is confined to such obligation,
and he is entitled to have all payments made applied exclusively to said
application and to no other. Besides, Article 1253 of the Civil Code is
merely directory, and not mandatory. Inasmuch as the appellee (creditor)
cannot protest for non-payment of the interest when it accepted the amount
of P5,000.00 from the Luzon Surety Co., nor apply a part of that amount
for the interest, we cannot now say that there was a waiver or condonation
on the interest due.

Article 1254. When the payment cannot be applied in accordance with the
preceding rules, or if application can not be inferred from other
circumstances, the debt which is most onerous to the debtor, among those
due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be
applied to all of them proportionately. (1174a)

If there is no indication as to which debt the payment is to be applied, it shall

be applied to the most onerous debt provided that it is due. The “most onerous”
debt means the indebtedness which exacts the heavier burden from among
many. Thus, a debt with interest is more onerous than a simple debt without
interest. A debt with an acceleration clause enabling the creditor to demand
payment of the whole obligation if the debtor defaults in even one amortization
or installment is more onerous than a debt payable in installment but without
an acceleration clause. A debt secured by a mortgage is more onerous than one
which is not. For example, A owes G a due debt of P30,000 with an interest
rate of 12% per annum, another due debt of P22,000 without interest but
secured by his silver watch, and

G.R. No. 116805, June 22, 2000, 128 SCAD 312, 334 SCRA 186.
Lopez vs. Court of Appeals, G.R. No. L-33157, June 29, 1982, 114 SCRA 671. 68Article 155 of
Executive Order No. 209 which took effect on August 3, 1988, otherwise known as the Family
Code of the Philippines.
. 1254

lastly P24,000 collateralized by the house of the debtor and payable in equal
installment with the first installment already due and with an acceleration
clause. If A makes a payment of P600 without any indication where the latter
art ObligatiOns 207
Extinguishment of Obligations
amount should be applied and the creditor agrees to any partial payment, it will
be applied to the most onerous debt which in this case is the P24,000 because,
aside from the imposition of an interest rate it has an acceleration clause which
will make the whole amount due.

In Espina vs. Court of Appeals,66 where a debtor paid an amount without

particularly declaring as to whether it should be applied to an indebtedness
resulting from unpaid back rentals for the condominium unit he was occupying,
or to his obligation arising from his contract to pay the purchase price of such
condominium unit which he decided to buy, the Supreme Court ruled that the
payment should be applied to the unpaid back rentals as the same were more
onerous.

The law also provides that if the debts due are of the same nature and burden,
the payment shall be applied to all of them proportionately. Thus, if A owes B
three due debts each of which amounts to P30,000, a payment of P9,000.00 by
A, without any indication as to where it is to be applied and where the creditor
agrees to partial payment, shall be equally applied to each of the debts. Hence,
each debt will be reduced by P3,000 each. But if A owes B three due debts of
different amounts of P10,000.00, P20,000.00 and P30,000 and the creditor
agrees to partial payment, a payment of P6,000 will be applied in the proportion
of 1:2:3. Thus, P1,000 will be applied to the P10,000 debt; P2,000 to the
P20,000 debt; and P3,000 to the P30,000 debt.

Subsection 2. — Payment by Cession

Article 1255. The debtor may cede or assign his property to his creditors in
payment of his debts. This cession, unless there is stipulation to the contrary,
shall only release the debtor from responsibility for the net proceeds of the
thing assigned. The agreements which, on the effect of the cession, are made
between the debtor and his creditors shall be governed by special laws.
(1175a)

Cession is another mode of extinguishing a debt. It is also a form of paymen

Article 158 of Executive Order No. 209 which took effect on August 3, 1988, t. Cession under
69

Article 1255 presupposes financial

. 1254

Subsec. 1 — Application of Payment

difficulties on the part of the debtor67 and refers to a situation where the debtor
owes two or more creditors. At the least, there are as many debts as there are
creditors. It is possible however that from among the many creditors, the debtor
may owe any of them two or more debts. Hence, there can be situations when
the debts are more than the number of creditors. When the law states that the
debtor may cede or assign his property, it refers not only to the cession of one
208 ObligatiOns and COntraCts art
Text and Cases
or a number of properties of the debtor but to all of the properties of the debtor
which are susceptible of and not exempted by law from being alienated. An
example of a property which is generally exempted by law from being executed
or sold is the family home.68 However, it may be sold provided that it strictly
follows the requirements of law, such as the procurement of the written consent
to the sale of the person who constituted the home as a family home and the
latter’s spouse and a majority of the beneficiaries of legal age of the family
home.69

Just like in any contract, the creditors must agree to the cession under Article
1255. Among the creditors, they must likewise agree as to which debt will be
paid first or as to the proportioning of the payment of the money obtained
through cession for the payment of debt. If there is no agreement, the applicable
law on preference of
art ObligatiOns 209
Extinguishment of Obligations
212 ObligatiOns and COntraCts
Text and Cases

credit will apply.70 The creditors then will administer the totality of the ceded
property without the ownership being transferred to them. They will be
authorized to sell or alienate the property for purpose of obtaining enough
resources or money to pay off their respective debts. Once cession is made, the
obligation of the debtor shall only be extinguished up to the extent that the
proceeds are able to satisfy the claims of the creditors. Hence, it is possible that
the money obtained from the alienation of the property is not enough to satisfy
the claims of the creditors. In such case, the creditors can still demand payment
for the deficiency. The agreements on the effect of the cession made between
the debtor and his creditors shall be governed by special laws. One of the
special laws is the Insolvency Law which, if applicable, shall place the assets
of the debtor for judicial liquidation for the purpose of paying off his
obligations.

Subsection 3. — Tender of Payment and Consignation

Article 1256. If the creditor to whom tender of payment has been made
refuses without just cause to accept it, the debtor shall be released from
responsibility by the consig-nation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
1) When the creditor is absent or unknown, or does not appear at
the place of payment;
2) When he is incapacitated to receive the payment at the time it is
due;
3) When, without just cause, he refuses to give a re- ceipt;

otherwise known as the Family Code of the Philippines.

70
See Title XIX, Chapters 1 to 3, Articles 2236 up to 2251 of the 1950 Civil Code of the
Philippines.
71
G.R. No. 111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565.
72
G.R. No. L-28269, August 15, 1969, 29 SCRA 1.
73
G.R. No. 57630, March 13, 1992.
212
. 1255

Subsec. 2 — Payment by Cession

 4) When two or more persons claim the same right to collect;
5) When the title of the obligation has been lost. (1176a)

Article 1257. In order that the consignation of the thing due may release the
obligor, it must first be announced to the persons interested in the fulfillment
of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance
with the provisions which regulate payment. (1177)

Article 1258. Consignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be
proved, in a proper case, and the announcement of the consignation in other
cases. The consignation having been made, the interested parties

G.R. No. 138588, August 23, 2001.

G.R. No. L-58961, June 28, 1983, 123 SCRA 160.
214 ObligatiOns and COntraCts
Text and Cases
art ObligatiOns 211
Extinguishment of Obligations
shall also be notified thereof. (1178)
Tender of payment and consignation apply in any contract where there is an
obligation to pay. Thus, in Adelfa Properties, Inc. vs. Court of Appeals71 where
it was ruled that in a contract to sell, the requisites of a valid tender must be
complied with, the Supreme Court said:
The mere sending of a letter by the vendee expressing the intention to pay,
without the accompanying payment, is not considered a valid tender of
payment. Besides, a mere tender of payment is not sufficient to compel
private respondents to deliver the property and execute the deed of absolute
sale. It is consignation which is essential in order to extinguish petitioner’s
obligation to pay the balance of the purchase price. The rule is different in
case of an option contract or in legal redemption or in a sale with right to
repurchase, wherein consignation is not necessary because these cases
involve an exercise of a right or privilege (to buy, redeem, or repurchase)
rather than the discharge of an obligation, hence tender of payment would
be sufficient to preserve the right or privilege. This is because the
provisions on consignation are not applicable when there is no obligation
to pay. A contract to sell, as in the case before us, involves the performance
of an obligation, not merely the exercise of a right or a privilege.
Consequently, performance may be effected not by tender of payment
alone but by both tender and consignation.
In Vda. De Quirino vs. Palarca72 where the lessee was given “the right and
option to buy the leased premises for P12,000,” the Supreme Court ruled that
consignation cannot apply in such a case and stated:
x x x the consignation referred to in Article 1256 of our Civil Code is
inapplicable to the present case, because said provision refers to
consignation as one of the means for the payment or discharge of a “debt,”
whereas the lessee was not indebted to the lessor for the price of the leased
premises. The lessee merely exercised a right of option and had no
obligation to pay said price until the execution of the deed of sale in his
favor, which the lessor refused to do.
In Badayos vs. Court of Appeals73 where the exercise of a right

214
212 ObligatiOns and COntraCts
Text and Cases
arts. 1256-1258

of redemption is involved, the Supreme Court said:

In the exercise of the right of redemption, consignation is not necessary
for the reason that the relationship that existed between vendor and vendee
a retro, was not one of debtorcreditor. The vendor a retro is exercising a
right, not discharging an obligation, hence a mere tender of payment is
sufficient to preserve the right of a vendor.
In Far East Bank & Trust Company vs. Diaz Realty, Inc.74 where the issue
was whether or not the tender of a check is a valid tender of payment, the
Supreme Court ruled:
For a valid tender of payment, it is necessary that there be a fusion of
intent, ability and capability to make good such offer, which must be
absolute and must cover the amount due. Though a check is not legal
tender, and a creditor may validly refuse to accept it if tendered as payment,
one who in fact accepted a fully funded check after the debtor’s
manifestation that it had been given to settle an obligation is estopped from
later on denouncing the efficacy of such tender of payment.
In the case of Soco vs. Militante,75 the Supreme Court had the opportunity to
discuss the requirements of law for an effective tender and consignation, thus:
Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept
payment and it generally requires a prior tender of payment. (Limkako vs.
Teodoro, 74 Phil. 313).
In order that consignation may be effective, the debtor must first comply
with certain requirements prescribed by law. The debtor must show: (1)
that there was a debt due; (2) that the consignation of the obligation had
been made because the creditor to whom tender of payment was made
refused to accept it, or because he was absent or incapacitated, or because
several persons claimed to be entitled to receive the amount due (Article
1176, Civil Code); (3) that previous notice of the consignation had been
given to the person interested in the performance of the obligation (Art.
1177, Civil Code); (4) that the amount due was placed at the disposal of
the court (Art. 1178, Civil Code); and (5)

77
Id., Page 178. Id.,
Page 181.
G.R. Nos. 106467-68, October 19, 1999, 114 SCAD 475, 317 SCRA 24.

215
arts. 1256-1258
 ObligatiOns 213
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
that after the consignation had been made the person interested was notified
thereof (Art. 1178, Civil Code). Failure in any of these requirements is
enough to render a consignation ineffective. (Jose Ponce de Leon vs.
Santiago Syjuco, Inc., 90 Phil. 311).
Without the notice first announced to the persons interested in the
fulfillment of the obligation, the consignation as a payment is void.
(Limkako vs. Teodoro, 74 Phil. 313)
In order to be valid, the tender of payment must be made in lawful
currency. While payment in check by the debtor may be acceptable as
valid, if no prompt objection to said payment is made (Desbarats vs. Vda.
De Mortera, L-4915, May 25, 1956), the fact that in previous years
payment in check was accepted does not place its creditor in estoppel from
requiring the debtor to pay his obligation in cash (Sy vs. Eufemio, L-10572,
Sept. 30, 1958). Thus, tender of a check to pay for an obligation is not a
valid tender of payment thereof (Desbarats vs. Vda. De Mortera, supra).
See Annotation, The Mechanics of Consignation by Atty. S. Tabios, 104
SCRA 174-179.
Tender of payment must be distinguished from con-
signation. Tender is the antecedent of consignation, that is, an act
preparatory to the consignation, which is the principal, and from which are
derived the immediate consequences which the debtor desires or seeks to
obtain. Tender of payment may be extra-judicial, while consignation is
necessarily judicial and the priority of the first is the attempt to make a
private settlement before proceeding to the solemnities of consignation. (8
Manresa 325)
In the same Soco case, the Supreme Court likewise stated the reason for giving
the first notice and the second notice, to wit:
In this connection, the purpose of the notice is in order to give the creditor
the opportunity to reconsider his unjustified refusal and to accept payment
thereby avoiding consignation and the subsequent litigation. This previous
notice is essential to the validity of the consignation and its lack invalidates
the same. (Cabanos vs. Calo, 104 Phil. 1058; Limkako vs. Teodoro, 74 Phil.
313)76
The reason for the notification to the persons interested in the fulfillment
of the obligation after consignation had been made, which is separate and
distinct from the notification which is made prior to the consignation is
stated in Cabanos vs. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil.
1058, thus: “There

G.R. No. L-24791, August 29, 1969, 29 SCRA 160.

Riesenbeck vs. Court of Appeals, G.R. No. 90359, June 9, 1992.
arts. 1256-1258
214 ObligatiOns and COntraCts
Text and Cases
should be notice to the creditor prior and after the consignation as required
by the Civil Code. The reason for this is obvious, namely, to enable the
creditor to withdraw the goods or money deposited. Indeed, it would be
unjust to make him suffer the risk for any deterioration, depreciation or loss
of such goods or money by reason of lack of knowledge of the
consignation.”77
In De Mesa vs. Court of Appeals,78 where the debtor in the trial court filed a
motion to allow it to just consign all future quarterly installments without need
of formal tender of payment and service of notices to the creditor who was duly
notified of such motion, the Supreme Court ruled that the circumstances of the
case and the order of the court granting the motion can be considered
substantial compliance with the requirement of notice to the creditor. The
Supreme Court said:
Petitioner next argues that there was no notice to her regarding OSSA’s
consignation of the amounts corresponding to the 12th up to the 20th
quarterly installments. The records, however, show that several tenders of
payment were consistently turned down by the petitioner, so much so that
respondent OSSA found it pointless to keep on making formal tenders of
payment and serving notices of consignation to petitioner. Moreover, in a
motion dated May 7, 1987, OSSA prayed before the lower court that it be
allowed to deposit by way of consignation all the quarterly installments,
without making formal tenders of payment and serving notice of
consignation, which prayer was granted by the trial court in the Order dated
July 3, 1982. The motion and the subsequent court order served on the
petitioner in the consignation proceedings sufficiently served as notice to
petitioner of OSSA’s willingness to pay the quarterly installments and the
consignation of such payments with the court. For reasons of equity, the
procedural requirements of consig-nation are deemed substantially
complied with in the present case.
The law likewise states that consignation alone shall produce the same effect
in five cases. The first case is when the creditor is absent or unknown, or does
not appear at the place of payment. Hence, if A is indebted to B in the amount
of P1,000 payable on April 11, 1997 at the Manila Hotel, and on the said date,
A is ready to pay, but B is not at the Manila Hotel, then consignation can
immediately be made in court without need of looking for B and tendering
payment. The second case is when the creditor is incapacitated to receive the
payment at the time it is due. Hence, if A is indebted to B who

G.R. No. L-17076, January 29, 1962, 4 SCRA 40.

arts. 1256-1258
 ObligatiOns 215
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
later on becomes insane, tender of payment need not be made as the said insane
creditor might not even understand what the debtor is doing. A can
immediately consign the money in court so that he will be relieved of any
responsibility such as the running of interest. The third case is when, without
just cause, the creditor refuses to give a receipt. A receipt is a proof of payment.
It is under-standable that a debtor must protect himself by all means possible
and one of these protections is the receipt which he can demand from the
creditor upon payment precisely to evidence the fact of payment. However, if
there is just cause for the creditor not to issue the receipt, tender of payment
must still be made. For instance, if the debtor insists from the creditor that the
latter issue a receipt for the full amount of the indebtedness and the creditor
refuses to issue such a receipt because there has been no full payment, there is
justifiable ground for the creditor not to issue the receipt and therefore tender
of payment is still necessary. The fourth case is when two or more persons
claim the same right to collect. There is no use tendering payment to any of the
two or more persons who claim the right to collect because it may turn out that
the person to whom payment is given might not be lawfully entitled to the
payment. The fifth case is when the title of the obligation has been lost. For
the protection of the debtor, he may immediately go to court if title is lost
because, it is better for the court to declare that the obligation has been
extinguished than just pay the creditor without recovering the title to the debt
or at least without declaring or annotating in the said title that the debt is
already ineffective because of the payment.

Article 1259. The expenses of consignation, when properly made, shall be

charged against the creditor. (1179)

The creditor shall be responsible for the expenses of consignation because it

was his failure to accept payment that led to the consignation. In Miranda vs.
Reyes79 where the obligee or debtor tendered payment of the price for
redeeming the property to the creditor-defendant a few days before the period
of redemption was to expire and the latter immediately accepted the tender and
sent his letter of acceptance by mail and where the creditor-defendant, still
waiting for the reply, filed a case for consignation, and where the obligor,
instead of just withdrawing the money deposited in court, filed an answer
claiming that there was no need of consignation as he

art. 1259

accepted the tender and consequently litigated the case, the Supreme Court
ruled on the validity of the consignation and said:
216 ObligatiOns and COntraCts
Text and Cases
The law must be reasonably interpreted and the realities of the situation in
each case taken into account so that the purpose of the law may not be
defeated. It is true the defendant sent his letter of acceptance on September
24, 1964, but it was not received by the plaintiffs until September 29. In
the meantime the redemption period of one year was about to expire. The
plaintiffs, therefore, did the most prudent thing under the circumstances by
filing the action and depositing the redemption money in court. The
defendant bewails this step as “unduly dragging x x x (him) to an expensive
and protracted litigation.” This is a pharisaical attitude to adopt. If the
litigation has become expensive and protracted the defendant has nobody
to blame but himself, for the consignation was no less an effective and
timely tender of payment than the one which had been extrajudicially
made, and all that the defendant had to do was to withdraw the amount
deposited, without going through the rigmarole of filing an answer and
contesting the validity of the deposit just because there had been no
unjustified refusal to accept the said tender.

Article 1260. Once the consignation has been duly made, the debtor may ask
the judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial
declaration that the consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the obligation to remain
in force. (1180)

Once there is already a finding that the consignation is proper, the debtor
should be released from the obligation. He can ask the court to order the
cancellation of the obligation. Consequently, the court will order that the
creditor accepts the money or thing consigned as payment. The consignation
has a retroactive effect. The payment is deemed to have been made at the time
of the deposit of the money in court or when it was placed at the disposal of
the judicial autho-rity.80

In Gamboa vs. Tan81 where the debtor filed a case for consignation and
deposited the amount of money offered as payment to the creditor who
previously refused to accept, and where the court granted the withdrawal of the
amount deposited upon motion of the debtor, and where the creditor, aware of
the said withdrawal, filed

art. 1260

an answer stating that the money was not enough, and that he was willing to
accept the money as partial payment and likewise sought the nullification of
the withdrawal as he was not given notice of the motion regarding the same,
 ObligatiOns 217
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
the Supreme Court ruled that the withdrawal was proper as it was pursuant to
the second paragraph of Article 1260 and said:
We think the above article gives the depositor the right to withdraw the
amount deposited at any time before the creditor accepts it (not to speak of
the court’s order declaring it to be proper). Such right is clear in this case,
because the statement of the creditor came late, and, what is more, the
acceptance was partial. This last consideration renders unnecessary to
discuss the effect of failure to give the creditor any notice of withdrawal,
since Cancio’s statement was practically a rejection of the offer of
payment.
Prior to any withdrawal of the debtor of the amount, the creditor may accept
the amount consigned either unconditionally or with reservation. An
acceptance with reservation is valid. Thus in Riesenbeck vs. Court of Appeals,82
the Supreme Court ruled that, in a consignation case, the creditor’s acceptance
of the consigned amount but with an express reservation that he is not admitting
the correct-ness of the obligation and therefore he is also reserving his right to
claim the balance in accordance with what is prayed for in his answer and
counterclaims is valid. The reservation did not completely extinguish the
obligation. If there is no reservation made, it means that the creditor waives his
other claims under the contract. Upon the declaration of the court that the
consignation is valid, the debtor cannot anymore claim that he is the owner of
the said amount, and hence he cannot withdraw it anymore.

Article 1261. If, the consignation having been made, the creditor should
authorize the debtor to withdraw the same, he shall lose every preference
which he may have over the thing. The co-debtors, guarantors and sureties
shall be released. (1181a)

When there is already a finding by the court that there has been proper
consignation and consequently the obligation has been cancelled, it is
incumbent upon the creditor to obtain from the court

art. 1261

the money deposited as payment. However, if the obligation having been

extinguished, the debtor decides to withdraw the thing deposited with the
creditor’s consent, there is therefore nothing which the creditor can obtain from
the court. In this case, both the debtor and the creditor, in effect, agreed to
revive the indebtedness. However, the creditor, because of his consent to the
withdrawal, will lose preference to the thing previously deposited to
specifically pay-off his debt. Anybody who has an interest in it can also go
218 ObligatiOns and COntraCts
Text and Cases
after it and the creditor cannot anymore say that it has been precisely consigned
to answer for the credit in his favor. Moreover, his solidary debtors, guarantors
and sureties shall be released as they likewise benefit from the extinguishment
of the obligation and the debtor cannot unilaterally revive the obligation
without their consent.

G.R. No. 90359, June 9, 1992.

222 ObligatiOns and COntraCts art. 1261
Text and Cases
220 ObligatiOns and COntraCts art
Text and Cases
223

SECTION 2. — Loss of the Thing Due

Article 1262. An obligation which consists in the delivery of a determinate

thing shall be extinguished if it should be lost or destroyed without the fault
of the debtor, and before he has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events,
the loss of the thing does not extinguish the obligation, and he shall be
responsible for damages. The same rule applies when the nature of the
obligation requires the assumption of risk. (1182a)

When the object of the prestation is a determinate thing, the debtor shall be
excused from performing his obligation if such thing is lost without his fault.
However, if it is his fault or if it has been lost after the debtor has incurred in
delay, the debtor shall answer for the resulting damages. In Federation of
United Namarco Distributors, Inc. vs. National Marketing Corporation
(NAMARCO)1 where the debtorappellant NAMARCO refused to deliver the
goods to the creditorfederation after due demand, and, as a result, some of the
goods were destroyed, the Supreme Court said that the debtor-appellant had to
bear the risk of loss and said:
Appellant also claims that the trial court erred in allowing the appellee to
take delivery of 445 cases of oranges only, instead of 2,400 cases, in effect
charging it (appellant) the loss of 1,955 cases.
The claim is unmeritorious. Let it be remembered that as early as January
25, 1960, appellant had refused to deliver the imported commodities to
appellee. It is true that on March 2, 1960, the FEDERATION, upon filing
its complaint, obtained a writ of preliminary injunction to prevent
NAMARCO from disposing of these goods through other distributors or
retailers, but the FEDERATION was willing to accept, and in fact had been
requesting the delivery of the same to it or its members for sale to

G.R. No. L-17819, March 31, 1962, 4 SCRA 867.

G.R. No. 116896, May 5, 1997, 82 SCAD 377.
223
. 1263
 the general public, but NAMARCO refused to make such delivery. It was
only on March 26, 1960 that the trial court upon appellee’s motion, ordered
the release to it of, among others, “2,400 cases of mandarin oranges
provided they are in good condition, or only so much thereof that are in
good condition.” Consequently, the FEDERATION could not be blamed
for refusing to take delivery of the oranges that had in the meantime
become spoiled during the period from January 25 to March 26. In the
circumstances, it is but proper that appellant must bear the loss (the rotting
of 1 ,955 cases of oranges) occasioned by its own fault.
Appellant asserts that the trial court likewise erred in holding it liable for
storage charges from March 2, 1960 (date of filing of appellee’s complaint
in the lower court) of the commodities covered by the contract of sale in
question.
The argument merits no serious consideration. It is true that under the
contract of sale the handling and storage charges of the commodities
covered thereby are for the account of appellee FEDERATION. However,
the storage charges that became due from the date the goods had to remain
in the warehouse because of the refusal of NAMARCO to deliver the same
to the FEDERATION which had been demanding the surrender thereof to
it, can not be charged to the FEDERATION, but to NAMARCO as the one
who, in the performance of its obligation under the contract, has been guilty
of delay in the delivery of the goods subject matter thereof.
With respect to liability even for fortuitous event, or when the nature of the
obligation requires an assumption of risk, this has been fully discussed under
Article 1174. In these cases, because the thing is lost already, damages can be
obtained from the debtor. Thus, if the specific and particular car to be delivered
by the debtor is worth P500,000, and it is lost through a fortuitous event, but
the parties stipulate that the debtor, even under such circumstances, will still
be liable, the creditor cannot insist on the delivery of the specific car because
it has already been lost, but he can seek damages in the amount of P500,000
which is the value of the car.

Article 1263. In an obligation to deliver a generic thing, the loss or

destruction of anything of the same kind does not extinguish the obligation.
(n)

A generic thing is not a determinate thing. A generic thing, which is the object
of the prestation cannot really be lost or destroyed unless the whole class of
said thing is destroyed, hence the obligation subsists despite the loss or
destruction of one thing in the said class.
 ObligatiOns 222
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
arts. 1264-1265

For example, if the debtor is bound to deliver a ball without any specification,
he may deliver any kind of ball. If he buys one and subsequently loses it
through a fortuitous event, his obligation is not extinguished. The debtor
simply has to buy another ball.

Article 1264. The courts shall determine whether, under the circumstances,
the partial loss of the object of the obligation is so important as to extinguish
the obligation. (n)

A loss may be complete or partial. If the loss is complete, Articles 1262 and
1263 will apply. If the loss is partial and the circumstances so warrant, the court
may consider it as a complete loss which extinguishes the obligation. This can
only happen if the partial loss is so important so as to totally affect the whole
object of the obligation. However, if it is considered as a complete loss, then
the rules under Articles 1262 and 1263 must apply. For example, if the debtor
is under an obligation to deliver a specific computer consisting of the CPU with
specific drives and particular hard disks together with a very specialized screen
peculiarly made for the said computer, with a special keyboard made to
respond only to said screen, and the said screen is lost through a fortuitous
event before the debtor has incurred in delay, there is clearly a partial loss
which renders the computer system totally useless. In this case, the debtor can
go to court and declare that the partial loss has extinguished his obligation to
deliver the computer.

Article 1265. Whenever the thing is lost in the possession of the debtor, it
shall be presumed that the loss was due to his fault, unless there is proof to
the contrary, and without prejudice to the provisions of Article 1165. This
presumption does not apply in case of earthquake, flood, storm, or other
natural calamity. (1183a)

As a general rule, it is presumed that the loss of the thing is due to the fault of
the debtor who possesses it. The presumption arises from the fact that it was
lost while it is in the possession of the debtor. If the debtor is not in the
possession of the thing when it is lost, the presumption does not arise. If the
presumption applies, it is incumbent upon the debtor to prove that the loss is
not through his fault or it has been caused by a fortuitous event. However, he
will still be responsible for a fortuitous event if it has been so stipulated by the
parties, if the law so states, or if the nature of the obligation involves an
assumption of risk, and if the obligor delays or has promised the
. 1266
art. 1267 ObligatiOns 223
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
same thing to two or more persons who do not have the same interest. In any
event, the presumption does not apply even if the loss happens at the time the
thing is in the possession of the debtor if, at the time of the loss, an earthquake,
storm, or other natural calamity exists.

Article 1266. The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the
obligor. (1184a)

This article refers to the prestation “to do.” In Philippine National

Construction Corporation vs. Court of Appeals2 where the lessee in a lease
contract sought its release from paying the rentals and from the said contract
itself invoking Article 1266 and claiming that, due to the change in political
climate after the EDSA revolution and change in financial condition, it was not
able to use the property for the purpose for which it intended to utilize it, i.e.,
to use the leased premises as a site of a rock crushing plant, the Supreme Court
rejected such prayer for the lessee’s release by stating:
It is a fundamental rule that contracts, once perfected, bind both
contracting parties, and obligations arising therefrom have the force of law
between the parties and should be complied with in good faith. But the law
recognizes exceptions to the principle of the obligatory force of contracts.
One exception is laid down in Article 1266 of the Civil Code, which reads:
“The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor.”
Petitioner cannot, however, successfully take refuge in the said article,
since it is applicable only to obligations “to do,” and not to obligations “to
give.” An obligation “to do” includes all kinds of work or service; while an
obligation “to give” is a prestation which consists in the delivery of a
movable or an immovable thing in order to create a real right or for the use
of the recipient, or for its simple possession, or in order to return it to its
owner.
The obligation to pay rentals or deliver the thing in a contract of lease falls
within the prestation “to give;” hence, it is not covered within the scope of
Article 1266. At any rate, the unforeseen event and causes mentioned by
the petitioner are not the legal or physical impossibilities contemplated in
the said article. Besides, petitioner failed to state specifically the
circumstances brought about by the “abrupt change in the political climate”
except the alleged prevailing uncertainties in

Taylor vs. Caldwell, King’s Bench, 1863, 3 B. & S., 122 Eng. Rep. 309, cited in
government policies on infrastructure projects.
When the prestation becomes legally or physically impossible without the fault
of the obligor, it shall be considered a loss which extinguishes the obligation.
224 ObligatiOns and COntraCts art
Text and Cases
Thus, if the obligor is bound to build a fence along the property of the obligor
and the said property is expropriated by the government which bars everybody
from entering the same, the obligation has become legally impossible to do and
hence it is extinguished. Also, in a case3 where a debtor was bound to do a
concert and to provide musical bands and other entertainment only and
exclusively in a particular Music Hall and the parties contracted on the basis
of the continued existence of the said Music Hall, which however burned down
without the fault of either the debtor or the creditor, before the concert can
begin, the obligation of the debtor to render a concert has become physically
impossible to perform and therefore the same was extinguished.

Article 1267. When the service has become so difficult as to be manifestly

beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part. (n)

Difficulty alone does not excuse the debtor from fulfilling his prestation. This
has been referred to as “subjective impossibility” which means that “a
promissor’s duty is never discharged by the mere fact that the supervening
events deprive him of the ability to perform, if they are not such as to deprive
other persons, likewise, of ability to render such a performance.”4 However,
Article 1267 creates a new norm by providing that when the service has
become so difficult as to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or in part. This is still
within the penumbra of the rule on impossibility of performance although the
obligation may not technically and necessarily be impossible. The law lays
down the requisite for this article to apply and they are the following: a) the
prestation has become so difficult to render, and b) the service has become
manifestly beyond the contemplation of the parties. These requirements must
exist together. This is an innovation under the 1950 Civil Code and its rationale
has been aptly stated as follows:

Cases and Materials on Contracts, by E. Allan Farnsworth and William F. Young, 3rd edition,
Mineola New York, The Foundation Press, Inc., 1980, Page 953.
4
United States vs. Wegematic Corp., 360 F.2d 674, cited in Cases and Materials on Contracts, by
E. Allan Farnsworth and William F. Young, 3rd edition, Mineola New York, The Foundation
Press, Inc., 1980, Page 972.
5
Naga Telephone Co. vs. Court of Appeals, G.R. No. L-107112, February 24, 1994 , 48 SCAD
539, 230 SCRA 351.
6
G.R. No. 116896, May 5, 1997, 82 SCAD 377.
. 1267

The general rule is that impossibility of performance releases the obligor.

However, it is submitted that when the service has become so difficult as
to be manifestly beyond the contemplation of the parties, the court should
art. 1267 ObligatiOns 225
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
be authorized to release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out to be so
difficult as to have been beyond their contemplation, it would be doing
violence to that intention to hold the obligor still responsible.5
For example, if an obligor is bound to deliver 40 cases of mangoes from the
Philippines to South Africa by ship at the cost of $30,000 on or before April
11, 1997 and the usual route known to the parties in going to South Africa has
been suddenly closed prompting the obligor to look and eventually pass
through another route, which is likewise closed, again leaving the obligor with
no other choice but to attempt passing through another alternative route four
times longer than the usual route, and which route could be traversed by its
vessel without damaging itself and without entailing enormous additional and
unreasonable cost (i.e., the obligor would have to charter other vessels for the
continuing voyage), and also without subjecting the fruits to possible harm as
they would most likely spoil along such a long trip, the obligation in this case
has clearly become so difficult to do and is manifestly beyond their
contemplation. The obligation should be deemed extinguished.

In Philippine National Construction Corporation vs. Court of Appeals6 where

the lessee in a lease contract sought its release from paying the rentals and from
the said contract itself invoking Article 1266 and the theory of rebus sic
stantibus from where Article 1267 was based, claiming that, due to the change
in political climate after the EDSA revolution and change in financial
condition, it was not able to use the property for the purpose for which it
intended to utilize it, i.e., to use the leased premises as a site of a rock crushing
plant, the Supreme Court rejected the application of the concept of rebus sic
stantibus by stating:
The principle of rebus sic stantibus neither fits in with the facts of the case.
Under this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist, the contract also
ceases to exist. This theory is said to be the basis of Article 1267 of the
Civil Code, which provides: ART. 1267. When the service has become
difficult as to be
7Id.

G.R. No. L-44349, October 29, 1976, 73 SCRA 637.

G.R. No. 124221, August 4, 2000, 131 SCAD 303, 337 SCRA 298.
manifestly beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole and in part.
This article, which enunciates the doctrine of unforeseen events, is not,
however, an absolute application of the principle of rebus sic stantibus,
which would endanger the security of contractual relations. The parties to
the contract must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.
226 ObligatiOns and COntraCts art
Text and Cases
In this case, petitioner wants this Court to believe that the
abrupt change in the political climate of the country after the
EDSA Revolution and its poor financial condition “rendered
the performance of the lease contract impractical and
inimical to the corporate survival of the petitioner.”
This Court cannot subscribe to this argument. As pointed
out by the private respondents:
It is a matter of record that petitioner PNCC entered into a
contract with private respondents on November 18, 1985.
Prior thereto, it is of judicial notice that after the assassination
of Senator Benigno Aquino on August 21, 1983, the country
has experienced political upheavals, turmoils, almost daily
mass demonstrations, unprecedented inflation, peace and
order deterioration, the Aquino trial and many other things
that brought about the hatred of people even against crony
corporations. On November 3, 1985, Pres. Marcos, being
interviewed live on U.S. television announced that there
would be a snap election scheduled for February 7, 1986.
On November 18, 1985, notwithstanding the above,
petitioner PNCC entered into the contract of lease with
private respondents with open eyes of the deteriorating
conditions of the country.
Anent petitioner’s alleged poor financial condition, the same will neither
release petitioner from the binding effect of the contract of lease. As held
in Central Bank vs. Court of Appeals (139 SCRA 46, citing Repide vs.
Afzelius, 39 Phil. 190), cited by private respondents, mere pecuniary
inability to fulfill an engagement does not discharge a contractual
obligation, nor does it constitute a defense to an action for specific
performance.
In the case of Naga Telephone Co., Inc. vs. Court of Appeals,7 a
. 1267

contract was entered into between the petitioner and the respondent where they
agreed that the petitioner shall use the electrical posts of the respondent in Naga
City free of charge, but the contract can be terminated if the respondent is
forced to stop its business. As consideration, the petitioner agreed to install free
of charge 10 telephone connections to the respondent. At the time of the
execution of the contract, it was the contemplation of the parties that the posts
were only to be used in Naga City because, at that time the capability of
respondent was very limited. This was so even if at that time there were many
subscribers in Naga City for telephone lines, who cannot be served because of
this contemplated limited capability. After 11 years of the effectivity of the
contract, the contract became so burdensome to the petitioner. This fact was
art. 1267 ObligatiOns 227
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
shown by the following: the telephone cables strung by the respondent had
become heavier with the increase in the volume of their subscribers, worsened
by the fact that their linemen bore holes through the posts at which points those
posts were broken during typhoons, and that a post costs as much as P2,630.
While there was an increased use of the posts, there was no corresponding
increase in the telephone connections to the respondent. Petitioners also began
using respondent’s telephone posts outside Naga City. The contract became so
one-sided to the prejudice of the respondent. The Supreme Court agreed with
the lower court and the Court of Appeals, that Article 1267 was applicable
under the situation as the continued enforcement of the contract had manifestly
gone beyond the contemplation of the parties so much so that the respondent
should be released from the contract to avoid petitioner’s unjust enrichment at
respondent’s expense. With respect to petitioner’s contention that, because the
contract did not involve the rendition of service or a personal prestation and it
was not for future service with future unusual change, Article 1267 should not
apply and therefore the ruling in the Occena vs. Jabson8 case should be
followed, the Supreme Court said:
Article 1267 speaks of “service” which has become difficult. Taking into
consideration the rationale behind this provision, the term “service” should
be understood as referring to the “performance” of the obligation. In the
present case, the obligation of private respondent consists in allowing
petitioners to use its posts in Naga City, which is the service contemplated
in said article. Furthermore, a bare reading of this article reveals that it is
not a requirement thereunder that the contract be for

future service with future unusual change. x x x Considering the practical

needs and the demands of equity and good faith, the disappearance of the
basis of a contract gives rise to a right to relief in favor of the party
prejudiced.
In a nutshell, private respondent in the Occena case filed a complaint
against petitioner before the trial court praying for modification of the
terms and conditions of the contract that they entered into by fixing the
proper shares that should pertain to them out of the gross proceeds from
the sales of subdivided lots. We ordered the dismissal of the complaint
therein for failure to state a sufficient cause of action. We rationalized that
the Court of Appeals misapplied Article 1267 because:
“x x x respondent’s complaint seeks not release from the
subdivision contract but that the court ‘render judgment
modifying the terms and conditions of the contract . . . by
fixing the proper shares that should pertain to the herein
parties out of the gross proceeds from the sale of subdivided
lots of subject subdivision.’ The cited article (Article 1267)
does not grant the courts (the) authority to remake, modify or
revise the contract or to fix the division of shares between the
228 ObligatiOns and COntraCts art
Text and Cases
parties, so as to substitute its own terms for those covenanted
by the parties themselves. Res-pondent’s complaint for
modification of contract manifestly has no basis in law and
therefore states no cause of action. Under the particular
allegations of respondent’s complaint and the circumstances
therein arrived, the courts cannot even in equity grant the
relief sought.”
The ruling in the Occena case is not applicable because we agree with
respondent court that the allegations in private respondent’s complaint and
the evidence it has presented sufficiently made out a cause of action under
Article 1267. We, therefore, release the parties from their correlative
obligations under the contract. x x x
In Magat, Jr. vs. Court of Appeals,9 respondent won a bidding to operate a
fleet taxi cabs with radio transceivers. For this purpose, respondent ordered
certain radio transceivers through the petitioner. The petitioner ordered from
Japan. It was agreed that the radio transceivers will be delivered within 60 to
90 days notice from the respondent of the assigned radio frequency taking note
of government regulations. The radio frequency was assigned but later the
government, because of the imposition of martial law, denied the application
for a permit to import the radio transceivers. Due to this
. 1268

denial, the respondent was likewise unable to obtain the necessary letter of
credit. Respondent did not continue with the contract. The Supreme Court
rejected the case of petitioner for breach of contract by thus ruling:
Guerrero (respondent) testified that a permit to import the transceivers
from Japan was denied by the Radio Control Board. He stated that he,
together with Aligada, Victorino (petitioner), and a certain John Dauden
personally went to the Radio Control Office, and were denied a permit to
import. They also went to the Office of the President, where Secretary
Ronaldo B. Zamora explained that radios were “banned like guns because
of martial law.” Guerrero testified that this prevented him from securing a
letter of credit from the Central Bank. This testimony was not rebutted.
The law provides that “when the service (required by the contract) has
become so manifestly beyond the contemplation of the parites, the obligor
may also be released therefrom, in whole or in part. Here, Guerrero’s
inability to secure a letter of credit and to comply with his obligation was
a direct consequence of the denial of the permit to import. For this he
cannot be faulted.
Article 1268. When the 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, unless the thing having
art. 1267 ObligatiOns 229
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
been offered by him to the person who should receive it, the latter refused
without justification to accept it. (1185)

If A stole a watch from B and was criminally charged for such an offense, and
the watch was lost through a fortuitous event, the debtor-accused must still pay
the price of the watch. The loss will not excuse him from being responsible as
he did not have the right to possess the same in the first place. If A however
offered back the watch to B, and the latter refused to accept, the risk of loss of
the watch would be on B except if there was justifiable reason not to accept it
as, for example, it had already been severely damaged.

Article 1269. The obligation having been extinguished by the loss of the
thing, the creditor shall have all the rights of action which the debtor may
have against third persons by reason of the loss. (1186)
 . 1269

Sec. 2 — Loss of the Thing Due

This is another provision designed to protect the interest of the creditor.

Hence, if A buys a house from G, and the house, which is insured, is
accidentally burned by a fortuitous event prior to the demand for its delivery
by A, the obligation of G to deliver the house is extinguished. However, in the
event that A has already paid the price of the house, he can seek reimbursement
of the insurance proceeds due from the insurance company.
art ObligatiOns 231
Extinguishment of Obligations
234 ObligatiOns and COntraCts Text
and Cases

SECTION 3. — Condonation or Remission of

the Debt

Article 1270. Condonation or remission is essentially gratuitous, and

requires the acceptance by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms
of donation. (1187)

Condonation is an act of liberality. It connotes that there is a previous

demandable obligation but the obligee or the creditor decides not to enforce
the debtor’s prestation anymore. It requires however the implied or express
consent of the obligor. In effect, condonation or remission of a debt is a
donation of the obligee’s credit in favor of the debtor.

The remission or condonation is governed by the rules on inofficious donation.

A donation is inofficious if it turns out that the thing or amount donated
(remitted or condoned) encroaches or infringes on the legitime or successional
rights of the heirs of the condoning creditor. Thus, if a creditor condones the
debt of a debtor in the amount of P50,000, and later on, the creditor gives birth
to a child at a time when her properties are worth only P10,000, her overall
estate (including the remitted P50,000) at the time of the birth of the child is
therefore P60,000. The legitime of the child as provided in the Civil Code is
one-half (1/2) of the estate1 which, in this example, is P30,000. Hence,
technically the free portion which can be given to any person not necessarily
an heir is also P30,000. Thus, since the child will only get P10,000 because
this is the only existing property out of an estate of P60,000, the remission in
favor of the debtor is inofficious to the extent of P20,000. The remission clearly
infringes on the legitime of the child. The debtor must therefore be made to
pay P20,000 out of the P50,000 remitted debt. Hence, the child shall get
P20,000 in addition to his P10,000 which will complete his legitime.

Article 888 of the 1950 Civil Code.

Biala vs. Court of Appeals, G.R. No. 43503, October 31, 1990, 191 SCRA 51; First Integrated
Bonding and Insurance Company vs. Isnani, G.R. No. 70246, July 234 . 1270

Sec. 3 — Condonation or Remission of the Debt

The rules on the reduction of inofficious donations are provided in the Civil
Code thus:
Article 750.The donation may comprehend all the present property of the
donor, or part thereof, provided he reserves, in full ownership or in
usufruct, sufficient means for the support of himself, and of all relatives
who, at the time of the acceptance of the donation, are by law entitled to be
supported by the donor. Without such reservation, the donation shall be
reduced on petition of any person affected.
Article 771. Donations which in accordance with the provisions of Article
752, are inofficious, bearing in mind the estimated net value of the donor’s
property at the time of his death, shall be reduced with regard to the excess;
but this reduction shall not prevent the donations from taking effect during
the life of the donor, nor shall it bar the donee from appropriating the fruits.
For the reduction of donations the provisions of this chapter and of Articles
911 and 912 of this Code shall govern.
Article 772. Only those who at the time of the donor’s death have a right
to the legitime and their heirs and successors in interest may ask for the
reduction of inofficious donations.
Those referred to in the preceding paragraph cannot renounce their right
during the lifetime of the donor, either by express declaration, or by
consenting to the donation.
The donees, devisees and legatees, who are not entitled to the legitime and
the creditors of the deceased can neither ask for the reduction nor avail
themselves thereof.
Article 773. If, there being two or more donations, the disposable portion
is not sufficient to cover all of them, those of the more recent date shall be
suppressed or reduced with regard to the excess.
Article 760. Every donation inter vivos, made by a person having no
children or descendants, legitimate or legitimated by subsequent marriage,
or illegitimate, may be revoked or reduced as provided in the next article,
by the happening of any of these events:
(1) If the donor, after the donation, should have legitimate or
legitimated or illegitimate children, even though they be
posthumous;
(2) If the child of the donor, whom the latter believed to be dead
when he made the donation, should turn out to be living;
 ObligatiOns 233Extinguishment of Obligations
art. 1270

(3) If the donor should subsequently adopt a minor child.

Article 761. In cases referred to in the preceding article, the donation shall
be revoked or reduced insofar as it exceeds the portion that may be freely
disposed of by will, taking into account the whole estate of the donor at the
time of the birth, appearance or adoption of a child.
Article 762. Upon the revocation or reduction of the donation by the birth,
appearance or adoption of a child, the property affected shall be returned,
or its value if the donee has sold the same.
If the property is mortgaged, the donor may redeem the mortgage, by
paying the amount guaranteed, with a right to recover the same from the
donee.
When the property cannot be returned, it shall be esti-mated at what it was
worth at the time of the donation.
Article 763. The action for revocation or reduction on the grounds set forth
in Article 760 shall prescribe after four years from the birth of the first
child, or from his legitimation, recognition or adoption or from the judicial
declaration of filiation, or from the time information was received
regarding the existence of the child believed dead.
This action cannot be renounced, and is transmitted, upon the death of the
donor, to his legitimate and illegitimate children and descendants.
The law likewise provides that express condonation shall, furthermore,
comply with the forms of donation. Title III, Chapter 2 of the Civil Code on
Donations pertinently provides:
Article 748. The donation of a movable may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the
document representing the right donated.
If the value of the personal property donated exceeds five thousand pesos,
the donation and the acceptance shall be made in writing. Otherwise, the
donation shall be void.
Article 749. In order that the donation of an immovable may be valid, it
must be made in a public document, specifying therein the property
donated and the value of the charges which the donee must satisfy.
The acceptance may be made in the same deed of donation
arts. 1271-1272

Sec. 3 — Condonation or Remission of the Debt

or in a separate public document, but it shall not take effect unless it is done
during the lifetime of the donor.
234 ObligatiOns and COntraCts
Text and Cases
If the acceptance is made in a separate instrument, the donor shall be
notified thereof in an authentic form, and this step shall be noted in both
instruments.

Article 1271. The delivery of a private document evi-

dencing a credit, made voluntarily by the creditor to the debtor, implies the
renunciation of the action which the former had against the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the
debtor and his heirs may uphold it by proving that the delivery of the
document was made in virtue of payment of the debt. (1188)

The most common private document evidencing a credit is a promissory note.

A promissory note in the hands of the creditor is proof of indebtedness rather
than proof of payment.2 If a creditor delivers a promissory note to the debtor,
the former, in effect, furnishes the debtor the evidence which could prove the
indebtedness of such debtor in his favor. It therefore implies that he is no longer
interested in the debt. The law provides that such act will be considered a
renunciation. Thus, if A is indebted to B in the amount of P1,000.00 evidenced
by a promissory note executed by A, which is in the possession of B who later
voluntarily gives it to A, such delivery implies a renunciation of the debt.
However, in the event that the remission of the P1,000 is claimed to be void
because it is inofficious, the heirs of A can show that A’s possession of the
promissory note is not a result of a remission made by A but a result of A’s
payment of the obligation. In case of payment, the promissory note is always
taken by the debtor.

Article 1272. Whenever the private document in which the debt appears is
found in the possession of the debtor, it shall be presumed that the creditor
delivered it voluntarily, unless the contrary is proved. (1189)
The fact that the document evidencing the debt is in the possession of the
debtor gives rise to the refutable presumption that such document has been
delivered by the creditor voluntarily. However, this presumption can be
overturned by clear evidence to the contrary.

, 1989, 175 SCRA 753.

Article 2085 of the 1950 Civil Code.
Articles 1316 and 2093 of the 1950 Civil Code.
arts. 1273-1274

Article 1273. The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former in
force. (1190)
 ObligatiOns 235Extinguishment of Obligations
The existence of the accessory obligation depends on the existence of the
principal obligation. But the existence of the principal obligation does not
depend on the accessory obligation. If the principal obligation is extinguished,
it carries with it the extinguishment of the accessory obligation but not vice-
versa. If A is indebted to B, and the indebtedness is guaranteed by X, and B
told X that he will not anymore claim on X’s guarantee as the said creditor is
renouncing the same, X is released but the principal obligation of A still
subsists. B can still collect from A. However, if B renounces the indebtedness
of A, B cannot go against X because the latter’s guarantee, being an accessory
obligation, is extinguished with that of the principal obligation.

Article 1274. It is presumed that the necessary obligation of pledge has been
remitted when the thing pledged, after its delivery to the creditor, is found in
the possession of the debtor, or of a third person who owns the thing. (1191a)

A pledge involves a movable property constituted by the owner of such

property who has free disposal of it, to secure the fulfillment of a principal
obligation3 and such contract is perfected only upon the delivery of the thing
pledged to the creditor.4 A pledge is an accessory contract. A person may even
pledge his property not for his own indebtedness but for the indebtedness of
another person. Hence, in a contract of pledge, the creditor or the obligee must
be in possession of the thing pledged. If it is in the possession of the debtor or
of the third person who owns it, there is a presumption that the accessory
obligation has been condoned or remitted. However, this is a refutable
presumption.
236 ObligatiOns and COntraCts
Text and Cases
239

SECTION 4. — Confusion or Merger of

Rights

Article 1275. The obligation is extinguished from the time the characters of
creditor and debtor are merged in the same person. (1192a)

A creditor cannot collect a debt from himself. A debtor cannot pay a debt to
himself. Thus, according to the law, the obligation is extinguished from the
time the characters of creditor and debtor are merged in the same person. Thus,
if the son owes his father P10,000.00, and the father dies leaving as part of his
estate, inherited by the son, the amount of P10,000 owed by the son to his
father. There is a merger of creditor and debtor. The son cannot collect his
indebtedness from himself as there is confusion which extinguishes the
obligation. In Chittick vs. Court of Appeals138 where the former wife filed a
complaint against her father for support in arrears and for her share in the
conjugal partnership, and where, after the former wife was substituted in the
case by her children upon her death, the father likewise died, the Supreme
Court dismissed the complaint stating that
since the Chittick children as heirs of respondent creditor are also the heirs
of the petitioner-debtor, the obligation sued upon had been extinguished by
the merger in their persons of the character of creditor and debtor of the
same obligation.

Article 1276. Merger which takes place in the person of the principal debtor
or creditor benefits the guarantors. Confusion which takes place in the
person of any of the latter does not extinguish the obligation. (1193)

An indebtedness by a debtor and guaranteed by a third person is extinguished

if there is a merger of the characters of the debtor and creditor. In this case, the
guarantor is clearly benefited because

239

138
G.R. No. L-25350, October 4, 1988, 166 SCRA 219.
 art. 1277

the extinguishment of the principal obligation extinguishes the accessory

obligation of guarantee. Indeed, the debtor, in whose person the character of
the creditor has merged, cannot collect from the guarantor claiming that he (the
debtor) is now at the same time the creditor because it is legally quite absurd
to tell the guarantor that, after exhausting all available remedies to collect the
indebtedness from himself, he failed to collect it, and thus, he is now going
against the guarantor for collection of the amount owed. However, the merger
of the persons of the guarantor and the creditor does not extinguish the
obligation. It merely extinguishes the accessory obligation. Also, a merger of
the characters of the debtor and the guarantor extinguishes the accessory
obligation, but not the principal obligation.

Article 1277. Confusion does not extinguish a joint obligation except as

regards the share corresponding to the creditor or debtor in whom the two
characters concur. (1194)

Joint debtors owe the creditor only their share in the whole indebtedness and
the creditor can only collect from a joint debtor his share in the total
indebtedness. Thus, if A, B and C jointly owe X P3,000 and there is a merger
of the characters of X and C, the obligation is extinguished in so far as the
P1,000 share of C in the indebtedness is concerned but not as to the rest. X can
still collect P1,000 each from A and B. If the obligation of the debtors is
solidary and there is merger of the characters of C and X, the obligation is
extinguished.139 However, if A pays the whole indebtedness to X prior to the
merger of the characters of C and X, A can still collect from X and likewise
from B their respective shares in the indebtedness which is P1,000 each. 140
241

SECTION 5. — Compensation

Article 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. (1195)

139
Article 1215 of the 1950 Civil Code.
140
Article 1215 in relation to Article 1219 of the 1950 Civil Code.
238 ObligatiOns and COntraCts
Text and Cases
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to
the debtor. (1196)

Compensation is a mode of extinguishing an obligation whereby the parties

are mutually debtors and creditors of each other such that if they exactly owe
each other the same amount and the requisites under Article 1279 are present,
they do not have to make actual payment to each other in the sense that they
do not have to hand money or the things due to each other, as payment is made
by operation of law. Hence, if A is indebted to B in the amount of P2,000, and
B is, in turn, indebted to A in the amount of P2,000, and both indebtedness are
due without any third person claiming the same, the obligation is extinguished
as there is legal compensation. If they mutually owe each other the unequal
amounts, then there is compensation up to the extent that the amounts are
covered by their mutual outstanding obligations.

241
arts. 1278-1279

The first requisite for legal compensation is that each one of the obligors be
bound principally and that each of them be at the same time a principal creditor
of the other. The parties must be mutual creditors and debtors of each other.
Thus in Soriano vs. Compana General de Tabacos de Filipinas141 where the
defendant extended a crop loan to the plaintiff who secured payment of the
loan by, among others, the sugarcane crops that would be planted and
harvested, and where the defendant, after receipt of some export sugar from
the plaintiff, shipped the same to the United States for it’s (defendant’s) own
account and benefit, and where, later on, the defendant resisted the claim of the
plaintiff to be credited an amount of P51,528.01 representing the amount of the
sugar it delivered to the defendant, by invoking automatic compensation
because the plaintiff was its debtor due to his crop loan account, and at the

141
G.R. No. L-17392, December 17, 1966, 18 SCRA 999.
same time a creditor of the defendant for the proceeds of the sale of plaintiff’s
sugar. The Supreme Court rejected the theory of legal compensation because
the parties were not mutual debtors and creditors of each other considering the
fact that, by its own admission, the sugar was sold not for the account of the
plaintiff but for the account of the defendant and therefore defendant could not
have been a debtor of the plaintiff. Also in Republic vs. Mambulao Lumber
Company,142 where the said company contended that the reforestation charges
collected under Republic Act No. 115 and not used in the area subject of its
timber license, could be applied in compensation of the sum due from it as
forest charges, the Supreme Court ruled that the reforestation charges were in
the nature of taxes and therefore can never be refunded even if the reforestation
charges were not actually used in the area subject of its timber license, and,
because they were taxes, the reforestation charges were not debts for purposes
of legal compensation to make the parties therein mutual creditors and debtors
of each other. The Supreme Court even quoted tax authorities to prove its point,
thus:
“A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action
or any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they proper subject of
recoupment since they do not arise out of contract or transaction sued on x
x x.” (80
C.J.S. 73-74)
“The general rule, based on grounds of public policy is well-

142
G.R. No. L-17725, February 28, 1962, 4 SCRA 622.
240 ObligatiOns and COntraCts
Text and Cases
. 1278-1279

settled that no set-off is admissible against demands for taxes levied for
general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the
parties but grow out of a duty to, and are the positive acts of the
government, to the making and enforcing of which, the personal consent of
individual taxpayers is not required. x x x If the taxpayer can properly
refuse to pay his tax when called upon by the Collector, because he has
claim against the governmental body which is not included in the tax levy,
it is plain that some legitimate and necessary expenditure must be curtailed.
If the taxpayer’s claim is disputed, the collection of the tax must await and
abide the result of a lawsuit, and meanwhile the financial affairs of the
government will be thrown into great confusion.” (47 Am. Jur. 766-767)
The second requisite for legal compensation is that both debts consist in a sum
of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated. Clearly, there can be no
compensation if one debt involves the payment of money and the other the
delivery of a particular thing. However, there can be compensation involving
things which are determined such as any computer but not a specific
determinate thing such as a computer with serial number 10325. In this sense,
“consumable” used by the law must be interpreted as “fungible” which is
susceptible of substitution. In Ong vs. Court of Appeals, 143 where
compensation is sought for an obligation of a debtor to deliver a sum of money
to a creditor and another obligation of the latter to deliver zippers to the former,
the Supreme Court said that there can be no compensation, thus:
Now, to the only legal question raised, to wit, the alleged compensation between
the reciprocal obligations of the parties.
Fermin claims the balance of his debt is deemed set off by the price of the
zippers in the possession of Mariano, who had the obligation to return them
to him. The flaw in this argument is the assumption that Mariano had such
an obligation, which has not been proved by Fermin. It has already been
found that Mariano has not retained them nor did he have any need for them
as he was in a different business. He had not bought them or otherwise
owed their value to Fermin, who was in fact the obligor. Fermin does not
deny that he deposited the zippers in Mariano’s warehouse without paying
storage fees or any other consideration.
arts. 1278-1279

143
G.R. No. 75819, September 8, 1989, 177 SCRA 402.
arts ObligatiOns 241
Extinguishment of Obligations Sec. 5
— Compensation
This being so, Fermin obviously cannot take refuge in Article 1279 of the Civil
Code, providing as follows: x x x
As the respondent Court correctly observed in holding that the above provision
was not applicable:
The instant case does not certainly satisfy the above because: (1) appellant
is not a debtor of appellee, it is only the latter who is indebted to appellant;
(2) the debts, even admitting that the delivery of the zippers to plaintiff is
a debt, do not both consist in a sum of money nor are they of the same
quality and kind x x x.
The third requisite is that the two debts be due. However, the debts need not
be contracted or incurred at the same time. 144 A debt cannot be demanded if it
is not yet due. Hence, this requisite is very important. However, the parties can
agree that compensation can be made even as to the debts which are not yet
due. In Perez vs. Court of Appeals,145 where a finance company was indebted
to an investor with respect to two debts due originally on August 6, 1974 and
August 13, 1974 respectively and which debts were rolled-over so that their
maturity dates were extended to October 4, 1974 and October 11, 1974,
respectively, and where the finance company was the creditor with respect to
a certain obligation to mature on August 5, 1994 as against a certain company
to whom the two credits of the investor, which were to mature on October 4
and 11, 1974 respectively, were assigned on September 9, 1974, the Supreme
Court said that:
Since, on the respective dates of maturity, specifically, August 6, 1974 and
August 13, 1974, respectively, Ramon C. Mojica was still the holder of
those bills, it can be safely assumed that it was he who had asked for the
roll-overs on the said dates. MEVER was bound by the roll-overs since the
assignment to it was made only on September 9, 1974. The inevitable result
of the roll-overs of the principals was that Bill No. 1298 and Bill No. 14129
were not yet due and demandable as of the date of their assignment by
MOJICA to MEVER on September 9, 1974, nor as of October 3, 1974
when MEVER surrendered the Bills to CONGENERIC. As a consequence,
no legal compensation could have taken place because, for it to exist, the
two debts, among other requisites, must be due and demandable.
Also, in PNB Madecor vs. Uy6 where one of the debts was payable only upon
demand and there was no demand made, the Supreme Court ruled that there
can be no compensation because such debt is

144
PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
145
G.R. No. L-56101, February 20, 1984, 127 SCRA 636.
242 ObligatiOns and COntraCts
Text and Cases
. 1278-1279 146

not yet due.

The fourth requisite is that they be liquidated and demandable. The debt must
be determined and certain. Thus compensation cannot take place where one of
the debts is not liquidated as when there is a running interest still to be paid
thereon. Thus, in Compania Maritima vs. Court of Appeals,147 the Supreme
Court, in disallowing compensation because the amount is not liquidated, said
More, the legal interest payable from February 3, 1951 on the sum of
P40,797.54, representing useful expenses incurred by PAN-ORIENTAL,
is also still unliquidated since interest does not stop accruing “until the
expenses are fully paid.” Thus, we find without basis REPUBLIC’s
allegation that PAN-ORIENTAL’s claim in the amount of P40,797.54 was
extin-guished by compensation since the rentals payable by PAN-
ORIENTAL amount to P59,500.00 while the expenses reach only
P40,797.54. Deducting the latter amount from the for- mer,
REPUBLIC claims that P18,702.46 would still be owing by
PANORIENTAL to REPUBLIC. That argument loses sight of the fact that
to the sum of P40,797.54 will still have to be added the legal rate of interest
“from February 3, 1951 until fully paid.”
In Miailhe vs. Halili148 where the Supreme Court reduced the liability in favor
of the petitioner resulting, among others, in an excess amount of P2,004.28,
which consequently became payable to the respondent, and where the
petitioner did not want to return the said amount on the ground that he had the
right to retain the same considering that, in another case, which was on appeal,
the lower court had rendered judgment against the respondent and in favor of
the petitioner for the sum of P2,004.28, and hence, compensation should apply,
the Supreme Court said that there can be no com-pensation because the amount
of P2,004.28 awarded to the petitioner in another case was still under litigation
and therefore still being disputed, and that it was a requirement for
compensation to take place that the amount involved be certain and liquidated.

The fifth requisite is that over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to
the debtor.
By “due time” should be meant the period before legal compensation was
supposed to take place, considering that

146
PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
147
G.R. No. L-50900, April 9, 1985, 135 SCRA 593.
148
G.R. No. L-16587, October 31, 1962, 6 SCRA 453.
arts ObligatiOns 243
Extinguishment of Obligations Sec. 5
— Compensation
art. 1280

legal compensation operates so long as the requisites concur, even without

any conscious intent on the part of the parties. A controversy that is
communicated to the parties after that time may no longer undo the
compensation that had taken place by force of law, lest the law concerning
legal compensation be for naught.149
Hence, for example: A is indebted to B in the amount of P1,000, due on May
3, 1999 and B is likewise indebted to A in the same amount due on May 23,
1999. Legal compensation therefore could set in on May 23, 1999. However,
D filed suit against A and was able to obtain a favorable resolution from the
court garnishing all money and credits of A. One of the garnished credits
belonging to A was the indebtedness of B in his (A’s) favor. If it were only on
June 1, 1999 that B was able to know of the garnishment, legal compensation
has already set in by May 23, 1999. Hence, D cannot anymore make use of the
credits of A against B to satisfy A’s obligation in his (D’s) favor. However, if
B were notified of the garnishment on May 20, 1999, there can be no
compensation of the mutual debts of A and B against each other as the
controversy commenced by D, a third person, was duly communicated at a time
before legal compensation could set in. 150

Article 1280. Notwithstanding the provisions of the preceding article, the

guarantor may set up compensation as regards what the creditor may owe
the principal debtor. (1197)

A guarantor is a person who promises to pay the creditor in the event that the
principal debtor fails to pay the indebtedness. But before the creditor can go
against a guarantor, the creditor must first exhaust all possible ways to collect
the debt from the principal debtor unless the guarantor binds himself solidarily
with the principal debtor. If the creditor goes against the guarantor, the latter
can resist payment by invoking compensation between the creditor and the
principal debtor. The phrase “notwithstanding the provisions of the preceding
article” refers to the fact that, even if the guarantor and the principal creditor
are not mutual debtors and creditors of each other, the obligation of the
guarantor can be extinguished by invoking compensation in so far as
the principal debtor is con-cerned.

149
PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
150
See PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
244 ObligatiOns and COntraCts
Text and Cases
Article 1281. Compensation may be total or partial. When the two debts are
of the same amount, there is a total com-
. 1281-1283

pensation. (n)

Total compensation arises when the mutual debts of the parties to each other
are equal. There is partial compensation when the debts are not equal, in which
case, the debts are extinguished to the concurrent amount. Hence, if A owes Z
P2,000 and Z owes A P500, compensation can occur but only on a partial basis.
Z’s indebtedness will be extinguished, but A’s indebtedness will subsist but
partially extinguished to the extent of P500, reducing liability to the amount of
P1,500.

Article 1282. The parties may agree upon the compensation of debts which
are not yet due. (n)

As a general rule, compensation can only occur when the debts are due and
demandable. However, the parties may agree upon the compensation of debts
which are not yet due. This type of compensation is not legal compensation but
contractual compensation. Hence, if A is indebted to Z in the amount of P1,000
due on April 11, 1997 and Z is indebted to A in the same amount but due on
May 7, 1997, there can be no compensation on April 11, 1997. However, Z and
A can agree that, even if May 7, 1997 has not yet arrived, their mutual
indebtedness compensate each other so that their respective obligations are
extinguished.

Article 1283. 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. (n)

This is judicial set-off. Thus, if A files a collection case against B in the amount
of P1,000, B can file a counterclaim in the same amount claiming damages
arising from the same or different transaction and requesting the court to just
set-off the damages. If the court agrees, then there can be compensation. In
Ong vs. Court of Appeals,11 the Supreme Court ruled that for judicial set-off to
apply, the amount of damages or the claim sought to be compensated must be
duly proven, thus:
The petitioner says, however, that there was a judicial setoff under Article
1283 of the Civil Code, reading as follows:
ART. 1283. 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.
arts ObligatiOns 245
Extinguishment of Obligations Sec. 5
— Compensation
arts. 1284-1285

The trouble is that Fermin has not proved the right to any damage as a
result of the claimed retention of the zippers by Mariano. There was also
no proof of the amount of such damages as he could not even say how
many of the zippers had been earlier withdrawn by him.

Article 1284. When one or both debts are rescissible or voidable, they may
be compensated against each other before they are judicially rescinded or
avoided. (n)

A rescissible or voidable debt is valid up to the time it is rescinded or annulled.

Hence, if all the requisites for a valid compensation are present before a
contract is rescinded or annulled, the compensation can occur by operation of
law. Hence, if A is in-debted to B for P1,000 and the latter is likewise indebted
to A for the same amount which are both due and demandable, compensation
will occur even if the loan obtained by B from A was procured through force
and intimidation, therefore making the same voidable, for as long as such debt
has not yet been annulled.

Article 1285. The debtor who has consented to the assignment of rights made
by a creditor in favor of a third person, cannot set up against the assignee
the compensation which would pertain to him against the assignor , unless
the assignor was notified by the debtor at the time he gave his consent, that
he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credits prior to the same and also later ones until
he had knowledge of the assignment. (1198a)

Article 1285 provides three cases when one of the creditors assigns his credit
to a third person. The first case is when the debtor who has consented to the
assignment of rights made by a creditor in favor of a third person, cannot set
up against the assignee the

G.R. No. 75819, September 8, 1989, 177 SCRA 402.

246 ObligatiOns and COntraCts
Text and Cases
. 1285

compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation. Thus, as an example: X owes Y P1,000
due on April 12, 1997. Y is likewise indebted to X in the same amount due on
May 6, 1997. On April 14, 1997, Y assigned his credit to O with the consent
of X who does not make any reservation as to his right of compensation which
could occur on May 6, 1997. On May 7, 1997, O demands payment from X the
amount of P1,000 which has been assigned to him by Y. X cannot resist
payment by invoking that the amount of indebtedness of Y in his favor may be
applied in compensation of the said amount of P1,000 assigned by Y to O.
However, if at the time X gives his consent to the assignment, he reserves his
right to the compensation, he can validly invoke that the obligation has been
extinguished through com-pensation. In Perez vs. Court of Appeals, 151 the
Supreme Court took special consideration of the nature of money market
transactions with respect to the issue of assignment in compensation. In this
case, a finance company issued to an investor two promissory notes to mature
originally on August 6, 1974 and August 13, 1974, res-pectively, and which
commercial papers were rolled-over so that their maturity dates were extended
to October 4, 1974 and October 11, 1974 respectively. The same finance
corporation was the creditor with respect to a certain obligation to mature on
August 5, 1994 as against a certain company to whom the two credits of the
investor, which were to mature on October 4 and 11, 1974, respectively, were
assigned on September 9, 1974. Compensation was claimed in this case on the
basis of the third paragraph of Article 1285. The Supreme Court rejected the
same and instead applied the first paragraph because the debtor cannot claim
that he had no knowledge of the assignment in view of the special nature of
money market tran-sactions, thus:
The impersonal character of the money market device overlooks the
individuals or entities concerned. The issuer of a commercial paper in the
money market necessarily knows in advance that it would be expeditiously
transacted and transferred to any investor/lender without need of notice to
said issuer. In practice, non-notification is given to the borrower or issuer
of commercial paper of the sale or transfer to the investor.
Accordingly, we find no applicability herein of Article 1285, 3rd
paragraph of the Civil Code. Rather, it is the first paragraph of the same
legal provision that is applicable:

151
G.R. No. L-56101, February 20, 1984, 127 SCRA 636.
art ObligatiOns 247
Extinguishment of Obligations Sec. 5
— Compensation
art. 1285

“Article 1285. The debtor who has consented to the assignment of rights
made by a creditor in favor of a third person, cannot set up against the
assignee the compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor at the time he gave
his consent, that he reserved his right to the compensation.” x x x
The second case is when the creditor communicated the cession to the debtor
but the debtor did not consent thereto, the latter may set up the compensation
of debts previous to the cession, but not of subsequent ones. Thus, as an
example: X owes Y P1,000 due on April 12, 1997 and another P2,000 due on
May 10, 1997. Y is likewise indebted to X in the amount of P1,000 due on May
6, 1997 and another P2,000 due on May 9, 1997. On May 7, 1997, Y assigns
all his credits to O but X does not consent to the assignment. On June 1, 1997,
O demands payment from X of the first P1,000 and the second P2,000 assigned
to him by Y. X can resist payment of the P1,000 on the ground that
compensation has taken place because both have become due before the
cession, but he cannot set up compensation as to the P2,000 which has become
due after the cession.

The third case is when the assignment is made without the knowledge of the
debtor, he may set up the compensation of all credits prior to the same and also
later ones until he has knowledge of the assignment. In the example given in
the second case, if X is informed by Y only on May 15, 1997 that he has
assigned all his credits to O, and the latter demands payment of the first P1,000
and the second P2,000 on June 1, 1997, X can invoke that all the indebtedness
have been extinguished because compensation has set in. In Sesbreño vs. Court
of Appeals13 where Philfinance was indebted to Delta evidenced by PN No.
143-A and the latter was likewise indebted to the former evidenced by DMC
PN No. 2731, and where Philfinance assigned its credit against Delta,
evidenced by DMC PN No. 2731, to Sesbreno (one of Philfinance’s creditors)
who only notified Delta of such assignment after the indebtedness of Delta in
favor of Philfinance and the indebtedness of Philfinance in favor of Delta both
became mutually due, and where, despite the said maturities of said debts,
Sesbreño decided to claim from Delta on the basis of the assigned credit made
to him by Philfinance, the Supreme Court, citing Article 1285 especially the
last paragraph thereof, ruled that Sesbreno could no longer claim from Delta
because he notified Delta of his rights as assignee after compensation had taken
place by operation of law between Philfinance

G.R. No. L-89252, May 24, 1993, 222 SCRA 466.

248 ObligatiOns and COntraCts
Text and Cases
Articles 1962 and 1972 of the 1950 Civil Code.
. 1285

and Delta. The Supreme Court pertinently ruled as follows:

We turn to Delta’s arguments concerning the alleged compensation or off-
setting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is
important to note that at the time Philfinance sold part of its rights under
DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had
as yet taken place and indeed none could have taken place. The essential
requisites of compensation are listed in the Civil Code as follows:
“Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention controversy, commenced
by third persons and communicated in due time to the debtor.” (Italics
supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No.
143-A was due. This was explicitly recognized by Delta in its 10 April
1980 “Letter of Agreement” with Philfinance, where Delta acknowledged
that the relevant promissory notes were “to be offsetted (sic) against
[Philfinance] PN No. 143-A upon co-terminal maturity.”
As noted, the assignment to petitioner was made on 9 February 1981 or
forty-nine (49) days before the “co-terminal maturity” date, that is to say,
before any compensation had taken place. Further, the assignment to
petitioner would have prevented compensation from taking place between
Philfinance and Delta, to the extent of P304,533.33, because upon
execution of the assignment in favor of petitioner, Philfinance and Delta,
would have ceased to be creditors and debtors of each other in their own
right to the extent of the amount assigned by Philfinance to petitioner.
Thus, we conclude that the assignment effected by Philfinance in favor of
petitioner was a valid one and that petitioner accordingly became owner of
DMC PN No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981, that is after the maturity not only
of the money market placement made
art. 1285
art ObligatiOns 249
Extinguishment of Obligations Sec. 5
— Compensation
by petitioner but also of both DMC PN No. 2731 and Philfinance PN No.
143-A. In other words, petitioner notified Delta of his rights as assignee
after compensation had taken place by ope-ration of law because the
offsetting instruments had both reached maturity. It is firmly settled
doctrine that the rights of an assignee are not any greater than the rights of
the assignor, since the assignee is merely substituted in the place of the
assignor and that the assignee acquires his rights subject to the equities —
i.e., the defenses— which the debtor could have set up against the original
assignor before notice of the assignment was given to the debtor. Article
1285 of the Civil Code provides that:
“Article 1285. The debtor who has consented to the assignment of rights
made by a creditor in favor of a third person, cannot set up against the
assignee the compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor at the time he gave
his consent, that he reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to
the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credits prior to the same and also later ones
until he had knowledge of the assignment.” (Italics supplied)
Article 1626 of the same Code states that: “The debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the
obligation. In Sison vs. Yap-Tico, the Court explained:
“No man is bound to remain a debtor: he may pay to him with whom he
contracted to pay; and if he pays before notice that his debt has been
assigned, the law holds him exonerated, for the reason that it is the duty of
the person who has acquired a title by transfer to demand payment of the
debt, to give his debtor notice.”
At the time that Delta was put to notice of the assignment in petitioner’s
favor on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have been then
compelled payment anew by Delta of DMC PN No. 2731, petitioner, as
assignee of Philfinance, is similarly disabled from collecting from Delta
the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the
assignment in his favor as soon as that assignment or
. 1286

sale was effected on 9 February 1981. He could have also notified Delta as
soon as his money market placement matured on 13 March 1981 without
payment thereof being made by Philfinance; at that time, compensation had
yet to set in and discharge DMC PN No. 2731. Again petitioner could have
250 ObligatiOns and COntraCts
Text and Cases
notified Delta on 26 March 1981 when petitioner received from Philfinance
the Denominated Custodianship Receipt (“DCR”) No. 10805 issued by
private respondent Philfinance in favor of petitioner. Petitioner could, in
fine, have notified Delta at any time before the maturity date of DMC PN
No. 2731. Because petitioner failed to do so, and because the record is bare
of any indication that Philfinance had itself notified Delta of the assignment
to petitioner, the Court is compelled to uphold the defense of compensation
raised by private respondent Delta. xxx

Article 1286. Compensation takes place by operation of law, even though the
debts may be payable at different places, but there shall be an indemnity for
expenses of exchange or transportation to the place of payment. (1199a)

If all the requisites under Article 1279 are present, compensation takes place
by operation of law. The parties need not notify each other that they intend to
have their debts compensated. Indemnity for expenses of exchange or
transportation to the place of payment can arise only if there is partial
compensation. If there is complete compensation, the parties need not do
anything as the obligations are completely extinguished. Hence, if A owes B
P1,000 payable in Davao and B owes A the same amount payable in Marikina
and both are due, A and B do not have to go to the places of payment as the
compensation here is complete and therefore both obligations are totally
extinguished. But if B owes A P500, then there is only partial compensation,
and A has to go to Marikina for him to receive the payment of B for the balance
of P500. A, the creditor, should be reimbursed by the debtor the amount of
transportation expenses A has incurred in going to Marikina because, under
Article 1247, the extrajudicial expenses required for payment shall be for the
account of the debtor, unless it is otherwise stipulated.

Article 1287. Compensation shall not be proper when one of the debts arises
from a depositum or from the obligations of a depository or of a bailee in
commodatum.
Neither can compensation be set up against a creditor who has a claim for
support due by gratuitous title, without
arts. 1287-1288

prejudice to the provisions of paragraph 2 of Article 301. (1200a)

Article 1288. Neither shall there be compensation if one of the debts consists
in civil liability arising from a penal offense. ( n )

Compensation will not occur in the following situations even if there

is technically a loan or an indebtedness existing:
art ObligatiOns 251
Extinguishment of Obligations Sec. 5
— Compensation
1) Debts arising from a depositum or from the obligations of a
depository. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely
keeping it and of returning the same.14 Thus, if A owes B P1,000 due
on April 11, 1997, and A deposited with B an amount of P1,000 only
for safekeeping to be returned on April 11, 1977, there can be no
compensation come April 11, 1997 as the obligation of B to return
the P1,000 arises from the obligations of a depository.
2) Debts arising from the obligations of a bailee in commodatum. The
bailee in commodatum acquires the use of the thing loaned but not
its fruits.152 The bailee is obliged to pay the ordinary expenses for the
use and preservation of the thing loaned.153 The bailee cannot retain
the thing loaned on the ground that the bailor owes him something,
even though it may be by reason of expenses. However, the bailee
has the right of retention for damages mentioned in Article 1951.154
3) Debts arising from duty to support. Compensation cannot likewise
apply if the other obligation is one of support to the other party.
Thus, a father, who is required to give support to his son, cannot
claim that he need not give the support considering that his son owes
him the same amount of money. The law provides that this rule on
gratuitous support shall be “without prejudice to the provisions to
paragraph 2 of Article 301” of the Civil Code which provides that
support in arrears can be compensated or renounced. Hence if the
father has not given his son the amount of P4,000 which is
equivalent to the previous four months of unremitted financial
support, but the same son owes the father P4,000, there can be
compensation in his case. The application of paragraph 2 of Article
301 of the Civil Code
. 1289

is of doubtful applicability in view of the fact that the said Article

301 of the Civil Code has already been deleted by the New Family
Code.18
4) Debts consisting of a civil liability arising from a penal offense. If A
is indebted to B by virtue of a contract of loan and B is indebted to
A by virtue of an award of civil damages in favor of A as a result of
B’s conviction in inflicting physical injuries on A, there can be no
compensation. Also, a criminal violation of the Trust Receipt Law
which makes the obligor financially and civilly liable to the
contracting bank to the extent indicated in the Trust Receipt contract
cannot be extinguished by a claim of compensation of the amount of

152
Article 1395 of the 1950 Civil Code.
153
Article 1941 of the 1950 Civil Code.
154
Article 1944 of the 1950 Civil Code.
252 ObligatiOns and COntraCts
Text and Cases
deposit which the obligor has with the bank even if, under the law,
a person who opens a deposit account in a bank is technically a
creditor of that bank.19

Article 1289. If a person should have against him several debts which are
susceptible of compensation, the rules on the application of payments shall
apply to the order of the compensation. (1201)

The rules on application of payments are provided for in Subsection 1, Chapter

4, Book IV, Title I of the Civil Code covering Articles 1252 up to 1254. Hence,
if A owes X P3,000 due on April 11, 1997, and X owes A P3,000 without
interest, and another P3,000 with interest at 12% per annum in case of non-
payment, all due on April 11, 1997, there can be compensation. If X does not
designate the indebtedness to which compensation will apply, it will be applied
to the most onerous debt which is the interest-bearing P3,000 debt. This is the
most onerous because the payment of the interest is necessarily most
burdensome.

Article 1290. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes both to the
concurrent amount, even though the creditors and debtors are not aware of
the compensation. (1202a)

Compensation is the most expedient way of extinguishing an

Executive Order No. 209 as amended which took effect on August 3, 1988. 19Metropolitan Bank
and Trust Company vs. Tonda, G.R. No. 134436, August 16 , 2000, 132 SCAD 111, 338 SCRA
254.
G.R. No. L-62169, February 20, 1983, 120 SCRA 930.
art. 1290 ObligatiOns 253
Extinguishment of Obligations Sec. 5
— Compensation

obligation. It is automatic and occurs even though the creditors and debtors are
not aware of the compensation. Thus in Mindanao Portland Cement vs. Court
of Appeals20 where a creditor was able to obtain in a civil case an award of
attorney’s fees in the amount of P10,000.00 from the debtor, and the latter was
also able to obtain a judgment in another civil case for attorney’s fees in the
same amount from the former, the Supreme Court said there was
compensation, thus:
It is clear from the record that both corporations, petitioner Mindanao
Portland Cement Corporation (appellant) and respondent Pacweld Steel
Corporation (appellee), were creditors and debtors of each other, their debts
to each other consisting in final and executory judgments of the Court of
First Instance in two (2) separate cases, ordering the payment to each other
of the sum of P10,000.00 by way of attorney’s fees. The two (2)
obligations, therefore respectively offset each other, compensation having
taken effect by operation of law and extinguished both debts to the
concurrent amount of P10,000.00 pursuant to the provisions of Arts. 1278,
1279 and 1290 of the Civil Code, since all the requisites provided in Article
1279 of the Code for automatic compensation “even though the creditors
and debtors are not aware of the compensation” were duly present.
In Pioneer Insurance & Surety Corporation vs. Court of Appeals,21 an
interesting case of compensation was likewise decided, thus:

In September, 1978, petitioner Pioneer Insurance and Surety Corporation

issued general warehousing bonds in favor of the Bureau of Customs for
importation of raw materials in the total amount of P6,500.00. The bonds
were issued on behalf of the private respondents Wearever Textile Mills,
Inc., and its president, Vicente T. Lim.
To secure the petitioner from and against any and all harm, damages and
losses of whatever kind and nature which it may incur as a consequence of
its becoming a surety upon the bonds, the respondents executed jointly and
severally in favor of the petitioner indemnity agreements for said bonds
each of which contains the following stipulations:
“INDEMNITY — The undersigned, jointly and severally, agree and bind
themselves to indemnify and hold and save harmless the Corporation from and
against any and all damages, losses, costs, stamps, taxes, penalties, charges and
expenses of whatsoever kind and nature which the Corporation shall or may at
any time incur in consequence of having become surety upon 21G.R. No. 76509,
December 15, 1989, 180 SCRA 156. the bond/note or any extension, renewal,
substitution or alteration thereof made at the instance of the undersigned or
executed on behalf of the undersigned or any of them; and to pay, reimburse and
make good to the Corporation, its successors and assigns, all sums and amounts
of money which it or its representatives shall or may pay or cause to be paid or
become liable to pay, on account of the undersigned or any of them, of whatsoever
kind and nature including 20% of the amount involved in the litigation or other
254 ObligatiOns and COntraCts art. 1290
Text and Cases

matters growing out or connected therewith for attorney’s fees but in no case to
be less than P200.00. The undersigned further agree, jointly and severally, that in
case of any extension or renewal of the bond/note, to bind ourselves for the
payment thereof under the same terms and conditions, as above mentioned,
without the necessity of executing another Indemnity Agreement for the purpose
and we hereby equally waive our right to be notified of any renewal or extension
of the bond/note which may be granted under this Indemnity Agreement.
“MATURITY OF OUR OBLIGATIONS CONTRACTED
HEREWITH — The above indemnities shall be paid to the corporation as
soon as demand is received from the creditor or as soon as it becomes liable
to make payment of any sum under the terms of the above-mentioned
bond/note, its renewal, extensions or substitutions whether the said sum or
sums or part thereof have been actually paid or not.” (pp. 29-30, Rollo)
The private respondents failed to comply with their commitment under the
warehousing bonds by reason whereof the Bureau of Customs demanded
from the petitioner payment of the value of the said bonds in the amount of
P6,390,259.00. This amount eventually reached P9,031,000.00 in 1983.
In the meantime, in response to the petitioner’s demand letter, the private
respondents wrote petitioner promising that they will settle their
obligations with the Bureau of Customs.
On representations by private respondents to the Bureau of Customs, the
latter granted the request of respondents for staggered monthly installment
payments of their obligation on condition that the respondents will make
an initial payment of P500,000.00 and thereafter shall amortize the balance
of P400,000.00 monthly until fully paid pursuant to the first endorsement
by the Bureau of Customs dated September 22, 1976. Other than the initial
payment of P500,000.00, however, respondents have not made any other
payments thereby violating the terms of the said agreement.
As a result of the foregoing, the Bureau of Customs again demanded from
the petitioner payment of its bonds. No payment, however, has been made
as yet.
Sometime in 1979, a fire gutted the respondent’s factory destroying materials
insured with the petitioner in the amount of P1,144,744.49. Respondents
demanded from the petitioner payment of the proceeds of the insurance policy
but the latter refused to pay claiming that said proceeds must be applied
by way of partial compensation or set-off against its lia- bility with the
Bureau of Customs arising from the warehousing bonds.
The petitioner’s efforts to protect itself from total loss in the much bigger
amount of P6,390,259.00 which as of April 19, 1983 had already reached
P9,031,000.00 having proved fruitless, the complaint for compensation
was filed below.
The trial court rendered judgment in favor of the private respondents and
ordered the petitioner to pay, among others, the insurance proceeds in the
art. 1290 ObligatiOns 255
Extinguishment of Obligations Sec. 5
— Compensation

amount of P1,144,744.49 plus legal interest from November 19, 1979 until
the whole amount is fully paid.
On appeal, the Court of Appeals affirmed the trial court’s decision, holding
that legal compensation cannot take place because the requisites thereof are
not present, namely: that petitioner is not the creditor of private
respondents; and that the former’s claim against the latter is not due,
demandable and liquidated because its liability on the warehousing bonds
was extinguished when the textile goods covered by the same were
destroyed by the fire. Therefore, according to the appellate court since the
petitioner and private respondents are not mutually creditors to each other,
the law on compensation is inapplicable.
In this petition, Pioneer Insurance alleges that legal compensation or set-
off under Articles 1278 and 1279 can take place because there is due to
private respondents from the petitioner the amount of P1,144,744.49 as
proceeds of the fire insurance policy in the same manner that the private
respondents are bound, jointly and severally, to reimburse petitioner what
the latter is liable to pay the Bureau of Customs in the total amount of
P6,390,259.00 and which, as of the date of the filing of the complaint, had
already reached P9,031,000.00. The petitioner also stresses that even if it
has not yet paid the Bureau of Customs any amount, the private
respondents have already become indebted to the petitioner pursuant to the
indemnity agreement which stands as the law between the parties.
On the other hand, the private respondents argue that the demands to pay
made by the Bureau of Customs did not prove nor create any liability and
even if they did, the liability under the warehousing bonds in favor of the
Bureau of Customs was the liability of the petitioner, that petitioner did not
pay and has never paid the Bureau of Customs under the warehousing
bonds and, therefore, the private respondents have nothing to reimburse the
petitioner for and that the approved staggered payment arrangement of the
respondents with the Bureau of Customs released petitioner from liability
under the warehousing bonds.
We rule for the petitioner.
In the case of the International Corporate Bank, Inc. vs. The Intermediate
Appellate Court, et al. (G.R. No. 69560, June 30, 1988), we reiterated the
requisites of legal compensation. We said:
“Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. (Art. 1278, Civil Code). When all the
requisites mentioned in Art. 1279 of the Civil Code are present,
compensation takes effect by operation of law, even without the consent or
knowledge of the debtors.’ (Art. 1290, Civil Code). Art. 1279 of the Civil
Code requires among others, that in order that legal compensation shall
take place, the two debts be ‘due and they be liquidated and demandable.’
Compensation is not proper where the claim of the person asserting the set-
off against the other is not clear nor liquidated; compensation cannot
256 ObligatiOns and COntraCts art. 1290
Text and Cases

extend to unliquidated, disputed claim arising from breach of contract.

(Compania General de Tabacos vs. French and Unson, 39 Phil. 34;
Lorenzo & Martinez vs. Hererro, 17 Phil. 29)
“There can be no doubt that petitioner is indebted to private respondent in
the amount of P1,062,063.83 representing the proceeds of her money
market investment. This is admitted. But whether private respondent is
indebted to petitioner in the amount of P6.81 million representing the
deficiency balance after the foreclosure of the mortgage executed to secure
the loan extended to her, is vigorously disputed. This circumstance
prevents legal compensation from taking place. (CA Decision, Rollo, pp.
112-113)
There is no dispute that the petitioner owes the private respondents the
amount representing the proceeds of the insurance policy. The private
respondents, however, try to negate their liability by questioning the
veracity and accuracy of the Bureau of Customs’ demand letters to the
petitioner and by claiming that they have no more liability because of the
fortuitous event. At the same time however, they admit liability when they
argued that the petitioner was released from the same upon their agreement
with the Bureau of Customs to make staggered payments. Finally, the
private respondent argue that since the petitioner has not made any
payment yet regarding the amount demanded by the Bureau of Customs,
there is nothing for which the petitioner should be reimbursed.
It is needless to emphasize that at the time the fire occurred, the private
respondents together with the petitioner had already incurred liability on
the warehousing bonds with the Bureau of Customs because of the
respondents’ inability to comply with the provisions of their undertaking.
It is therefore, clear that as far as the amount of P9,031,000.00 is concerned,
both the petitioner and respondents were already liable for said amount to
the Bureau of Customs when the contingency for which compensation is
sought, happened. Neither can the respondents claim that the petitioner was
released from liability when they made arrangements with the Bureau of
Customs for staggered payments since the facts will bear out that other than
the P500,000.00 payment by respondents, no further payment was made by
them thus leading the Bureau of Customs to go after the petitioner again.
The private respondents, contend, however, that since the petitioner has not
made any payment with the Bureau of Customs, it cannot demand
reimbursement and, thus, petitioner cannot apply legal compensation or
set-off against them because their liability has not yet become due and
demandable.
In the recent case of Mercantile Insurance Co., Inc. vs. Felipe Ysmael, Jr.
& Co., Inc. (G.R. No. L-43962, January 13, 1989), we ruled:
“The question as to whether or not under the Indemnity Agreement of the
parties, the Surety can demand indemni-fication from the principal, upon
the latter’s default, even before it has paid to the creditor, has long been
settled by this Court in the affirmative.
art. 1290 ObligatiOns 257
Extinguishment of Obligations Sec. 5
— Compensation

It has been held that:

“The stipulation in the indemnity agreement allowing the surety to recover
even before it paid the creditor is enforceable. In accordance therewith, the
surety may demand from the indemnitors even before paying the creditors.
(Cosmopolitan Ins. Co., Inc. vs. Reyes, 15 SCRA 528 [1965], citing
Security Bank vs. Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962];
also Surety and Ins. Co., Inc. vs. Aguilar, et al., G.R. No. L-5625, March
16, 1954) .”
Clearly, the petitioner can demand reimbursement from the respondents
even before it has actually paid its obligation to the Bureau of Customs. It
can, in principle, be held liable under the warehouse bonds even before
actual payment to the Bureau of Customs. The liability has been fixed.
What remains is simply its liquidation. The respondents who defaulted on
the agreement to make staggered payments thereby causing the petitioner’s
liability to the Bureau of Customs cannot refuse the set-off. Consequently,
legal compensation can take place between the petitioner and the private
respondents, that is, the petitioner can partially set-off the insurance
proceeds in the amount of P1,144,744.49 against its liability under the
warehousing bonds which has been computed in the amount of
P9,031,000.00 as of 1983.
From the records, it is seen that the last demand letter of the Bureau of
Customs asking the petitioner to pay the value of the bonds was on March
27, 1981. The records are silent on whether or not the Bureau of Customs
sued either of the parties to enforce liability under the warehousing bonds.
It may be noted that the petitioner admits its liability under the warehousing
bonds. Since the issue is legal compensation and in order to avoid any
miscarriage of justice, the Court refers the issue on the enforcement of
liability under the bonds to the Bureau of Customs.
262 ObligatiOns and COntraCts Text
and Cases

SECTION 6. — Novation

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

Novation is another way of extinguishing an obligation. Novation under the

provisions of the Civil Code refers to extinctive novation and not modificatory
novation. In Ajax Marketing & Development Corporation vs. Court of Appeals1
where petitioners’ three debts (secured by continuing real estate mortgages also
intended to secure future indebtedness, including renewals and extensions)
were consolidated into one debt with the original debtors incorporating
themselves into a corporation for purposes of the consolidated debt, and where
the original debtors claimed that there was novation considering the resulting
consolidation, and the change in the person of the debtor, the Supreme Court
ruled that there was no subjective or objective novation and explained that:
Novation, unlike other modes of extinction of obligations, is a juridical act
with a dual function, namely, it extinguishes an obligation and creates a
new one in lieu of the old. It can be objective, subjective, or mixed.
Objective novation occurs when there is a change of the object or principal
conditions of an existing obligation while subjective novation occurs when
there is a change of either the person of the debtor, or of the creditor in an
existing obligation. When the change of the object or principal conditions
of an obligation occurs at the same time with the change of either the person
of the debtor or creditor, a mixed novation occurs.
x x x Thus to effect an objective novation it is imperative that the new
obligation expressly declare that the old obligation is thereby extinguished,
or that the new obligation be on every point incompatible with the new one.
In the same vein, to effect

G.R. No. 118585, September 14, 1995, 64 SCAD 311, 248 SCRA 222.
Garcia, Jr. vs. Court of Appeals, G.R. No. 80201, November 20, 1990, 191 SCRA 262
. 1291
art ObligatiOns 259
Extinguishment of Obligations Sec. 6
— Novation
a subjective novation by a change in the person of the debtor it is necessary
that the old debtor be released expressly from the obligation, and the third
person or new debtor assumes his place in the relation. There is no novation
without such release as the third person who has assumed the debtor’s
obligation becomes merely a co-debtor or surety.
“The attendant facts herein do not make a case of novation. There is
nothing in the records to show the unequivocal intent of the parties to
novate the three loan agreements through the execution of PN No. BDS-
3065. The provisions of PN No. BDS 3065 yield no indication of the
extinguishment of, or an incompatibility with, the three loan agreements
secured by the real estate mortgages over TCT No. 105233. On its face, PN
No. BDS-3065 has these words typewritten: “secured by REM” and “9.
COLLATERAL. This is wholly/partly secured by: (x) real estate,” which
strongly negate petitioners’ asseveration that the consolidation of the three
loans effected the discharge of the mortgaged real estate property.
Otherwise there would be no sense placing these material provisions. x x x
The foregoing shows that petitioners agreed to apply the real estate
property to secure obligations that they may thereafter obtain including
their renewals or extensions with the principals fixed at “P600,000.00,
P150,000.00, and P250,000.00 which when added have an aggregate sum
of P1.0 million. PN No. BDS-3605 merely restructured and renewed the
three previous loans to expediently make the loans current. There was no
change in the object of the prior obligations. The consolidation of the three
loans, contrary to petitioner’s contention, did not release the mortgaged real
estate property from any liability because the mortgage annotations at the
back of TCT No. 105233, in fact, all remained uncancelled, thus indicating
the continuing subsistence of the real estate mortgages.
“Neither can it be validly contended that there was a change or substitution
in the persons of either the creditor (Metrobank) or more specifically the
debtors (petitioners) upon the consolidation of the loans in PN No. BDS
3605. The bare fact of petitioners’ conversion from a partnership to a
corporation, without sufficient evidence, either testimonial or
documentary, that they were expressly released from their obligations, did
not make petitioner AJAX, with its new corporate personality, a third
person or new debtor within the context of a subjective novation. If at all,
petitioner AJAX only became a co-debtor or surety. Without express
release of the debtor from the obligation, any third party who may
thereafter assume the obligation shall be considered merely as co-debtor or
surety. Novation arising from a purported change in the person of the
debtor must be clear and express because, to repeat, it is never presumed.
Clearly then, from the aforesaid points, neither objective nor subjective
novation occurred.”
It is a general rule that no form of words or writing is necessary to give effect
to a novation.2 Thus, in Goni vs. Court of Appeals,155 the Supreme Court upheld
that an oral lease agreement can validly novate a contract to sell provided that

155
G.R. No. L-27434, September 23, 1986, 144 SCRA 222.
260 ObligatiOns and COntraCts art. 1292
Text and Cases
it can be shown that the intent to novate was present and that the terms are truly
incompatible in every respect.

Article 1292. In order that an obligation may be extinguished by another

which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other. (1204)

There can be no novation unless two distinct and successive binding contracts
take place, with the later one designed to replace the preceding convention. 156
Also, if a subsequent contract is designed to novate a previous contract and not
all parties to the original contract consented to or are made parties in the
subsequent contract, there can be no novation. 157 Modifications introduced
before a bargain becomes obligatory can in no sense constitute novation in
law. 158 An obligation which intends to substitute another obligation
extinguishes the latter obligation only if it so expressly declares in certain terms
or when the old obligation is completely incompatible with the new obligation
in every aspect159160 that there can be no other import but to wipe out the old
obligation by the new one. Novation therefore can never be presumed.
The extinguishments of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or impliedly. The
term “expressly” means that the contracting parties incontrovertibly disclose that
their object in executing the new contract is to extinguish the old one. Upon the
493. other hand, no specific form is required for an implied novation,

156
Evadel Realty and Development Corporation vs. Spouses Antero, G.R. No. 144291 , April 20,
2001.
157
Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD 281 , 320
SCRA 625.
158
Montelibano vs. Bacolod-Murcia Milling Co., G.R. No. L-15092, May 18, 1962, 5 SCRA 36.
159
National Power Corporation vs. Dayrit, G.R. Nos. L-62845-46, November 25, 1983 , 125 SCRA
849.
160
Quinto vs. People, G.R. No. 126712, April 14, 1999, 105 SCAD 473, 305 SCRA
art. 1292 ObligatiOns 261
Extinguishment of Obligations Sec. 6
— Novation

and all that is prescribed by law would be an incompatibility 161between the

two contracts. While there is really no hard and fast rule to determine what
might constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable incom-
patibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation
and thereby produce the effect of extinguishing an obligation by another
which substitutes the same. The first is when novation has been explicitly
stated and declared in unequivocal terms. The second is when the old and
the new obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand together,
each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes
that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions
thereof; otherwise the change would be merely modificatory in nature and
insufficient to extinguish the original obligation.8
Hence, if an obligation evidenced by a promissory note was superseded by
another obligation evidenced by a new promissory note which expressly
provided that the old promissory note was cancelled, there is novation as the
phrase “to cancel” means to strike out, revoke, rescind, abandon, or
terminate.162 However, a contract to sell of a condominium unit was executed
after the lessor and the lessee executed their lease contract, the former does not
necessarily novate the latter absent any clear expression of the intention to
novate.163 In Garcia, Jr. vs. Court of Appeals,164165 the Supreme Court, quoting
the Court of Appeals, said:
x x x In every novation there are four essential requisites: (1) a previous
valid obligation; (2) the agreement of all the parties to the new contract; (3)
the extinguishment of the old contract; and (4) validity of the new one.
There must be consent of all the parties to the substitution, resulting in the
extinction of the old obligation and the creation of a valid new one (Tiu
Siuco vs.
Habana, 45 Phil. 707). The acceptance of the promissory note by the
plaintiff is not novation of the contract. The legal doctrine is that an
obligation to pay a sum of money is not novated in a new instrument by
changing the term of payment and adding other obligations not

161
.
162
Bautista vs. Pilar Development Corporation, G.R. No. 135046, August 17, 1999, 110 SCAD
964, 312 SCRA 611.
163
Espina vs. Court of Appeals, G.R. No. 116805, June 22, 2000, 128 SCAD 312, 334 SCRA 186.
164
G.R. No. L-80201, November 20, 1990, 191 SCRA 493.
165
G.R. No. L-22366, October 30, 1969, 29 SCRA 791, citing Martinez vs. Cavives,
262 ObligatiOns and COntraCts art. 1292
Text and Cases

incompatible with the old one (Inchausti & Co. vs. Yulo, 34 Phil. 978). It
is not proper to consider an obligation novated as in the case at bar by the
mere granting of extension of payment which did not even alter its essence.
To sustain novation necessitates that the same be declared in unequivocal
terms or that there is complete and substantial incompatibility between the
two obligations (Sandico vs. Pacquing, 42 SCRA 322). An obligation to
pay a sum of money is not novated in a new instrument wherein the
old is ratified by changing only the terms of payment and adding other
obligations not incompatible with the old one or wherein the old contract
is merely supplementing the new one (Dungo vs. Lopena, L-19377, Dec.
29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA
967; Rizal Commercial Banking Corp. vs. Militante, AC GR CV 04077,
Sept. 20, 1985; Investors Finance Corp. vs. Cruz, AC GR CV 047190,
Nov. 27, 1985)
Thus, in Guerrero vs. Court of Appeals12 where the petitioner together with
two other persons executed an agreement of counterguaranty in favor of a
surety corporation binding themselves solidarily for whatever claim the surety
corporation may have against them, and where, upon default in the payment of
the subject solidary obligation, the surety corporation sued one of the solidary
debtors and consequently obtained a favorable judgment on the basis of a
compromise agreement directing the sued solidary debtor to pay the whole
obligation, and where, upon failure to satisfy the judgment, the surety
corporation filed a case against the petitioner for the collection of the same
amount of money, and where the petitioner resisted such claim on the ground
that the previous judgment in the civil case against one of the solidary debtors
novated the contract of indemnity and therefore released the petitioner from its
obligation, the Supreme Court rejected such contention on the ground that there
was no novation, to wit:
There being no modicum of doubt, in this case before us, that the obligation
of the petitioner has matured, the release of his obligation by virtue of
novation must be proved by clear and convincing evidence, in the absence
of an express release, nothing less than a showing of complete
incompatibility between

25 Phil. 581; Young vs. Villa, 93 Phil. 21.

G.R. No. L-18411, December 17, 1966, 18 SCRA 967.
the two obligations — the “agreement of counter-guaranty” and the
compromise agreement — would justify a finding of novation by
implication. The express mandate of the law that for an obligation to be
extinguished by another “it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other,” blazes the direction to be taken by courts in
appraising the defense of novation. This Court has held time and time again
that novation is never presumed. The necessity to prove the same by clear
art. 1292 ObligatiOns 263
Extinguishment of Obligations Sec. 6
— Novation

and convincing evidence is accentuated where, as in this case, the

obligation of the debtor has already matured.
We fail to see any incompatibility between the two obligation that would
sustain the defense of novation. The fact that in the compromise agreement
and subsequently in the execution sale, ALTO chose first to realize its
credit from Robles, did not imply a waiver of its right to proceed against
any of the solidary debtors or some of all of them simultaneously, and the
demand made against one of them is no obstacle to demands which may
subsequently be directed against the others so long as the debt or any part
of it remains outstanding and unpaid.
Upon all the foregoing, the inescapable conclusion is that the compromise
agreement on the basis of which judgment was rendered in Civil Case
29357, did not serve to release the petitioner from his obligation of
indemnity to ALTO.
In Magdalena Estates, Inc. vs. Rodriguez13 where the appellants, in buying a
property from the appellee, issued a promissory note with interest, and where
they also procured a bond from a surety company for the payment of the
principal, and where the appellee accepted without reservation the agreement
set forth in the surety bond which however did not make provisions on the
interest, and where appellant contended that the surety bond novated the
obligation of the appellant with respect to the interest, the Supreme Court
rejected such a contention by stating:
The rule is settled that novation by presumption has never been favored.
To be sustained, it needs to be established that the old and new contracts
are incompatible in all points, or that the will to novate appears by express
agreement of the parties or in acts of similar import.
An obligation to pay a sum of money is not novated, in a new instrument
wherein the old is ratified, by changing only the terms of payment and
adding other obligations not incompatible with

G.R. No. L-47369, June 30, 1987, 151 SCRA 339.

264 ObligatiOns and COntraCts art. 1292
Text and Cases

the old one, or wherein the old contract is merely supplemented by the new
one. The mere fact that the creditor receives a guaranty or accepts the
payments from a third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be released form
responsibility, does not constitute a novation, and the creditor can still
enforce the obligation against the original debtor. (Straight vs. Haskel, 49
Phil. 614; Pacific Commercial Co. vs. Sotto, 34 Phil. 237; Estate of Mota
vs. Serra, 47 Phil. 464; Dungo vs. Lopena, G.R. No. L-18377, December
29, 1962, 6 SCRA 1007). In the instant case, the surety bond is not a new
and separate contract but an accessory of the promissory note.
In Cochingyan vs. R & B Surety and Insurance Co. 14 where, in a trust
agreement, the trustor bound itself to pay to the creditorbeneficiary whatever
amount the debtors have to pay to the creditorbeneficiary, and where the said
principal loan was previously secured by a bond issued by a surety company,
the Supreme Court ruled that the trust agreement did not novate the surety
agreement by stating:
x x x it is at once evident that the Trust Agreement does not expressly
terminate the obligation of R & B Surety under the Surety Bond. On the
contrary, the Trust Agreement expressly provides for the continuing
subsistence of that obligation by stipulating that “[the Trust Agreement]
shall not in any manner release” R & B Surety from its obligation under
the Surety Bond.
Neither can the petitioners anchor their defense on implied novation.
Absent an unequivocal declaration of extinguishment of a pre-existing
obligation, a showing of complete incom-patibility between the old and the
new obligation (and nothing else) would sustain a finding of novation by
implication. But where, as in this case the parties to the new obligation
expressly recognize the continuing existence and validity of the old one,
where, in other words, the parties expressly negated the lapsing of the old
obligation, there can be no novation. The issue of implied novation is not
reached at all.
What the trust agreement did was, at most, merely to bring in another
person or persons — the Trust[s] — to assume the same obligation that R
& B Surety was bound to perform under the Surety Bond. It is not unusual
in business for a stranger to a contract to assume obligations thereunder; a
contract of suretyship or guarantee is the classical example. The precise
legal effect is the increase of the number of persons liable to the obligee,
and not the extinguishment of the liability of the first debtor. x x x In the
present case, we note that the Trustor under 15G.R. No. 112191, February 7,
1997, 79 SCAD 149.
the Trust Agreement, the CCM, was already previously bound to R & B
Surety under its Indemnity Agreement. Under the Trust Agreement, the
Trustor also became directly liable to the PNB. So far as the PNB was
concerned, the effect of the Trust Agreement was that where there had been
only two, there would now be three obligors directly and solidarily bound
art. 1292 ObligatiOns 265
Extinguishment of Obligations Sec. 6
— Novation

in favor of the PNB could proceed against any of the three, in any order or
sequence. Clearly, PNB never intended to release, and never did release,
any of its own indemnitors simply because one of those indemnitors, the
Trustor under the Trust Agreement, became also directly liable to the PNB.
In Fortune Motors (Phils.) Corporation vs. Court of Appeals15 where a
financing agreement merely detailed the obligations of one of the parties
without changing the nature of the previous agreement, the Supreme Court
said:
Neither do we find merit in the averment of petitioners that the Financing
Agreement contained onerous obligations not contemplated in the surety
undertakings, thus changing the principal term thereof and effecting a
novation.
We have ruled previously that there are only two ways to effect novation
and thereby extinguish an obligation. First, novation must be explicitly
stated and declared in unequivocal terms. Novation is never presumed.
Second, the old and new obligations must be incompatible on every point.
The test of incompatibility is whether the two obligations can stand
together, each one having its independent existence. If they cannot, they
are incompatible and the latter obligation novates the first. Novation must
be established either by the express terms of the new agreement or by the
acts of the parties clearly demonstrating the intent to dissolve the old
obligation as a consideration for the emergence of the new one. The will to
novate, whether totally or partially, must appear by express agreement of
the parties, or by their acts which are too clear and unequivocal to be
mistaken.
Under the surety undertakings however, the obligation of the sureties
referred to absolutely, unconditionally and solidarily guaranteeing the full,
faithful and prompt performance, payment and discharge of all obligations
of Petitioner Fortune with respect to any and all contracts and other
agreements with Respondent Filinvest in force at that time or thereafter
made. There were no qualifications, conditions or reservations stated
therein as to the extent of the suretyship. The Financing Agreement, on the
other hand, merely detailed the obligations of Fortune to CARCO

G.R. No. 138544, October 3, 2000, 135 SCAD 98, 341 SCRA 781.
(succeeded by Filinvest as assignee). There is no incompatibility to speak
of in the two contracts. They can stand together without conflict.
Furthermore, the parties have not performed any explicit and unequivocal
act to manifest their agreement or intention to novate their contract. Neither
did the sureties object to the Financing Agreement nor try to avoid liability
thereunder at the time of its execution. x x x
266 ObligatiOns and COntraCts art. 1292
Text and Cases

In Security Bank and Trust Company, Inc. vs. Cuenca,16 the Supreme Court
ruled that the original loan agreement was novated by a new one and stated
some indicators of the incompatibility of the two contracts, thus:
x x x Clearly, the requisite of novation are present in this case. The 1989
Loan Agreement extinguished the obligation obtained under the 1980
credit accommodation. This is evident from its explicit provision to
“liquidate” the principal and the interest of the earlier indebtedness, as the
following shows:
1.02 Purpose. The First Loan shall be applied to liquidate the
principal portion of the Borrower’s present total outstanding
indebtedness in the Lender (the “Indebtedness”) while the
Second Loan shall be applied to liquidate the past due interest
and penalty portion of the indebtedness.
The testimony of an officer of the bank that the proceeds of the 1989 Loan
Agreement were used “to pay-off” the original indebtedness serves to
strengthen this ruling.
Furthermore, several incompatibilities between the 1989 Agreement and
the 1980 original obligation demonstrate that the two cannot co-exist.
While the 1980 credit accommodation had stipulated that the amount of
loan was not to exceed P8 million, the 1989 Agreement provided that the
loan was P12.2 million. The periods for payment were also different.
Likewise the later contract contained conditions, “positive covenants” and
“negative covenants” not found in the earlier obligation. As an example of
a positive covenant, Sta. Ines undertook “from time to time and upon
request by the Lender, (to) perform such further acts and/or execute and
deliver such additional documents and writings as may be necessary or
proper to effectively carry out the provisions and purposes of this Loan
Agreement. Likewise, SIMC agreed that it would not create any mortgage
or encumbrance on any asset owned or hereafter

G.R. No. 126891, August 5, 1998, 97 SCAD 103, 293 SCRA 634.
 ObligatiOns 267
Extinguishment of Obligations Sec. 6 — Novation
arts. 1293-1294

acquired, nor would it participate in any merger or consolidation.

In Lim Tay vs. Court of Appeals17 the Supreme Court held that a dacion en
pago is a form of novation in which a change takes place in the object involved
in the original contract.

Article 1293. Novation which consists in substituting a new debtor in the

place of the original one, may be made even without the knowledge or against
the will of the latter, but not without the consent of the creditor. Payment by
the new debtor gives him the rights mentioned in Articles 1236 and 1237.
(1205a)

Article 1294. If the substitution is without the knowledge or against the will
of the debtor, the new debtor’s insolvency or non-fulfillment of the obligation
shall not give rise to any liability on the part of the original debtor. (n)

In Bangayan vs. Court of Appeals,166 it has been held that an assignment of a

lease contract by the lessee must get the consent of the lessor because such
assignment would involve the transfer, not only of rights but also of
obligations. It constitutes novation by substitution of the person of one of the
parties namely the lessee-debtor.

In Gaw vs. IAC,167 where the petitioner entered into an exclusive 168dealership
agreement with a certain company to sell the latter’s product, and where the
petitioner entered into a co-terminous marketing agreement with another
person for the latter to market the products and for the purpose of obtaining
funds to fulfill the deposit required by the company, and where such deposit,
upon being tendered by the said person, was refused by the company for fear
that it might violate the exclusive dealership agreement with the petitioner, and
where the said company said that it would accept provided it be made under
the name of the petitioner, the Supreme Court ruled that in such a case the co-
terminous marketing agreement did not novate the dealership agreement by
stating:
While in a sense, the marketing agreement between Gaw and Tan is related
to the original dealership agreement between the former and PWCC, as the
term of the former is co-terminous with that of the latter, we cannot
subscribe to petitioner’s contention that the marketing agreement was “an

166
G.R. No. 123581, August 29, 1997, 86 SCAD 447, 278 SCRA 379.
167
G.R. No. L-70451, March 24, 1993, 220 SCRA 405.
168
Article 1347 of the 1950 Civil Code.
268 ObligatiOns and COntraCts
Text and Cases
arts. 1293-1294

attempted novation” of the dealership agreement. Arguing that “Tan

intended to step into the shoes of petitioner Gaw as a debtor of Prime White
in respect to the additional deposit of P250,000,” Gaw cites Article 1293
of the Civil Code which provides that “novation which consists in
substituting a new debtor in the place of the original one may be made even
without the knowledge or against the will of the latter, but not without the
consent of the creditor.” Yet Gaw fails to prove that PWCC, the creditor,
knew all about the so-called substitution.
It is axiomatic that novation is never presumed. It must be explicitly stated
in the contract and there must be a manifest incompatibility between the
old and the new obligation in every aspect. The fact that the two agreements
are co-terminous with each other does not imply that a new obligation had
arisen when the marketing agreement was signed, thus displacing the
dealership contract. Not only was Gaw not released from complying with
the terms and conditions of the dealership agreement but he was, in a sense,
already implementing the latter.
Hence, the change in the principal object or conditions, the substitution of
the person of the debtor, the subrogation of a third person in the rights of
the creditor must all involve a clear and manifest intent to extinguish the
old obligation and to release the debtor from such old obligation. Novation
therefore creates a new obligation.
Novation through the replacement of the old debtor by a new debtor may either
be with or without the initiative of the old debtor. If the old debtor, to
extinguish his obligation, suggests to the creditor that he be substituted by a
new debtor of his choice and the creditor agrees, there will be a novation called
delegacion. If the old debtor is substituted without the knowledge or consent
of the old debtor and the obligation is extinguished, there is also a novation
called expromission. In both delegacion and expromission, the consent of the
creditor is indispensable.

For example, Y is indebted to Z in the amount of P1,000 and, without the

knowledge or consent of Y, O commits to pay Z the indebtedness of Y should
it become due, Z can still claim from Y the said indebtedness on due date,
despite O’s commitment, because there is no novation. There is nothing in the
commitment of O that clearly shows the intention of O to release Y from his
obligation. O only became an additional debtor. However, if Z agrees that the
obligation of Y is to be extinguished upon O’s making the commitment to pay
the indebtedness of Y, there is a novation. If O later on makes a
art. 1295
 ObligatiOns 269
Extinguishment of Obligations Sec. 6 — Novation
partial payment of P500, Z cannot go against Y for the balance, as his
obligation has already been extinguished in so far as Z is concerned. O can
demand reimbursement from Y, not of the whole P1,000, but only P500
because this is the amount which benefited Y. This is pursuant to the second
paragraph of Article 1236 of the Civil Code. If O pays the whole amount, then
he can recover the full amount from Y. However, in all these cases, if the
original indebtedness of Y to Z is secured by a mortgage on the house of Y and
the payment of the indebtedness of Y is made by O, he cannot compel Z to
subrogate him in his rights, such as those arising from mortgage, guaranty or
penalty. Hence, if Y fails to reimburse O, the latter cannot make use of the
mortgage which has been constituted on the indebtedness. This is pursuant to
Article 1237 of the Civil Code.
In the event that after O commits to pay the indebtedness of Y which, upon
agreement with Z releases Y from his obligation with Z, O becomes insolvent
or does not pay Z the indebtedness upon demand by Z on due date, Z can no
longer go against the original debtor, Y, to claim the debt, as the latter’s
obligation has already been extinguished through novation.

Article 1295. The insolvency of the new debtor, who has been proposed by
the original debtor and accepted by the creditor, shall not revive the action
of the latter against the original obligor, except when said insolvency was
already existing and of public knowledge, or known to the debtor, when he
delegated his debt. (1206a)

If the old debtor proposes to the creditor that he be substituted by a new debtor,
with the understanding that he (the old debtor) will be released from the
obligation, and the creditor accepts the proposal, and the new debtor assumes
the indebtedness, there is a novation that occurs and it extinguishes the
obligation of the old debtor to make payment. In the event that the new debtor
is insolvent, the creditor cannot go against the old debtor to collect the
indebtedness as the latter’s obligation has already been extinguished.

However, the creditor can go against the old debtor in two cases. The first
case is when the insolvency of the new debtor has already been existing and of
public knowledge when the old debtor delegated the debt. It is enough that the
insolvency has been existing and of public knowledge at the time of the
delegation. The second case is when the insolvency of the new debtor is known
to the old debtor when he delegates his debt. In both cases, the creditor must
art. 1296

not have knowledge of the insolvency of the new debtor. Otherwise, he cannot
claim the benefit of the exceptions as he would be considered in estoppel. In
both cases also, the insolvency must have existed at the time the old debtor
270 ObligatiOns and COntraCts
Text and Cases
delegated his debt. While it may seem that the “already-existing” requirement
applies only to the first case, this is not so as it should likewise apply to the
second case. In fact, an already-existing insolvency is necessarily implied in
the second case. Otherwise, the old debtor would not have known such
insolvency.

Article 1296. When the principal obligation is extinguished in consequence

of a novation, accessory obligations may subsist only insofar as they may
benefit third persons who did not give their consent. (1207)

The accessory always follows the principal. If the principal is extinguished,

the accessory goes with it. Hence, all accessory obligations such as those
arising from a contract of mortgage, guarantee, and pledge are likewise
extinguished. However, the law likewise says that the accessory obligation
may subsist only insofar as they may benefit third persons who do not give
their consent. For example, X borrows P100,000 from Y to be paid after 12
months. The loan is secured by a real estate mortgage of Z’s house. The
mortgage is to be effective only for 12 months. In constituting his house as
security for the loan of X, Z agrees to be paid by X the amount of P1,000 for
as long as the loan secured by the mortgage exists. However, instead of paying
Z the said amount, X will just apply the P1,000 to the P12,000 indebtedness of
Z in his favor such that by the time the 12-month loan matures, the
indebtedness of Z would have already been paid. This is made because Z has
no cash to pay the P12,000 obligation to X. On the eleventh month, X and Y
decide to consolidate the P100,000 loan with the other P700,000 loan which X
owes in favor of Y and, in so doing, they expressly agreed in the consolidation-
document that the loan of P100,000 shall in effect cease and be integrated in
the P700,000 with a lower interest rate and payable for a longer period of time
without any collateral. Z did not consent to this arrangement as it would clearly
prejudice him. His mortgage therefore may subsist for the remaining month
attached to the principal new obligation.

Article 1297. If the new obligation is void, the original one shall subsist,
unless the parties intended that the former relation should be extinguished
in any event. (n)

A subsequent void obligation intended to novate an old one has

arts. 1297-1298

no legal effect and will be considered as not having been agreed upon in the
first place. Hence, the original obligation shall subsist. However, if in coming
up with the new but void obligation, the parties agree that it shall in any event
extinguish the old obligation, then such old obligation will not be revived.
 ObligatiOns 271
Extinguishment of Obligations Sec. 6 — Novation
Hence, if X is bound to give Y a car and this is novated by binding X to give
instead his future inheritance to Y, which he will get upon the death of his
father, the latter new obligation is void because, according to the law, future
inheritance cannot be the object of a contract.20 This new void obligation will
not be deemed to have been entered into and the old obligation will be revived.
However, if the parties agree that the act of entering into the new but void
obligation will in any event extinguish the old one, then the latter will not be
revived.

Article 1298. The novation is void if the original obligation was void, except
when annulment may be claimed only by the debtor, or when ratification
validates acts which are voidable. (1208a)

Novation of a principal obligation definitely presupposes a previously existing

obligation which is valid. If the previously existing obligation is void, a
subsequent obligation intending to novate it shall likewise be void unless it is
clear that such subsequent one can stand on itself and without any reference to
the old one. If the original obligation is merely annulable or voidable, it means
that it is valid up to the time it is annulled. Hence, it can be novated before it is
annulled. For example, if, through force and intimidation, X was obliged to
give Y a car and later the prestation was novated, again through force and
intimidation, in such a way that X is now obliged to give Y not a car but a
house, it is only X who can file a case for annulment of the obligation, and if
he does not do so, then the new obligation may be given effect. Also, if, after
the obligation was novated, X asks for an increase in the price of the house and
Y agrees, then the obligation is ratified because of the act of X.

Article 1299. If the original obligation was subject to a suspensive or

resolutory condition, the new obligation shall be under the same condition,
unless it is otherwise stipulated. ( n )

If, for example X is bound to give Y a house only if he passes

Sesbreño vs. Court of Appeals, G.R. No. 89252, May 24, 1993, 41 SCAD 633, a rts. 1299-1300

his law course and thereafter the obligation is novated such that X instead is
bound to give Y a car without any statement as to the suspensive condition, it
shall be deemed that the giving of the car is likewise subject to Y passing his
law course. In order not to subject the obligation to the previous suspensive
condition, there must be an express statement to that effect in the new
obligation as novated.
272 ObligatiOns and COntraCts
Text and Cases
Article 1300. Subrogation of a third person in the rights of the creditor is
either legal or conventional. The former is not presumed, except in cases
expressly mentioned in this Code; the latter must be clearly established in
order that it may take effect. (1209a)

Legal subrogation is that which takes effect by mandate of law and does not
proceed from an agreement of the parties. Hence, the law which forms the basis
of the subrogation must be clearly identified and invoked to enforce the rights
pertinent thereto. Conventional subrogation, which in the first place is never
lightly inferred, must be clearly established by the unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old
obligations on every point.21 Both kinds of subrogation principally involve the
change in the person of the creditor. Thus, if X is indebted to B for P10,000.00
secured by a mortgage on X’s house and, for consideration, Y, with the consent
of X, assumes the credit with the stipulation that X’s obligation against B is
extinguished such that B can no longer collect from X, Y becomes the new
creditor who can enforce the claim, and if X cannot pay, Y can foreclose on
the mortgage.

Article 1301. Conventional subrogation of a third person requires the

consent of the original parties and of the third person. (n)

Conventional subrogation must be agreed upon by the debtor, new creditor

and the old creditor. It is therefore contractual. For the replacement or
substitution of the creditor to be legally complete in all aspects, all parties must
agree to the same. Hence, if the debtor does not agree and the third-party makes
payment to the creditor, such third party can demand payment from the debtor
up to the extent the latter has been benefited,22 but cannot compel the creditor

222 SCRA 466.

Article 1236 of the 1950 Civil Code.
arts. 1301-1302

to subrogate him (third party) in his rights, such as those arising from mortgage,
guaranty, or penalty.169

Article 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even
without the debtor’s knowledge;

169
Article 1237 of the 1950 Civil Code.
 ObligatiOns 273
Extinguishment of Obligations Sec. 6 — Novation
(2) When a third person, not interested in the obligation, pays with
the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the latter’s share.
(1210a)

There are three cases when legal subrogation is presumed. The first case is
when a creditor pays another creditor who is preferred, even without the
debtor’s knowledge. Under our law, 170 claims for the unpaid price of movables
sold, on said movables, so long as they are in the possession of the debtor, up
to the value of the same is a preferred credit. Hence, any creditor who owns
such credit is a preferred creditor and if another creditor pays off the unpaid
purchase price of the movable, such paying creditor will be presumed to have
been subrogated to the rights of the creditor who originally owned the credit.
Title XIX, Book IV of the Civil Code contains all the provisions on
concurrence and preference of credits.

The second case is when a third person, not interested in the obligation, pays
with the express or tacit approval of the debtor. In this case, the debtor, in
effect, agrees to the payment and hence there exists something similar to a
conventional subrogation. The presumption of legal subrogation will arise
from this situation. In Chempil vs. Court of Appeals,171 where the petitioner
claimed that he was subrogated to the rights of the creditor when it paid its
indebtedness to the bank but where the money used for payment belonged to
the debtor, the Supreme Court ruled that there was no subrogation under Article
1302(2) , thus :
CEIC traces its claim over the disputed shares to the
art. 1302

attachment lien obtained by SBTC on 2 July 1985 against Antonio Garcia

in Civil Case No. 10398. It avers that when FCI, CEIC’s predecessor-in-
interest, paid SBTC the due obligations of Garcia to the said bank pursuant
to the Deed of Absolute Sale and Purchase of Shares of Stock, FCI and
later CEIC, was subrogated to the rights of SBTC, particularly to the
latter’s aforementioned attachment lien over the disputed shares.
CEIC argues that SBTC’s attachment lien is superior as it was obtained on
2 July 1985, ahead of the consortium’s purported attachment on 19 July

170
Article 2241(3) of the 1950 Civil Code.
171
G.R. Nos. 112438-39, December 12, 1995, 66 SCAD 557, 251 SCRA 257.
274 ObligatiOns and COntraCts
Text and Cases
1985. More importantly, said CEIC lien was duly recorded in the stock and
transfer books of Chempil.
CEIC’s subrogation theory is unavailing.
By definition, subrogation is “the transfer of all the rights of the creditor
to a third person, who substitutes him in all his rights. It may either be legal
or conventional. Legal subrogation is that which takes place without
agreement but by operation of law because of certain acts; this is the
subrogation referred to in Article 1302. Conventional subrogation is that
which takes place by agreement of the parties . . .”
CEIC’s theory is premised on Article 1302(2) of the Civil Code which states: x
xx
Despite, however its multitudinous arguments, CEIC presents an
erroneous interpretation of the concept of subrogation. An analysis of the
situations involved would reveal the clear inapplicability of Art. 1302(2).
Antonio Garcia sold the disputed shares to FCI for a consideration of
P79,207,331.28. FCI, however, did not pay the entire amount to Garcia as
it was obligated to deliver part of the purchase price directly to SBTC
pursuant to the following stipulations in the Deed of Sale:
“Manner of Payment
Payment of the Purchase Price
shall be made in accordance with the following order of preference
provided that in no instance shall the total amount paid by the Buyer exceed
the Purchase Price:
a. Buyer shall pay directly to the Security Bank and Trust Co. the
amount determined by the Supreme Court as due and owing
in favor of the said bank by the Seller.

art. 1302

The foregoing amount shall be paid within fifteen (15) days from the date
of the decision of the Supreme Court in the case entitled ‘Antonio M.
Garcia, et al. vs. Court of Appeals, et al.’ G.R. Nos. 82282-83 becomes
final and executory.” (Italics ours)
Hence, when FCI issued the BA check to SBTC in the amount of
P35,462,869.62 to pay Garcia’s indebtedness to the said bank, it was in
effect paying with Garcia’s money, no longer with its own, because said
amount was part of the purchase price which FCI owed Garcia in payment
for the sale of the disputed shares by the latter to the former. The money
“paid” by FCI to SBTC, thus properly belonged to Garcia. It is as if Garcia
himself paid his own debt to SBTC but through a third party — FCI.
 ObligatiOns 275
Extinguishment of Obligations Sec. 6 — Novation
The aforequoted contractual stipulation in the Deed of Sale dated 15 July
1988 between Antonio Garcia and FCI is nothing more but an arrangement
for the sake of convenience. Payment was to be effected in the aforesaid
manner so as to prevent money form changing hands needlessly. Besides,
the very purpose of Garcia in selling the disputed shares and his other
properties was to “settle certain civil suits filed against him.”
Since the money used to discharge Garcia’s debt rightfully belonged to
him, FCI cannot be considered a third party payor under Article 1302(2).
It was a conduit, or aptly categorized by respondents, merely an agent as
defined in Article 1868 of the Civil Code: x x x
FCI was merely fulfilling its obligation under the aforementioned Deed of Sale.
Additionally, FCI is not a disinterested party as required by Art. 1302(2)
since the benefits of the extinguishment of the obligation would redound
to none other but himself. Payment of the judgment debt to SBTC resulted
in the discharge of the attachment lien on the disputed shares by FCI. The
latter would then have a free and “clean” title to said shares.
In sum, CEIC, for its failure to fulfill the requirement of Art. 1302(2), was
not subrogated to the rights of SBTC against Antonio Garcia and did not
acquire SBTC’s attachment lien over the disputed shares which, in turn,
had already been lifted or discharged upon satisfaction by Garcia, through
FCI, of his debt to the said bank.
The third case is when, even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without prejudice to the
effects of confusion as to the latter’s share. A person interested in the
fulfillment of the obligation is one who will be affected by payment of the
debtor. Thus, a guarantor will be released if the principal obligation of the
debtor is paid. This is
arts. 1303-1304

also true with respect to a surety or a solidary debtor. For example, A is

indebted to M. The loan was secured by a real estate mortgage constituted by
X on his own property for the benefit of A’s debt. In the event X pays M, the
presumption of legal subrogation will arise in favor of X even if such payment
was made without the consent of A. Since there is merger or confusion of the
characters of the creditor and the mortgagor, the real estate mortgage is
extinguished.

Article 1303. Subrogation transfers to the person subrogated the credit with
all the rights thereto appertaining, either against the debtor or against third
persons, be they guarantors or possessors of mortgages, subject to stipulation
in a conventional subrogation. (1212a)
276 ObligatiOns and COntraCts
Text and Cases
This provision states the general effect of subrogation. Euphemistically
speaking, the third person “steps into the shoes” of the creditor and becomes
the new creditor. However, in conventional subrogation, the parties may
stipulate the nature, limits, extent and scope of the subrogation provided these
are not contrary to law, morals, good customs, public order, or public policy.

Article 1304. 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 subrogated in his place in virtue of the partial payment of the same
credit. (1213)

This provision contemplates a situation where a debt has been partially paid
by a third person, with the consent of the debtor. If there is no consent of the
debtor, the only right of the third party who made the payment is to be
reimbursed of the amount he has partially paid pursuant to Article 1236. Article
1237 states that whoever pays on behalf of the debtor without the knowledge
or against the will of the latter, cannot compel the creditor to subrogate him his
rights, such as those arising from mortgage, guaranty, or penalty.

In the event partial payment is made by a third person which extinguishes the
debtor’s obligation to pay the creditor up to the extent of said partial payment,
the creditor can still demand from the debtor the balance of the obligation. In
the meantime, the third party who made the partial payment can likewise
demand from the debtor what he has paid to the creditor. In the event that the
creditor and the third party demands from the debtor at the same time the
payment of what is due them, the creditor will be preferred. He will be paid
first as the law states that he is preferred.
art. 1304 ObligatiOns 281
Extinguishment of Obligations
Sec. 6 — Novation
282 ObligatiOns and COntraCts Text
and Cases

TITLE II. — CONTRACTS

Chapter 1

GENERAL PROVISIONS

Article 1305. A contract is a meeting of minds between two persons whereby

one binds himself, with respect to the other, to give something or to render
some service. (1254a)

This particular provision states the statutory

definition of contracts. Contract is a
source of obligation and therefore, in this
sense, it can be defined also as a
legally enforceable agreement. A contract is
defined as a juridical convention manifested in
legal form, by virtue of which one or more
persons bind themselves in favor of another or
others, or reciprocally, to the fulfillment of
a prestation to give, to do or not
to do.172 However, there are cases where,
although there is a meeting of the minds
between or among the parties, the contract still
cannot be legally enforced because it lacks some of
the required formalities mandated by law for
enforceability. This is particularly true in the
case of agreements falling under the Statute of
Frauds. With certain exceptions, the latter agreements
are useless contracts for they cannot be
implemented which, in effect, negates the existence
of a contract. In its broadest sense, a
contract has likewise been defined as an agreement
whereby at least one of the parties acquires a

172
Jardine Davies vs. Court of Appeals, G.R. No.
128066, June 19, 2000, 128 SCAD 20, 333
SCRA 684, citing Sanchez Roman, 148-149.
art. 1306 COntraCts 279
General Provisions

right, either in rem or in personam, in relation to some

person, thing, act or forbearance.173
Among the sources of an obligation
is a contract (Article 1157, Civil Code),
which 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,
Civil Code).

282
A contract undergoes various stages that include
its negotiation or preparation, its perfection
and, finally, its consummation. Negotiation covers the
period from the time the prospective
contracting parties indicate interest in the
contract to the time the contract is
concluded (perfected). The perfection
of the contract takes place upon the
concurrence of the essential elements thereof.
A contract which is consensual as to
perfection is so established upon
a mere meeting of the minds, i.e.,
the concurrence of offer and
acceptance, on the object and on
the cause thereof. A contract which requires,
in addition to the above,
the delivery of the object of the
agreement, as in a pledge or
commodatum, is commonly referred to
as a real contract. In a solemn
contract, compliance with certain formalities
prescribed by law, such as in
a donation of real property, is essential
in order to make the act valid,
the prescribed form being thereby an
essential element thereof. The stage of

173
William F. Elliott, Commentaries on the Law of Contracts, Volume I,
Indianapolis The Bobbs-Merrill Company, 1913
Edition, Page 2.
 consummation begins when the parties perform
their respective undertakings under the
contract culminating in the extinguishment
thereof.174

Article 1306. The contracting parties may establish such stipulations,

clauses, terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public policy.
(1255a)

This provision states the autonomous nature of

contracts. Freedom to stipulate terms and conditions
175
is the essence of the contractual system
provided such stipulations are not contrary to law,
morals, good customs, public order, or public policy. This
freedom also prohibits a party from coercing or
intimidating or unduly influencing another to enter into a
contract.176
In Azcuna, Jr. vs. Court of Appeals,177 the Supreme Court, in
commenting on the legality of a provision
in a lease contract to the effect that, if
the lessee does not vacate the premises on due
date, the lessee shall be charged P1,000.00 per
day as damages without prejudice to other
remedies which the lessor is entitled to, ruled:
x x x The freedom of the
contracting parties to make stipulations in their
contract provided they are not contrary to law, morals, good
customs, public order or public policy is
so settled and the Court finds nothing
immoral or illegal with the

174
Ang vs. Court of Appeals, G.R. No. 109125,
December 2, 1994, 57 SCAD 163, 238 SCRA
602; Soler vs. Court of Appeals, G.R. No.
123892, May 21, 2001.
175
Republic vs. PLDT, G.R No. L-18841, January 27,
1969, 26 SCRA 620.
176
Id.
177
G.R. No. 116665, March 20, 1996, 69 SCAD 643,
255 SCRA 215.
281 ObligatiOns and COntraCts art. 1306
Text and Cases

indemnity/penalty clause of the lease contract (paragraph

10) which does not appear to have
been forced upon or fraudulently foisted on
petitioner. Petitioner cannot now evade further
liability for liquidateddamages, for “after entering into
such an agreement, petitioner cannot thereafter turn his back on his word
with a plea that on him was inflicted a penalty shocking to the conscience
and impressed with inequity as to call for the relief sought on the part of a
judicial tribunal.”

In Pakistan International Airlines vs. Ople178 where the

airline company and the employees entered into
a contract providing stipulations regarding
employment calculated to evade the provision
of the Labor Code, the Supreme Court ruled that
contractual stipulations contravening provisions of
law designed to protect laborers and employees were
not valid. Particularly, the Supreme Court ruled:
In its third contention, petitioner PIA invokes
paragraphs 5 and 6 of its
contract of employment with private
respondents Farrales and Mamasig, arguing that
its relationship with them was governed
by the provisions of its contract
rather than by the general provisions
of the Labor Code.
Paragraph 5 of that contract set a
term of three (3) years for that
relationship, extendible by agreement
between the parties; while paragraph6 provided
that, notwithstanding any other provision in
the contract, PIA had the right to
terminate the employment agreement at
any time by giving one-month’s notice
to the employee or, in lieu of
such notices, one-month’s salary.
A contract freely entered into should, of course,
be respected, as PIA argues, since
a contract is the law between the

178
G.R. No. 61594, September 28, 1990, 190 SCRA 90.
282 ObligatiOns and COntraCts art. 1306
Text and Cases

parties. The principle of party autonomyin

contracts is not, however, an absolute principle.
The rule in Article 1306, of our
Civil Code is that the contracting
parties may establish such stipulations as
they may deem convenient, “providedthey
are not contrary to law, morals, good
customs, public order or public policy.” Thus,
counter-balancing the principle of autonomyof
contracting parties is the equally general
rule that provisions of applicable
law, especiallyprovisions relating to matters
affected with public policy, are deemed written
into the contract. Put a little
differently, the governing principle is
that parties may not contract away applicable
provisions of law especiallyperemptory
provisions dealing with matters heavily impressed
with public interest. The law relating to
labor and employment is clearly such an area
and parties are not at liberty to
insulate themselves and their relationships
from the impact of labor laws and
regulations by simplycontracting with each other.
It is thus necessary to appraise the
contractual provisions invoked by petitioner
PIA in terms of their consistency with
applicable Philippine law and regulations.
As noted earlier, both the Labor Arbiter and
the Deputy Minister, MOLE, in effect held
that paragraph5 of that employment
contract was inconsistent with Articles 280
and 281 of the Labor Code as
they existed at the time the contract
of employment was entered into, and
hence refused to give effect to said
paragraph5. This article reads as follows:
“Art. 280. Security of Tenure — In
cases of regular employment, the
employer shall not terminate the
services of an employee except for
a just cause or when
art. 1306 COntraCts 283
General Provisions

authorized by this Title. An

employee who is unjustly dismissed
from work shall be entitled to
reinstatement without loss of
seniority rights and to his
backwages computed from the
time his compensation was
withheld from him up to the
time of his reinstatement.
Art. 281. Regular and Casual Employment — The
provisions of written agreement
to the contrary notwithstanding and
regardless of the oral
agreements of the parties, an
employment shall be deemed to
be regular where the employee has
been engaged to perform activities
which are usually necessary or
desirable in the usual business or
trade of the employer,
except where the employment has
been fixed for a specific
project or undertaking, the
completion or termination of
which has been determined at
the time of the engagement
of the employee or where the
work or services to be
performed is seasonal in
nature and the employment is
for the duration of the
season.
An employment shall be deemed to
be casual if it is not
covered by the preceding paragraph:
Provided, That, any employee who has
rendered at least one year of
service, whether such service is
continuous or broken, shall be
considered as regular employee
with respect to the activity in
which he is employed and his
284 ObligatiOns and COntraCts art. 1306
Text and Cases

employment shall continue while

such actually exists.”
Examining the provisions of paragraphs
5 and 6 of the employment
agreement between petitioner PIA and private
respondents, we consider that those provisions
must be read together and when so
read, the fixed period of three (3)
years specified in paragraph 5 will be seen
to have been effectively neutralized by
the provisions of paragraph6 of
that agreement. Paragraph 6 in effect
took back from the employee the fixed three
(3)-year period ostensibly granted by paragraph
5 by rendering such period in effect
as facultative one at the option
of the employer PIA. For petitioner PIA
claims to be authorized to shorten
that term, at any time and for
any cause satisfactory to itself, to
a one-month period, or even less
by simply paying the employee a month’s
salary. Because the net effect of
paragraphs 5 and 6 of the
agreement here involved is to render
the employment of private respondents
Farrales and Mamasig basically at the pleasure
of petitioner PIA, the Court considers that
paragraphs 5 and 6 were intended
to prevent any security of tenure from
accruing in favor of private respondents
even during the limited period of three
(3) years, and thus to escape
completely the thrust of Articles 280
and 281 of the Labor Code.

In Manila Bay Club Corporation vs. Court of Appeals179 where,

because of the failure of the petitioner to
comply with the insurance clause of the lease
contract, the lessor terminated the lease pursuant to

179
G.R. No. 110015, July 11, 1995, 62 SCAD 485,
245 SCRA 715.
art. 1306 COntraCts 285
General Provisions

a provision in the same lease contract

stipulating that failure to comply with any
provision of the contract shall allow the lessor
to rescind the same, the Supreme Court ruled on
the validity of the termination and said:
We do not agree with petitioner.
Under paragraph19 of the lease contract,
the lessee’s (petitioner) failure or neglect
to perform or comply with any of
the covenants, conditions, agreements
or restrictions stipulated shall result in
the automatic termination and cancellation
of the lease. It can be fairly
judged from the tenor of paragraph19
that the parties intended mandatory
compliance with all the provisions
of the contract. Among such provisions
requiring strict observance is the “insurance
clause” (paragraph 22) which expressly provides
that “the building must be insured and the insurance premium
must be for the account of the LESSEE. x x x” (italics supplied).
Thus, upon petitioner’s failure to comply
with the mandatory requirement of
paragraph22, private respondents were well
within their right to rescind the lease
contract by express grant of paragraph19.
Certainly, there is nothing wrong if the
parties to the lease contract agreed on
certain mandatory provisions concerning
their respective rights and obligations,
such as the procurement of the
insurance and the rescission clause. For it
is well to recall that contracts are
respected as the law between the
contracting parties, and they may establish
such stipulations, clauses, terms and conditions
as they may want to include. As long as
such agreements are not contrary to law, morals,
good customs, public policy or public order,
they shall have the force of law
between them.
286 ObligatiOns and COntraCts art. 1306
Text and Cases

In Philippine American General Insurance Co. vs. Mutuc 180 where

the appellant, after agreeing that his bond may
be renewed or extended without notification,
claimed that such provision was null and void,
and where the lower court, despite such claim, held
him liable for the bond, the Supreme Court
affirmed the decision of the lower court and ruled:
There was no other valid conclusion
that could be reached by the lower
court. Even appellant must have seen that
so it ought to be. That would
account for the contention in his
brief that the stipulation as to
“any extension” without the need for
his being notified was “null and void
being contrary to law, morals, good customs,
public order or public policy.” That is
a pretty tall order. There is more
than just a hint of hyperbolein
such a sweeping allegation. Appellant though
ought to have realized that assertion is
not the equivalent of proof. A
little more objectivity on his part
should bring the realization that no
offense to law or morals could be
imputed to such a contractual provision.
As to good customs, that category
requires something to substantiate it.
A mere denunciatory characterization certainly
cannot suffice. That leaves public order or
public policy. It is difficult to follow
appellant’s train of reasoning. He
would premise it on the indemnity
agreement being a contract of adhesion.
He was not at all compelled
to agree to it. He was free
to act either way. He had a
choice. It may be more offensive to
public policy, let alone morals or good
customs, if thereafter he would be allowed

180
G.R. No. L-19632, November 13, 1974, 61 SCRA 22.
art. 1306 COntraCts 287
General Provisions

to go back on his word. Besides

the policy underlying such a stipulation
in this litigation is clear. What was
guaranteed was the faithful performance
of defendant Mutuc of his employment
as a member of the crew of
a vessel plying overseas. That was more
logical considering the difficulty of
contracting him then for the extension
without the need for notification. So
the parties agreed. There could be thus
nothing that did offend public policy or
public order when such an arrangement
was explicitly provided for. Appellant has
not made out a case for reversal.

In Teves vs. People’s Homesite and Housing Corporation,10 the

Supreme Court pertinently said:
In the absence of express legislation or
constitutional prohibition,181 a court, in order
to declare void as against public policy, must find that
the contract, as to the consideration or
thing to be done, has a tendency to injure
the public, is against the public good, or
contravene some established interest of
society, or is inconsistent with sound policy
and good morals which tends to undermine
the security of individual rights, whether of
personal liability or of private property.

In De Leon vs. Court of Appeals182 where the parties stipulated

that “in consideration for a peaceful and
amicable termination of relations between the
undersigned and her lawful husband,” the
parties agreed to give some properties to the
wife and a monthly support for the children, and
for the wife to agree to a judicial sepa-
ration of property plus the amendment to the
divorce proceedings initiated by the wife in the

181
G.R. No. L-21498, June 27, 1968, 23 SCRA 1141;
Gabriel vs. Monte de Piedad, 71 Phil. 479.
182
G.R. No. 80965, June 6, 1990, 186 SCRA 345.
288 ObligatiOns and COntraCts art. 1306
Text and Cases

United States to conform to the agreement, the

Supreme Court sustained the lower court’s ruling that
the agreement is contrary to law, Filipino
morals and public policy because the consideration of
the agreement is the termination of the
marriage by the parties which they cannot do on
their own and without any legal basis.
It is a rule that only laws existing at
the time of the execution of a
contract are applicable thereto and that later
statutes do not govern said contract unless the latter
is specifically intended to have a retroactive
effect. A later law which enlarges,abridges or in
any manner changes the intent of the parties to
the contract necessarily impairs the contract itself and
cannot be given retroactive effect without violating the
constitutional prohibition against impairment of
contracts. However, while the legal system
upholds the sanctity of a contract so that a
contract is deemed to be the law between the
contracting parties, non-impairment of contracts or
vested rights clauses will have to yield to the
superior and legitimate exercise by the State of
police power to promote the health, morals, peace,
education, good order, safety and general welfare of
the people. Moreover, statutes promulgated in
exercise of a valid police power must be read
into every contract.183 Thus, in Ortigas vs. Court of Appeals13
where the contract of sale provided that the
property shall only be used for residential
purposes but where the buyer sub-sequently built a
commercial edifice in consonance with a later
zoning ordinance classifying the area as a
commercial zone, the Supreme Court ruled that the
construction was proper because the restric-tions in
the

183
Ortigas & Company., Ltd. vs. Court of Appeals, G.R.
No. 126102, December 4, 2000, 139 SCAD 158, 346 SCRA
748.
art COntraCts 289
General Provisions
. 1307 184

contract of sale were deemed extinguished by the

retroactive operation of the zoning ordinance
and could no longer be enforced.185

Article 1307. Innominate contracts shall be regulated by the stipulations of

the parties, by the provisions of Titles I and II of this Book, by the rules
governing the most analogous nominate contracts, and by the customs of the
place. (n)

Innominate contracts under the Civil Code are

those which are not specifically governed by
any provision in the Civil Code or
special law but which likewise involve the fulfillment
or accomplishment of some prestations. They are
governed by the following:
1) Stipulation of the parties. The parties
may have some arrangements which
they feel should bind them but
which nevertheless do not have
any exact legal provisions in
the Civil Code to govern the
nature of the obligation
appertaining to it. Following
the general rule on contracts, they
can therefore stipulate any provision,
term and condition that will govern
the enforceability of their agreement
provided they are not contrary to
law, morals, good customs, public order,
or public policy;
2) Provisions in the law of
obligations and contracts under Title I
and II of the Civil Code.
Innominate contracts still involve prestations
which are to be accomplished
by the parties. Though they may
be innominate, they are still
contracts which are sources of
obligations. Hence, they should likewise

184
Ibid.
185
Ibid.
290 ObligatiOns and COntraCts art
Text and Cases

follow the general rule on

obligations and contracts;
3) Rules governing the most analogous
nominate contracts. The Civil Code provides
for various types of nominate contracts,
namely: sale,186 barter or exchange, 187

lease,188 partnership,18 agency,19 loan,20 deposit,21

aleatory contracts, compromises,23
22
guaranty,24
pledge,25 mortgage,26 and antichresis.27 Other special
laws govern some other types of
contracts like insurance, real estate
mortgage, and charter party;
4) Customs of the place. Custom is
a rule of conduct formed
. 1307

by repetition of acts uniformlyobserved as

a social rule, legally binding and
obligatory and it must be
proved as a fact according to
the rules of evidence.28

Innominate contracts may be divided into the

kind of prestation it obligates the
parties to do. It can involve a prestation
where the parties mutually give each other a
certain thing (do ut des) or mutually render a service (facio ut facias).
It may likewise involve a mixed prestation such
that one party gives something and the other
party does something ( do ut facias; facias ut des ).
In Dizon vs. Gaborro29 where a contract was entered into
whereby the respondent assumed to pay the
indebtedness of petitioner to certain banks, and
in consideration therefor, respondent was given the
possession, the enjoyment and use of

186
Book IV Title VI of the 1950 Civil Code,
Articles 1458 to 1637.
187
Book IV Title VII of the 1950 Civil Code,
Articles 1638 to 1641.
188
Book IV Title VIII of the 1950 Civil Code,
Articles 1642 to 1766.
art COntraCts 291
General Provisions
certain lands until petitioner can reimburse fully
the respondents the amounts paid by the latter
to the banks, to accomplish the following
ends: (a) payment of the bank obligations; (b)
make the lands productive for the benefit of
the possessor; (c) assure the return of the
land to the petitioner thus rendering
equity and fairness to all parties concerned, the
Supreme Court said:
In view of all these considerations, the
law and jurisprudence, and the facts
established, We find that the agreement
between petitioner Dizon and respondent Gaborro
is one of those innominate contracts
under Art. 1302 of the New Civil
Code whereby the petitioner and respondent
agreed “to give and to do” certain
rights and obligations respecting the
lands and mortgage debts of petitioner which
would be acceptable to the bank,
but partaking of the nature of an
antichresis insofar as the principal parties,
petitioner Dizon and respondent Gaborro, are
concerned.

In Corpus vs. Court of Appeals30 where the agreement

as to legal fees between a lawyer and his
client was not reduced into writing but

Book IV, Title IX of the 1950 Civil

19
Code, Articles 1767 to 1867. Book IV, Title
X of the 1950 Civil Code, Articles 1868
to 1932.
Book IV, Title XI of the 1950 Civil Code,
Articles 1933 to 1961.
Book IV, Title XII of the 1950 Civil Code,
Articles 1962 to 2009.
Book IV, Title XIII of the 1950 Civil Code,
Articles 2010 to 2027.
Book IV, Title XIV of the 1950 Civil Code,
Articles 2028 to 2046.
Book IV, Title XV of the 1950 Civil Code,
Articles 2047 to 2084.
Book IV, Title XVI, Chapter 2 of the Civil
Code, Articles 2085-2123.
Id., Chapter 3, Articles 2085-2092, Articles 2124 to
2131.
Id., Chapter 4 of the Civil Code, Articles 2132
to 2139.
292 ObligatiOns and COntraCts art
Text and Cases

Yao Kee vs. Sy-Gonzales, G.R. No. L-55960,

November 24, 1988, 167 SCRA 736.
G.R. No. L-36821, June 22, 1978, 83 SCRA 688.
. 1307

there were indicators that payment of the same

was contemplated by the parties, the Supreme Court
said:
Moreover, the payment of attorney’sfees to
respondent David may also be justified
by virtue of the innominate contract
of facio ut des (I do and you
give) which is based on the principle
that “no one shall unjustly enrich himself
at the expense of another.” Innominate
contracts have been elevated to a codal
provision in the New Civil Code by
providing under Article 1307 that such contracts
shall be regulated by the stipulations
of the parties, by the general provisions
or principles of obligations and contracts,
and by the customs of the people.
The rationale of this article was stated
in the 1903 case of Perez vs. Pomar
(2 Phil. 982). In that case, the
Court sustained the claim of plaintiff Perez
for payment of services rendered against defendant
Pomar despite the absence of an express
contract to that effect, thus:
“It does not appear that any written contract was
entered into between the parties for the
employment of the plaintiff as interpreter,
or that any other innominate contract was
entered into; but whether the plaintiff’s services were solicited
or whether they were offered to the defendant for his assistance, inasmuch as
these services were accepted and made use of by the latter, we must consider that
there was a tacit and mutual consent as to the rendition of the services. This gives
rise to the obligation upon the person benefited by the services to make
compensation therefor, since the bilateral obligation to
render service as interpreter, on the one
hand and on the other to pay for
the service rendered, is thereby incurred. (Arts. 1088,
1089, and 1262 of the Civil Code). x x x
art COntraCts 293
General Provisions
x x x Whether the service was
solicited or offered, the

fact remains that Perez rendered to

Pomar services as interpreter. As it does
not appear that he did this gratuitously,
the duty is imposed upon defendant, he
having accepted the benefit of the service, to pay
a just compensation therefor, by virtue of the
innominate contract of facio ut des implicitly
established. x x x”

Article 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. (1256a)

This provision expresses the concept of

mutuality of contracts.31 In Garcia vs. Rita Legarda, Inc.32
where a contract to sell a real property
stipulated that the vendor was given the right
to unilaterally rescind 30G.R. or No.term L-
40424,inate theJune contract 30, 1980, 98in
SCRA the event 424. the other party failed to
pay any of the required installments of the
purchase price, the
. 1308

Supreme Court ruled that such provision did not

violate Article 1308 and explained:
The above legal provision is a virtual
reproduction of Article 1256 of the
old Civil Code but it was so
phrased as to emphasize the principle
that the contract must bind both parties.
This, of course, is based firstly, on
the principle that obligations arising from
contracts have the force of law between
the contracting parties and secondly, that
there must be mutuality between parties based
on their essential equality to which is
repugnantto have one party bound by
the contract leaving the other free therefrom
(8 Manresa 556). Its purpose is to
render void a contract containing a
condition which makes its fulfillment dependent
294 ObligatiOns and COntraCts art
Text and Cases

exclusively upon the uncontrolled will

of one of the contracting parties. x x
x
The above stipulation, to our mind,
merely gives the vendor “the right to
declare this contract cancelled and of no
effect” upon fulfillment of the conditions
therein set forth. It does not leave
the validity or compliance of the
contract “entirely to the will of one
of the contracting parties;” the stipulation
or agreement simply says that in
case of default in the payment of
installments by the vendee, he shall
have (1) “a month of grace,” and
that (2) should said month of grace
expire without the vendee paying his arrears,
he shall have another “period of 90
days” to pay “all the amounts he
should have paid,” etc., then the vendor
“has the right to declare this contract
cancelled and of no effect.” We have
heretofore upheld the validity of similar
stipulations. In Taylor vs. Ty Tieng Piao, etc. (43
Phil. 873, 876-878) the ruling was that
a contract expressly giving to one party
the right to cancel the same if
a resolutory condition therefor agreed upon
— similar to the one under
consideration — is not fulfilled, is
valid, the reason being that when the
contract is thus cancelled, the agreement
of the parties is in reality being
fulfilled. Indeed, the power thus granted can
not be said to be immoral, much
less unlawful, for it could be exercised
— not arbitrarily— but only upon
the other contracting party committing
the breach of contract of non-payment
of the installments agreed upon.
Obviously, all that said party had
to do to prevent the other from
exercising the power to cancel the
contract was for him to comply with
his part of the contract. And in
this case, after the maturity of any
art COntraCts 295
General Provisions
particular installment and its non-payment,
the contract gave him not only a
month of grace but an additionalperiod
of 90 days.

Mendoza vs. Court of Appeals, G.R. No. 116710, June

25, 2001.
G.R. No. L-20175, October 30, 1967, 21 SCRA 555;
See also Philippine Banking Corporation vs. Lui She,
G.R. No. L-17587, September 12, 1967, 21 SCRA 52.
G.R. No. 124290, January 16, 1998, 90 SCAD 325, 284
SCRA 357.
. 1308

In Allied Banking Corporation vs. Court of Appeals, 33 the Supreme

Court ruled that a stipulation in a lease
contract to the effect that the contract “may be
renewed for a like term at the option of
the lessee” is valid. It does not go
against the attribute of mutuality of contracts.
Such right on the part of the lessee is
part of the consideration in the contract. The
clause likewise means that, once the lessee exercises
the option to renew, all the terms and
conditions of the old contract are renewed and
not only the period.
In Philippine National Bank vs. Court of Appeals34 where PNB
and the debtor entered into a loan agreement
stipulating, among others, that PNB was authorized
to increase the stipulated 18% interest per
annum within the limits prescribed by law at any time
depending on whatever policy it [PNB] may
adopt in the future provided that the interest rate
on the note shall be correspondingly decreased
in the event that the applicable maximum
interest rate is reduced by law or by the
Monetary Board, and where the PNB indeed
increased the rates to 32%, then subsequently
to 41% and then finally to 48% within the
year over the objection of the debtor, the
Supreme Court declared null and void such increases
on the ground that, at that time, Presidential
Decree No. 116 specifically provides that increases
in interest rates shall be made “once every
296 ObligatiOns and COntraCts art
Text and Cases

twelve months” and furthermore such increases

violated the mutuality of contracts enunciated
in Article 1308 of the Civil Code, thus:
In order that obligations arising from contracts
may have the force of law between
the parties, there must be mutuality between
the parties based on their essential equality.
A contract containing a condition which
makes its fulfillment dependent upon
the exclusive will of the one of
the contracting parties is void (Garcia
vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the P1.8 million loan agreement
between the PNB and the private
respondent gave the PNB a license
(although in fact there was none) to
increase the interest rate at will during
the term of the loan, that license
would have been null and void for
being violative of the principle of mutuality
essential in contracts. It would have invested
the loan agreement with the character
of a contract of adhesion, where the
parties do not bargain on equal footing,
the weaker party’s (the debtor) participation
being reduced to the alternative “take
it or leave it” (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such contract is
a veritable trap for the weaker party
whom the courts of justice must protect
against abuse and imposition.

G.R. No. 88880, April 30, 1991, 196 SCRA 536.

G.R. No. 103338, January 4, 1994, 47 SCAD 55,
229 SCRA 60.
See Villalon vs. Court of Appeals, G.R. No.
116996, December 2, 1999, 116 SCAD
297 ObligatiOns and COntraCts
Text and Cases

arts. 1309-1310

However, contracts of adhesion are not per se

void. There must be a showing that it is
highly inequitable for such contract to be invalidated.
Thus in Serra vs. Court of Appeals35 where the contract was
assailed by one party who was a lawyer-CPA
as invalid for being a contract of adhesion, the
Supreme Court said:
A contract of adhesion is one wherein a
party, usually a corporation, prepares the
stipulations in the contract, while the
other party merely affixes his signature or
his “adhesion” thereto. These types of
contracts are as binding as ordinary contracts.
Because in reality, the party who adheres
to the contract is free to reject
it entirely. Although, this Court will
not hesitate to rule out blind adherence
to terms where facts and circumstances
will show that it is basically one-sided.
We do not find the situation in
the present case to be inequitable.
Petitioner is a highly educated man, who,
at the time of the trial was
already a CPA-Lawyer, and when he
entered into the contract, was already a
CPA, holding a respectable position with
the Metropolitan Manila Commission. It
is evident that a man of his
stature should have been more cautious in
transactions he enters into, particularly
where it concerns valuable properties. He
is amply equipped to drive a hard
bargain if he would be so minded.
298 ObligatiOns and COntraCts art. 1311
Text and Cases

Article 1309. 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. (n)

Article 1310. The determination shall not be obligatory if it is evidently

inequitable. In such case, the courts shall decide what is equitable under the
circumstances. (n)
The parties may constitute a third party to
determine the performance of the contract. The
decision shall become effective when both of the
contracting parties already have knowledge of the
decision.It will not be binding if only one
of the parties knows of the decision.This
determination must however not destroy the nature of
mutuality of the contract between the principal
parties based on their essential equality. Hence, the law
requires that the determination must not be
evidently inequitable. Otherwise the court shall
decide what is equitable under the circumstances.
For example, A and B enter into a
contract whereby A will sing in the nightclub
of B for 2 days. The contract stipulates
that, for two days, A is to be paid
P5,000 for such number of songs to be
determined by

, 319 SCRA 530; Garcia vs. Court of

Appeals, 258 SCRA 446; Capitol Insurance & Surety Co.,
Inc. vs. Central Azucarera del Danao, 221 SCRA 98.
G.R. No. 115117, June 8, 2000, 127 SCAD 395,
333 SCRA 170.
X two days before the performance, and any
violation renders the contract ineffectual entitling B not
to pay A any consideration as a penalty. They
sign the contract. Later, X makes a determination
that A is to sing 20 songs, selected by
X continually without a break starting from 6:00
in the evening to 2:00 the next morning;
and, if the nightclub is filled with
art. 1311 COntraCts 299
General Provisions

people, A will give an encore three times

divided into 30 minutes each time. A shall only
sing those specifically requested by the
audience, and in case he does not know
the song, his fee is to be reduced. X
notified A two days before the performance that
the latter will sing 15 English rock songs and
5 Norwegian songs which obviously A does
not know. This is clearly a situation where the
performance is so inequitable. In fact the
contract itself and not merely the determination of
its performance is almost left to the will
of the third party and it greatly favors the
nightclub owner. Also, it tends to destroy the
basic equality of the contracting parties. A can
go to court which will decide what is
equitable under the circumstances. Court intervention
is necessary in order that the intent of
the parties will not be rendered nugatory by the
inequitable terms and conditions of a third
party.

Article 1311. Contracts take effect only between the parties, their assigns
and heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation, or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a third person, he
may demand its fulfillment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person. (1257a)

The nature of relativity of contracts is

enunciated in Article 1311. Generally, contracts
take effect only between the immediate parties to
the same. Hence, as a general rule, a
stranger cannot invoke the contract of another for his
300 ObligatiOns and COntraCts art. 1311
Text and Cases

own interest or for a source of an

alleged prejudice. A party to a contract
cannot impose any obligation or liability to one
who, under its terms, is a stranger to the
said contract.36 Thus, in Integrated Packaging Corporation vs.
Court of Appeals37 where the company-petitioner,
which was itself defaulting in paying its
supplier, sued the said supplier-private respondent
allegedly for causing damage to it in that it
was not able to comply with its contract with
another corporation (Philacor) because the supplier-
private respondent failed to deliver the materials
which were supposed to be used by the
company-petitioner for the orders ofthe said
corporation, the Supreme Court rejected any claim of
damages in favor of the company-petitioner, not
only because it was shown that the non-delivery
of the materials by the supplier-private
respondent was justified in view of the non-
payment by the company of the deliveries,
but also because the supplier-private respondent has
absolutely nothing to do with the contract
between the companypetitioner and his client-
corporation (Philacor). The Supreme Court said:
As correctly held by the appellate court,
private respondent cannot be held liable
under the contracts entered into by petitioner
with Philacor. Private respondent is not
a party to said agreements. It
is also not a contract pour autrui.
Aforesaid contracts could not affect third persons
like private respondents because of the
basic civil law principle of relativity of
contracts which provides that contracts can only
bind the parties who entered into it,
and it cannot favor or prejudice a
third person, even if he is aware
of such contract and has acted with
knowledge thereof.
art. 1311 COntraCts 301
General Provisions

Indeed, the order agreement entered into

by petitioner and private respondent has
not been shown as having a direct
bearing on the contracts of petitioner with
Philacor. As pointed out by private
respondent and not refuted by petitioner,
the paper specified in the order agreement
between petitioner and private respondent are
markedly different from the paper involved in
the contracts of petitioner with Philacor. Further-
more, the demand made by Philacor upon
petitioner for the latter to comply with
its printing contract is dated February 15,
1984, which is clearly made long after
private respondent had filed its complaint
on August 14, 1981. This demand relates
to contracts with Philacor dated April 12,
1983 and May 13, 1983, which were
entered into by petitioner after private
respondent filed the instant case.
To recapitulate, private respondent did not
violate the order agreement it had
with petitioner. Likewise, private respondent
could not be held liable for
petitioner’s breach of contract with Philacor.
It follows that there is no basis
to hold private respondent liable for
damages. Accordingly, the appellate court

William F. Elliott, Commentaries on the Law of Contracts, Volume II,

1913 Edition, Indianapolis, The Bobbs-Merrill Company, Page
717.
Id.
Id.
G.R. No. 118248, April 5, 2000, 124 SCAD 464,
329 SCRA 666.
did not err in deleting the damages awarded by the trial
court to petitioner.

The basic principle of relativity of contracts

extends to the principal parties’ assigns and heirs.
302 ObligatiOns and COntraCts art. 1311
Text and Cases

Under certain conditions, the law operates to effect

the transfer of a chose of action from one
person to another without any concurring act on
the part of the parties or indeed without their
assent.38 The usual ways by which such transfers are
brought to pass are by the transfer of an
interest in land, by marriage, and by
death.39 Hence, the period of a contract of lease
is binding upon the heirs of the lessor.
Likewise, a sublessee is bound by the
terms of the principal contract of the lessor and
the lessee. Indeed, real property is peculiar in that,
upon its transfer, covenants may be annexed to
the contract which run with the land and one
who subsequently acquires an interest therein takes it
subject to the benefits and obligations of such
covenants.40
In DKH Holdings Corporation vs. Court of Appeals41 where the
sole heir of the lessor refused to honor the
lease contract entered into by the deceased lessor
contending that, though he inherited the property from
the deceased lessor, he was not a party
to the lease contract, the Supreme Court said that
the sole heir must honor the contract because in
inheriting the property, he acquired all the
rights and obligations of the deceased lessor
with respect to the property. Pertinently, the
Supreme Court based its decision on Article 1311 and
stated:
As early as 1903, it was held that
“He who contracts does so for himself
and his heirs.”42 In 1952, it was
ruled that if the predecessor was
duty-bound to reconvey land to another,
and at his death the reconveyance
had not been made, the heirs can
be compelled to execute the proper
deed for reconveyance. This was grounded
upon the principle that heirs cannot escape
art. 1311 COntraCts 303
General Provisions

the legal consequences of a

transaction entered into by their
predecessorin-interest because they have inherited
the property subject to the liability affecting
their common ancestor.43
It is futile for Victor to insist that
he is not a party to the
contract because of the clear provision of
Article 1311 of the Civil Code. Indeed,
being an heir of Encarnacion, there
is privity of interest between him and
his deceased mother. He only succeeds to
what rights his mother had and what
is valid and binding

Eleizeguii vs. Lawn Tennis Club, G.R. No. 967, 2

Phil. 309.
Carillo vs. Salak de Paz, G.R. No. L-4133, 91
Phil. 82.
DKC Holdings Corporation vs. Court of Appeals, G.R.
No. 118248, April 5, 2000, 124 SCAD 464, 329
SCRA 666.
Article 1973 of the 1950 Civil Code.
Coquia vs. Fieldman’sInsurance Co., Inc., G.R. No. L-
23276, November 29,
against her is also valid and binding as
against him. x x x
In the case at bar, the subject matter
of the contract is likewise a lease,
which is a property right. The death
of a party does not excuse non-
performance of a contract which involves a
property right, and the rights and
obligations thereunder pass to the
personal representatives of the deceased. Similarly,
nonperformance is not excused by the
death of the party when the other
party has a property interest in the
subject matter of the contract.
Under both Article 1311 of the Civil
Code and jurisprudence, Victor is bound
304 ObligatiOns and COntraCts art. 1311
Text and Cases

by the subject Contract of Lease with

Option to Buy.

Transmission of rights and obligations in a

contract may likewise be agreed upon by the
parties. Thus, a contract may provide that, in the
event a contractor fails to finish the house
on time, another contractor may assume his place
in the contract subject to the same terms and
conditions.
If the transferee is the heir of the
decedent, he shall not be held liable
beyond the value of the property he received from
the decedent. Hence, if the deceased left
the heir a property which, however, was a
collateral for a debt which the deceased
incurred during his lifetime, the creditor can go
against the property to pay off the indebtedness
of the deceased. If the property is not
sufficient to satisfy the debt, the creditor
cannot personally go against the heir to
collect the deficiency.
However, the law likewise provides that contracts
cannot take effect with respect to the heirs or
assigns in three (3) cases. The first case is when
the nature of the contract does not allow
transmission. Hence, a contract which binds a
person to sing in a particular nightclub
because of the special way he sings his songs
is not transmissible because the hiring of the
singer is quite personal and his abilities cannot be
exactly duplicated by any person. Moreover, the
audience may have bought the tickets to the show
precisely because that particular singer, and
nobody else, will sing.
In American Jurisprudence, “Where acts stipulated in
a contract require the exercise of special
knowledge, genius, skill, taste, ability,
art. 1311 COntraCts 305
General Provisions

experience, judgment, discretion, integrity,

or other personal qualification of one
or both parties, the agreement is
of a personal nature, and terminates
on the death of the party who
is required to render such service.”

, 26 SCRA 178; Florentino vs. Encarnacion, 79

SCRA 193 (1977).
Kauffman vs. Philippine National Bank, 42 Phil. 182; Bank
of the Philippine Islands vs. V. Concepcion Hijos,
Inc., 50 Phil. 806; Uy Tam vs. Leonard, 30
Phil. 471.
It has also been held that a good measure of
determining
whether a contract terminates upon the
death of one of the parties is
whether it is of such a character
that it may be performed by
the promissor’s personal representative. Contracts
to perform personal acts which cannot be
as well performed by others are
discharged by the death of the
promissory. Conversely, where the service
or act is of such a character
that it may as well be performed
by another, or where the contract, by
its terms, shows that performance by
others was contemplated, death does not
terminate the contract or excuse non-performance.44

The second instance is when the parties stipulate that

no transmission of rights shall be allowed. For
example, the parties to a contract of lease
can provide a stipulation that the lease
contract cannot be subleased and a sublease
without the consent of the lessor shall allow the
lessor to terminate the lease. The third case is
when the law provides non-transmission. Thus, in a
contract of voluntary deposit, the depositary
cannot deposit the thing with a third person,
306 ObligatiOns and COntraCts art. 1311
Text and Cases

unless there is a stipulation to the contrary.45 Also, in lease,

Article 1649 of the Civil Code provides that “the
lessee cannot assign the lease without the consent of
the lessor, unless there is a stipulation to the
contrary.”
The second paragraph of Article 1311 is but
a restatement of the well-known principle
concerning contracts pour autrui, the enforcement
of which may be demanded by a third
party for whose benefit it has been made,
although not a party to the contract, before the
stipulation in his favor has been revoked by
the contracting parties.46 There must be a clear
intent to benefit the third party. It is
insufficient that the third party be merely
incidentally benefited.47 The requisites of a
stipulation pour autrui are the following:
1. there must be a stipulation in favor
of a third person;
2. the stipulation must be a part, not
the whole of the contract;
3. the contracting parties must have clearly and
deliberately conferred a favor upon a
third person, not a mere incidental
benefit or interest;
4. Neither of the contracting parties bears
the legal representation or authorization
of the third party;48
5. The favored party must have communicated his
acceptance

48
Young vs. Court of Appeals, G.R. No. 79518,
49
January 13, 1989, 169 SCRA 213. G.R. No. L-
79734, December 8, 1988, 168 SCRA 373.
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
of the stipulation to the obligor before its revocation.
art. 1311 COntraCts 307
General Provisions

In Marmont Resort Hotel vs. Guiang49 where a memorandum

of agreement was entered into between Marmont
Hotel and Maris Trading for the installation of
a complete water supply facility, and where the
installation encroached on the property of the
respondentspouses with the latter’s permission and
which encroachment eventually prompted Maris
Trading and the respondent spouses to enter into
a second memorandum of agreement stipulating
that, for valuable monetary consideration and the
fact that the installation and the drilling of
the water facility for the benefit of Marmont
Hotel were made in the property of the
respondent spouses with their consent, the latter shall
cede their possessory rights over the property to
Maris Trading, the Supreme Court ruled that the
respondent spouses can be held liable for not
allowing Marmont Hotel from inspecting the water
facility in their property, thus:
It is clear from the foregoing stipulations that
petitioner Marmont was to benefit from the
second Memorandum of
Agreement. In fact, said stipulations appear
to have been designed precisely to benefit
petitioner and, thus, partake of the nature
of stipulations pour autrui, contemplated
in Article 1311 of the Civil Code.
A stipulation pour autrui is a stipulation
in favor of a third person conferring
a clear and deliberate favor upon him,
which stipulation is found in a
contract entered into by parties neither of
whom acted as agent of the
beneficiary. We believe and so hold
that the purpose and intent of the
stipulating parties (Maris Trading and
respondent spouses) to benefit the third
person (Petitioner Marmont) is
sufficiently clear in the second
Memorandum of Agreement. Marmont was
308 ObligatiOns and COntraCts art. 1311
Text and Cases

not of course a party to that

second Agreement, but as correctly pointed
out by the Trial Court and the
appellate court, the respondent spouses could
not have prevented Maris Trading from entering
the property possessory rights over which
had thus been acquired by Maris Trading.
That respondent spouses remained in physical
possession of that particular bit of
lane, is of no moment: they did
so simply upon the sufferance of
Maris Trading. Had Maris
Trading, and not the respondent spouses, been in
physical

Edition, Indianapolis, The Bobbs-Merrill Company, Page 671,

citing Chung Kee vs. Davidson, 73 Cal. 522, 15
Pac. 100; Bacon vs. Davis, 9 Cal. App. 83,
98 Pac. 71; Bristow vs. Lane, 21 Ill. 194;
Livingstone vs. Chicago & N.W.R. Co., 142 Iowa
404, 120 N.W. 1040; Knott vs. Dudubque & S.C.
Ry. Co., 84 Iowa 462, 51 N.W. 57; Burton
vs. Larkin, 36 Kans, 246, 13 Pac. 398, 59
Am. Rep. 541; Duchamp vs. Nicholson, 2 Mart. (La.)
(N.S.) 151; Maxfield vs. Schwartz, 43 Minn, 221, 45
N.W. 429.
51
Bank of America NT & SA vs. Intermediate
Appellate Court, G.R. No. L-74521,
possession, we believe that Marmont would have
been similarly entitled to compel Maris Trading
to give it (Marmont) access to
the site involved. The two (2) courts
below failed to take adequate account of
the fact that the sole purpose of
Maris Trading in acquiring possessory rights
over that specific portion of the land
where well and pump and piping had
been installed, was to supply the water
requirements of petitioner’s hotel. That
said purpose was known by respondent
spouses, is made explicit in the second
Memorandum of Agreement. Maris Trading
itself had no need for a water
art. 1311 COntraCts 309
General Provisions

supply facility; neither did the respondent

spouses. The water facility was intended solely
for Marmont Resort Hotel.
The interest of Marmont cannot therefore be
regarded as merely “incidental.”

However, it is unnecessary that such third

person be always named in the contract.50 The
benefit must only be a part of the
contract contained in one of its stipulations
and should not constitute the whole contract. Thus,
a letter of credit in commercial transactions
in favor of the exporter becomes ultimately but
the result of a stipulation pour autrui.51 In
a letter of credit transaction, the importer and
a bank enters into an agreement where the
bank pays an exporter in another country of goods
ordered and delivered to the importer. The
exporter-beneficiary therefore benefits from the
stipulation in a contract between the importer and
the bank. Also in Coquia vs. Fieldman’s Insurance Co.,
Inc.,52 the Supreme Court considered a particular
insurance contract as a contract pour autrui and narrated thus:
It appears that on December 1, 1961,
appellant Fieldman’s Insurance Company, Inc.
— hereinafter referred to as the
Company — issued, in favor of the
Manila Yellow Taxicab Co., Inc. — hereinafter
referred to as the Insured — a
common carrier accident insurance policy, covering the
period from December
1, 1961 to December 1,
1962. It was stipulated in said policy
that:
“The Company will, subject to the Limits
of Liability and under the Terms of this
Policy, indemnify the Insured in the event of
accident caused by or arising out of the use
November 11, 1986, 145 SCRA 419; Vargas Plow
Factory, Inc. vs. Central Bank, G.R.
No. L-25732, February 27, 1969, 27 SCRA 84.
310 ObligatiOns and COntraCts art. 1311
Text and Cases

G.R. No. L-23276, November 29, 1968, 26 SCRA 178.

William F. Elliott, Commentaries on the Law of Contracts, Volume II,
1913 Edition, Indianapolis, The Bobbs-Merrill Company, Page
672, citing Bay vs. Williams, 112 Ill 91, 1
N.E. 340, 54 Am. Rep. 209; Seaman Hasbrouck,
35 Barb (N.Y.) 151; Smith vs. Pfluger, 126 Wis.
253, 105 N.W. 476, 110 Am. St. 911.
Id., citing Rogers vs. Gosnell, 58 Mo. 589;
Lawrence vs. Fox, 20 N.Y. 268; Baker vs. Elgin,
11 Ore. 333, 8 Pac. 280; Brown vs.
Markland, 16 Utah 360, 52 Pac. 597, 67 Am.
St. 629; Tweeddale vs. Tweeddale, 116 Wis. 517,
93 N.W. 440, 61 L.R.A. 509, 96
of Motor Vehicle against all sums which
the Insured will become legally liable
to pay in respect of: Death
or bodily injury to any fare-
paying passenger including the Driver, Conductor
and/or Inspector who is riding in
the Motor Vehicle insured at the
time of accident or injury.”
While the policy was in force, or
on February 10, 1962, a taxicab of
the Insured, driven by Carlito Coquia, met
a vehicular accident at Mangaldan,
Pangasinan, in consequence of which
Carlito died. The Insured filed therefore a
claim for P5,000.00 to which the
Company replied with an offer to pay
P2,000.00, by way of compromise.
The Insured rejected the same and made
a counter-offer for P4,000.00, but
the Company did not accept it. Hence,
on September 18, 1962 the Insured
and Carlito’s parents, namely, Melecio Coquia and
Maria Espanueva — hereinafter referred
to as the Coquias — filed a
complaintagainst the Company to collect the
proceeds of the afore-mentioned policy. In
its answer, the Company admitted the existence
thereof, but pleaded lack of cause of
action on the part of the plaintiffs.
art. 1311 COntraCts 311
General Provisions

After appropriate proceedings, the trial

court rendered a decision sentencing the
Company to pay to the plaintiffs the
sum of P4,000.00 and the costs.
Hence, this appeal by the Company,
which contends that plaintiffs have no cause
of action because: 1) the Coquias have
no contractual relation with the Company;
and 2) the Insured has not complied
with the provisions of the policy
concerning arbitration.
As regards the first defense, it should be
noted that, although, in general, only parties
to a contract may bring an action
based thereon, this rule is subject to
exceptions, one of which is found
in the second paragraphof Article 1311
of the Civil Code of the
Philippines, reading:
“If a contract should contain some stipulation
in favor of a third person, he
may demand its fufillmentprovided he
communicated his acceptance to the
obligor before its revocation. A mere
incidental benefit or interest of a person
is not sufficient. The contracting
parties must have clearly and deliberately
conferred a favor upon a third person.”
This is but the restatement of
a well-known principle concerning contract
pour autrui, the enforcement of which
may be demanded by a third
party for whose benefit it was made,
although not a party to the contract,
before the stipulation in his favor
has been revoked by the contracting
parties. Does

the policy in question belong to such

class of contracts pour autrui?
312 ObligatiOns and COntraCts art. 1311
Text and Cases

Am. St. 1003.

In connection, said policy provides, inter alia:
“Section I — Liability to Passengers.
1. The Company will, subject to the
Limits of Liability and under the Terms
of this Policy, indemnify the Insured
in the event of accident caused by
or arising out of the use of
Motor Vehicle against all sums which the
Insured will become legally liable to pay
in respect of: Death or bodily injury
to any fare-paying passenger including the
Driver x x x who is riding
in the Motor Vehicle insured at the
time of accident or injury.
“Section II — Liability to the Public
xxx xxx xxx
“3. In terms of and subject to the
limitations of and for the purposes
of this Section, the Company will indemnify
any authorized Driver who is driving
the Motor Vehicle x x x.”
“Conditions
xxx xxx xxx
“7. In the event of death of any
person entitled to indemnity under this
Policy, the Company will in respect of
the liability incurred by such person, indemnify
his personal representatives in terms of
and subject to the limitations of
this Policy, provided, that such representative
shall, as though they were the Insured,
observe, fulfill and be subject to the
Terms of this Policy insofar as they
can apply.
art. 1311 COntraCts 313
General Provisions

“8. The Company may, at its option, make

indemnity payable directly to the claimants
or heirs of claimants, with or
without securing the consent of or prior
notification to the Insured, it being
the true intention of this Policy, the
liabilities of the Insured towards the passengers
of the Motor Vehicle and the Public.”
Pursuant to these stipulations, the Company
“will indemnify any authorized Driver
who is driving the Motor Vehicle” of
the Insured and, in the event of
death of said driver, the Company shall,
likewise, “indemnify his personal representatives.”
In fact, the Company “may, at its
option, make indemnity payable directly to
the claimants or heirs of claimants x
x x it being the true intention
of this Policy to protect x x
x the liabilities of the Insured towards
the passengers of the Motor Vehicle
and the Public” — in other words,
third parties.
Thus, the policy under consideration is
typical of contracts pour autrui, this character
being made more manifest by the fact
that the deceased driver paid fifty percent
(50%) of the corresponding premiums,
which were deducted from his weekly
commissions. Under these conditions, it
is clear that the Coquias — who,
admittedly, are the sole heirs of
the deceased — have a direct cause
of action against the Company, and,
since they could have maintained this
action by themselves, without the assistance
of the Insured, it goes without saying
that they could and did properly join
the latter in filing the complaintherein.
314 ObligatiOns and COntraCts art. 1311
Text and Cases

The law likewise requires that, in stipulations pour

autrui, the third party communicates his acceptance
to the obligor before its revocation. It is
not necessary as a general rule for the
third party to make a formal acceptance prior
to bringing of the suit.53 The assent of the
beneficiary will be presumed.54 The
commencement of an action to enforce a
promise is sufficient as an acceptance.55 In
56
Mandarin Villa, Inc. vs. Court of Appeals where the owner of
a restaurant refused to honor a credit card
for the purpose of payment from a customer
on the ground that its machine validating such
credit card indicated that the latter had
expired, when in fact it had not expired as
clearly indicated in the card itself, and
where the owner would have known such fact had
it merely followed the rules it agreed upon with
the credit card company providing that, in
cases of expiration of the credit card as
indicated in the machine, the restaurant
owner-obligor should examine the card itself and
follow certain other procedures, the Supreme Court found
the restaurant-owner liable for damages anchoring its
decision on the latter’s negligence and on
Article 1311 of the Civil Code on pour autrui
stipulations, thus:
We note that Mandarin Villa Seafood Village
is affiliated with BANKARD. In fact,
an “Agreement” entered into by petitioner
and BANKARD dated June 23, 1989,
provides inter alia:
“The MERCHANT shall honor validly issued
PCCCI credit cards presented by their
corresponding holders in the purchase of
goods and/or services supplied by it provided
that the card expiration date has
not elapsed and the card number does
not
art. 1311 COntraCts 315
General Provisions

Id., citing North Alabama Development Co. vs.

Orman, 55 Fed. 18, 5 C.C.A. 22; McCoy vs.
McCoy, 32 Ind. App. 38, 69 N.E. 193, 102
Am. St. 223; Coppage vs. Gregg, 127 Ind. 359,
26 N.E. 903; Copeland vs. Summers, 138 Ind. 219,
35 N.E. 514, 37 N.E. 971; Motley vs.
Manufacturers’ Ins. Co., 29 Maine 337, 50 Am.
Dec. 591; Stariha vs. Greenwood, 28 Minn 521,
11 N.W. 76; Campbell vs. Smith, 71 N.Y. 26,
27 Am. Rep., 5; Blake vs. Atlantic Nat. Bank,
33 R.I. 464, 82 Atl. 225.
G.R. No. 119850, June 20, 1996, 71 SCAD 255,
257 SCRA 538.
G.R. No. 79518, January 13, 1989, 169 SCRA 213.
Equitable PCI Bank vs. Rosita Ku, G.R. No.
142950, March 26, 2001; Oro Cam Enterprises, Inc.
vs. Court of Appeals, 116 SCAD 419, 319 SCRA
444.
Asuncion vs. Evangelista, G.R. No. 133491, October 13,
60
1999, 316 SCRA 848. William F. Elliott, Commentaries on
the Law of Contracts, Volume II, 1913 Edition, Indianapolis, The
Bobbs-Merrill Company, Pages 663-665.
G.R. No. 120554, September 21, 1999, 314 SCRA 751.
appear on the latest cancellation bulletin
of lost, suspended and canceled PCCCI credit cards
and, no signs of tampering, alterations
or irregularities appear on the face
of the credit card.”
While private respondent may not be
party to the said agreement, the
above-quoted stipulation conferred a favor
upon the private respondent, a holder
of credit card validly issued by
BANKARD. This stipulation is a
stipulation pour autrui and under Article 1311 of
the Civil Code private respondent may
demand its fulfillment provided he
communicated his acceptance to the
petitioner before its revocation. In this
case, private respondent’s offer to pay
by means of his BANKARD credit
card constitutes only an acceptance
316 ObligatiOns and COntraCts art. 1311
Text and Cases

of the said stipulation but also

an explicit communication of his
acceptance to the obligor.

In Young vs. Court of Appeals,57 the Supreme Court also

had the opportunity to decide on the
matter of “communication of acceptance.” The
pertinent portions of the case are as follows:
Defendant Philippine Holding, Inc. is the
former owner of a piece of land
located at Soler St., Sta. Cruz, Manila,
and a two storey building erected thereon,
consisting of six units; Unit 1350
which is vacant, Unit 1352 occupied by
Antonio Young, Unit 1354 by Rebecca C.
Young, Unit 1356 by Chui Wan and
Felisa Tan Yu, Unit 1358 by Fong
Yook Lu and Ellen Yee Fong and
Unit 1360 by the Guan Heng Hardware
(Rollo, pp. 14-15).
The owner Philippine Holding, Inc. secured
an order from the City Engineer of
Manila to demolish the building. Antonio Young,
then a tenant of said Unit 1352,
filed an action to annul the city
Engineer’s demolition Order (Civil Case
No. 123883) entitled Antonio S. Young vs. Philippine Holding,
Inc. before the then Court of First Instance
of Manila, Branch XXX. As an incident
in said case, the parties submitted a
Compromise Agreement to the Court
on September 24, 1981. Paragraph
3 of said agreement provides that
plaintiff (Antonio S. Young) and Rebecca Young
and all persons claiming rights under them
bind themselves to voluntarily and
peacefully vacate the premises which they
are occupying as lessees (Units 1352
and 1354, respectively) which are the
subject of the condemnation and demolition
order and to surrender possession thereof
art. 1311 COntraCts 317
General Provisions

to the defendant Philippine Holding, Inc.

within sixty (60) days from written notice,
subject to the proviso that should defendant
decide to sell the subject property or
portion thereof, “plaintiff and Rebecca C. Young
have the right of first refusal thereof.”
(Rollo, p. 49).

62
29 Phil. 542.
Article 1163 of the 1950 Civil Code.
On September 17, 1981, Philippine Holding,
Inc. had previously sold the above
said property described in the compromise
agreement by way of dacion in payment
to PH Credit Corporation (Rollo, p.
49).
On November 9, 1982, the property was
subdivided into two parcels, one 244.09
sq.m. in area covering Units 1350, 1352
and 1354 (TCT No. 152439) and the
other 241.71 sq.m. in area covering Units
1356, 1358 and 1360 (TCT No. 152440)
and both titles were placed in the
name of PH Credit Corporation.
On December 8, 1982, PH Credit
Corporation sold the property covered by
TCT 152439 to the Blessed Land
Development Corporation represented by
its President Antonio T.S. Young and on
September 16, 1983, PH Credit
Corporation sold the property covered by
TCT 152440 embracing Units 1356, 1358
and 1360 to spouses Fong Yook Lu
and Ellen Yee Fong (Rollo, p. 15).
Thereafter, petitioner Rebecca C. Young and her
coplaintiffs, the spouses Chi Wan and
Felisa Tan Yu filed in the Regional
Trial Court of Manila, Civil Case No.
318 ObligatiOns and COntraCts art. 1311
Text and Cases

84-22676 for the annulment of the

sale in favor of herein respondent
spouses, Fong Yook Lu and Ellen Yee
Fong and for specific performance and
damages against the PH Credit Corporation
and Philippine Holding, Incorporated.
Plaintiff spouses Chui and Felisa Tan Yu
alleged that defendant corporation and Francisco
Villaroman, sold the property without affording
them (the plaintiffs-spouses) the right of
first refusal to purchase that portion of
the property which they are renting.
Plaintiff Rebecca C. Young, now petitioner,
also claimed the right of the first
refusal purportedly granted to her under
the aforestated proviso of the abovesaid
compromise agreement and prayed that
the sale be annulled and that they
be allowed to exercise her right of
first refusal to purchase subject property (Rollo,
p. 50).
The lower court decided in favor of
the defendants and against the plaintiffs,
thus dismissing the complainttogether with
defendants’ counterclaims (Rollo, p. 15).
On the other hand, the claim of Rebecca
C. Young was similarly rejected by the
trial court on the following grounds: (1)
that she was not a party in
the Civil Case No. 123883, wherein subject
compromise agreement was submitted and
approved by the trial court apart from
the fact that she did not even
affix her signature to the said
compromise agreement; (2) that Rebecca
Young had failed to present any evidence
to show that she had demanded
from the defendants-owners, observance of her
right of first refusal before the said owners
sold units 1356, 1358 and 1360;(3) that
art. 1311 COntraCts 319
General Provisions

even assuming that her supposed right of

first refusal is a stipulation for
the benefit of a third person, she
did not inform the obligor of her
acceptance as required by the second
paragraph of Article 1311 of the Civil
Code.
Chui Wan and Felisa Tan Yu and
Rebecca C. Young, assisted by her husband,
appealed to the Court of Appeals which
dismissed the same on August 7, 1987,
for lack of merit.
The petition is devoid of merit.
xxx xxx xxx
Petitioner further argued that the stipulation
giving her the right of first refusal
is a stipulation pour autrui or a stipulation in
favor of a third person under Article
1311 of the Civil Code. xxx xxx xxx
Assuming that petitioner is correct in claiming
that this is a stipulation pour autrui, it is
unrebutted that she did not
communicate her acceptance whether expressly
or impliedly. She insists however, that
the stipulation has not yet been
revoked, so that her present claim or
demand is still timely.
As correctly observed by the Court of Appeals,
the above argument is pointless, considering
that the sale of subject property to
some other person or entity constitutes
in effect a revocation of the
grant of the right of first refusal
to Rebecca C. Young.

Article 1312. In contracts creating real rights, third persons who come into
possession of the object of the contract are bound thereby, subject to the
provisions of the Mortgage Law and the Land Registration Law. (n)
320 ObligatiOns and COntraCts art. 1311
Text and Cases

The article provides another example when a third

person not a party to a contract is
affected or may be subject to its provisions.
Thus, a lease of real estate recorded in the
Registry of Property between a lessor and a lessee
shall bind a subsequent buyer who purchases
and comes into the possession of the
contract’s object which is the property leased. The
latter is bound to honor the contract entered into
by the former lessor. Likewise, a sublessee
is bound by the contract of the lessor and
the lessee. Hence, if the lessor terminates the
lease contract for a valid cause, the sublessee
can be ejected from the leased premises even if
he is not a party to the lease
contract. Likewise, if the lessor was successful
in judicially ejecting the lessee,
321 ObligatiOns and COntraCts
Text and Cases
arts. 1312-1313

the following can likewise be ejected despite the

fact that they were not made parties to the
ejectment suit: a) trespassers, squatters, or
agents of the defendant-lessee fraudulently occupying
the property to frustrate the judgment; b) guest
or other occupants of the premises with the
permission of the defendant-lessee; c) transferees
pendente lite; d) sub-lessees; e) co-lessees; f)
members of the family, relatives and other
privies of the defendant-lessee.58
Also, a property mortgaged as a collateral
of a debt and recorded in the Registry of
Property shall bind any subsequent possessor-owner of
the same.59
Article 1313. Creditors are protected in cases of contracts intended to
defraud them. (n)

The articles provides another example when a third

person not a party to a contract is
affected by such contract. The objective of a
contract is to be able to bind the
parties to perform a particular obligation
consistent with the provisions and the spirit
of the contract. For this purpose, creditors are
protected with respect to contracts intended to
defraud them. Hence, Article 1381(3) provides that a
contract shall be rescissible if it is
undertaken in fraud of creditors when the latter
cannot in any other manner collect the claim due
them. In such a case, even if the
creditor is not a party to the contract
intended to defraud him, he is given legal
personality by law to terminate the
contract.
Article 1314. Any third person who induces another to violate his contract
shall be liable for damages to the other contracting party. (n)

Contracts are binding between and among the

parties who entered into the same. The parties
therefore are expected to comply with the
322 ObligatiOns and COntraCts art
Text and Cases
contract in keeping with good faith, usage and law.
Contract is a source of obligation and has
the force of law between the contracting
parties.
But while a contract between two parties
cannot impose on a stranger, without his
assent, a liability in accordance with
the terms of the contract, it is
nevertheless true that a stranger does
owe to the parties to the agreement
a duty not to interfere

William F. Elliott, Commentaries on the Law of Contracts, Volume II,

1913 Edition, Indianapolis, The Bobbs-Merrill Company, Page
659.
Article 1166 of the 1950 Civil Code.
Article 1165 of the 1950 Civil Code.
EDCA Publishing vs. Santos, G.R. No. L-80298, April 26,
1990, 184 SCRA 614; . 1314

with its performance. All persons are

under a duty to respect the rights of
others. The law recognizes that a
contract confers certain rights on the person
with whom it is made, and not only
binds the parties to it by the
obligation entered into, but also imposes on
all the world, in a sense at
least, the duty of respecting the
contractual obligation. x x x
This doctrine is not confined to contract
of services. It covers every case where
one person maliciously persuades another to
break any contract with a third person.
When loss ensues, malice is the gist
of the action for wantonly or
maliciously inducing one to break his
contract with intent to injure another. This
does not mean that acts done under
the right of competition or under
cover of friendly neighborly counsel or
mere persuasion are, generally speaking, wrongful
in law or in fact. Still if
the persuasion be used for the
indirect purpose of injuring the plaintiff, or
benefiting the defendant, at the
expense of the plaintiff, it is a
art COntraCts 323
General Provisions

malicious act, which, in law and in

fact, is a wrongful act and therefore
an actionable act of injury issued
from it. But with this explanation
it may be said that in order
to recover in such an action malice
must be shown to exist. It is
also true that no liability ordinarily attaches
where the party sought to be charged
in damages was acting in the lawful
exercise of some distinct right. Moreover,
if none of the legal rights of
the plaintiff are interfered with, an action
for damages cannot be maintained, An
action for damages is not, however, the
sole remedy. In a proper case one
may properly be enjoined from in any
way procuring the violation of lawful and
valid contract. While the one who violates
his contract may be personally liable
to the other party thereto for its
breach, the party guilty of such breach
may, nevertheless, recover against the one
who induces him to violate his contract
when the latter, by such acts and
persuasion, intended to injure the other
contracting party or to coerce him
into adopting a line of business
against his will and judgment.60

Hence, if for example, A was contracted

by B to be the resident painter in his
studio for one year and C maliciously
induces B to dishonor the contract so that he
can go to C’s studio, C can be liable
for damages under Article 1314.
In Song Pin Bun vs. Court of Appeals,61 a company
(Tek Hua Enterprises) leased property from the lessor
DCCSI. After the lease expired, the company still
occupied the premises. When the managing
324 ObligatiOns and COntraCts art
Text and Cases
partner of Tek Hua Enterprises died, the son,
So Ping Bun, of the said managing
partner took possession of the premises for his
own company, Trendsetter Marketing, using the
leased premises as warehouse for his textile
business. Hence, Tek Hua asked So Ping Bun
and Trendsetter Marketing to vacate the
premises. They refused
. 1314

and instead asked the lessor for the execution

of formal contracts of lease with his own
corporation. The lessor agreed. The lease contracts
were executed. Tek Hua Enterprises sued for
the nullification of the lease contracts on
the ground of contractual interference under
Article 1314 of the Civil Code. Tek Hua
Enterprises won but did not order So Ping
Bun and his company to pay damages.
They were only ordered to pay attorney’s fees.
Trendsetter Marketing and the son of the
deceased managing partner of Tek Hua
Enterprises contend that since no award of
damages were imposed, they were not liable for
attorneys fees. The Supreme Court rejected this
contention by explaining the concept of tort
interference, thus:
The foregoing issues involve, essentially, the
correct interpretation of the applicable
law on tortuous conduct, particularly unlawful
interference with contract. We have to
begin, obviously, with certain fundamental
principles on torts and damages.
Damage is the loss, hurt, or harm
which results from in-jury, and damages are
the recompense or compensation awarded
for the damage suffered. One becomes liable
in an action for damages for a
non-trespassory invasion of another’s interest in
the private use and enjoyment of
asset if: (a) the other has property
rights and privileges with respect to the
use or enjoyment interfered with, (b)
the invasion is substantial, (c) the
art COntraCts 325
General Provisions

defendant’s conduct is a legal cause

of the invasion, and (d) the invasion
is either intentional and unreasonable
or unintentional and actionable under
general negligence rules.
The elements of tort interference are:
(1) existence of a valid contract; (2)
knowledge on the part of the
third person of the existence of contract;
and (3) interference of the third
person is without legal justification or
excuse.
A duty which the law of torts is
concerned with is respect for the
property of others, and a cause of
action ex delicto may be predicated upon
an unlawful interference by one person
of the enjoyment by the other
of his private property. This may pertain
to a situation where a third person
induces a party to renege on or
violate his undertaking under a contract.
In the case before us, petitioner’s
Trendsetter Marketing asked DCCSI to
execute lease contracts in its favor, and
as a result petitioner deprived respondent
corporation of the latter’s property right.
Clearly, and as correctly viewed by the
appellate court, the three elements of tort
interference above-mentioned are present in
the instant case.
Article 1475 of the New Civil Code.
68
Heirs of Quirico Seraspi vs. Court of
Appeals, G.R. No. 135602, April 28, 2000, 125 SCAD
749.
Articles 1868 to 1932 of the 1950 Civil Code.
. 1314
326 ObligatiOns and COntraCts art
Text and Cases
Authorities debate whether interference may be justified
where the defendant acts for the sole
purpose of furtheringhis own financial or economic
interest. One view is that, as a
general rule, justification for interfering
with the business relations of another exists
where the actor’s motive is to benefit
himself. Such justification does not exist where
his sole motive is to cause harm
to the other. Added to this, some
authorities believe that it is not
necessary that the interferer’s interest outweigh
that of the party whose rights are
invaded, and that an individual acts
under an economic interest that is
substantial, not merely de minimis, such
that wrongful and malicious motives are nega-
tived, for he acts in self-protection.
Moreover, justification for protecting
one’s financial position should not be made
to depend on a comparison of
his economic interest in the subject matter
with that of others. It is sufficient
if the impetus of his conduct lies
in a proper business interest than in
wrongful motives.
As early as Gilchirst vs. Cuddy,62 we
held that where there was no malice
in the interference of a contract,
and the impulse behind one’s conduct lies
in a proper business interest rather than
in wrongful motives, a party cannot be
a malicious interferer. Where the alleged interferer
is financially interested, and such
interest motivates his conduct, it cannot be
said that he is an officious or
malicious intermeddler.
In the instant case, it is clear that
petitioner So Ping Bun prevailed upon DCCSI
to lease the warehouse to his
enterprise at the expense of respondent
corporation. Though petitioner took interest in
the property of respondent corporation
and benefited from it, nothing on record
imputes deliberate wrongful motives or malice on
him.
art COntraCts 327
General Provisions

Section 1314 of the Civil Code

categorically provides also that, “any third
person who induces another to violate his
contract shall be liable for damages to
the other contracting party.” Petitioner argues
that damage is an essential element of
tort interference, and since the trial
court and the appellate court ruled that
private respondents were not entitled to
actual, moral or exemplary damages, it
follows that he ought to be absolved
of any liability, including attorney’sfees.
It is true that the lower courts did
not award damages, but this was only
because the extent of damages was not
quantifiable. We had a similar situation
in Gilchrist, where it was difficult or
impossible to determinethe extent of
damage and there was nothing on record
to serve as basis thereof. In that
case,
We refrained from awarding damages. We believe the same

Article 1868 of the 1950 Civil Code.

. 1315

conclusion applies in this case.

While we do not encourage tort
interferers seeking their economic interest to
intrude into existing contracts at the expense
of others, however, we find that the
conduct herein complained of did not
transcend the limits forbidding an obligatory
award for damages in the absence of
any malice. The business desire is there
328 ObligatiOns and COntraCts art
Text and Cases
to make some gain to the detriment
of the contracting parties. Lack of
malice, however, precludes damages. But it does
not relieve petitioner of the legal liability
for entering into contracts and causing breach
of existing ones. The respondent court
correctly confirmed the permanent injunction
and nullification of the lease contracts
between DCCSI and Trendsetter Marketing,
without awarding damages. The injunction saved
the respondents from further damage or
injury caused by petitioner’s interference.

Article 1315. Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law. (1258)

Article 1316. Real contracts, such as deposit, pledge and commodatum, are
not perfected until the delivery of the object of the obligation. (n)

A contract is the law between the parties. Any

non-fulfillment of the contract will make the
violator liable. The law likewise states that the
parties are bound to fulfill all the consequences
which, according to their nature, may be in
keeping with good faith, usage and the law. Thus
the parties are bound to exercise the diligence
of a good father of a family with
respect to the thing sought to be delivered
unless there is another standard of care stipulated
by the parties or required by a law.63 There
is an implied obligation or duty to do
the act contracted to be performed with
reasonable care in order that the person or
property of others may not be injured by any
force which he sets in motion or by any
agent or agency for which he is responsible.64
They are likewise obliged to deliver with the
determinate thing which is the object of the
contract all its accessions and accessories even
though they may not have been mentioned.65 They
shall be liable for fortuitous event in case
of delay.66
art COntraCts 329
General Provisions

Generally, a contract is perfected by mere

consent of the parties. For example, a
contract of sale is consensual and is
perfected once agreement is reached between the
parties on the subject matter and
 COntraCts 330General Provisions
arts. 1315-1316

the consideration.67 However, ownership over the

object of the contract of sale is transferred
only upon actual or constructive delivery.68
There are also contracts which are perfected,
not by mere consent alone, but by the
delivery of the object of the contract. These are
real contracts such as deposit, pledge and
commodatum.
An accepted promise to deliver something by way
of commodatum is binding upon the parties, but the
commodatum itself shall be perfected upon the
delivery of the object of the contract (Article
1934). Delivery is essential in commodatum because, in such
a contract, the bailee in commodatum acquires the
use of the thing loaned but not its fruits.
Hence, if he does not have the object
which he is entitled to make use, there can
never be perfection. The contract can not be
implemented.
A contract of pledge is constituted by the
owner of the object to be pledged to
secure a loan. In a pledge, it is
indispensable that the thing pledged be placed in
the possession of the creditor, or of a
third person by common agreement. This transfer of
possession is a requirement of law under
Article 2093. Hence, before a contract of pledge can
be perfected, the object pledged must first be
delivered.
Delivery is also required before a contract of
deposit is perfected because, under Article 1962, a
deposit is constituted from the moment a
person receives a thing belonging to another, with
the obligation and principal purpose of safely
keeping it and of returning the same.

Article 1317. 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.
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
 art. 1317 COntraCts 331General Provisions
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been

Article 1910 of the 1950 Civil Code.

Article 1911 of the 1950 Civil Code.
Article 1887 of the 1950 Civil Code.
Article 1874 of the 1950 Civil Code.
Executive Order No. 209 which took effect on August
3, 1988.
Article 220(6) of the Family Code of the
Philippines.
Article 225 of the Family Code of the
Philippines.
Id.
Id.
executed, before it is revoked by the other contracting party. (1259a)

Normally, a person can contract in the name

of another if such person has been validly
constituted as an agent of the latter. The
laws on agency will apply.69 By the contract of
agency, a person binds himself to render some
service or to do something in representation
or on behalf of another, with the consent or
authority of the latter.70 The principal of the
agent must comply with all the obligations
which the agent may have contracted within the
scope of his authority. As for obligation
wherein the agent has exceeded his power, the
principal is not bound except when he ratifies it
expressly or tacitly.71 Even when the agent
exceeded his authority, the principal is
solidarily liable with the agent if the
former allowed the latter to act as though he
had full powers.72 In the execution of
the agency, the agent shall act in accordance
with the instructions of the principal. In
default thereof, he shall do all that a good
father of a family would do, as required by
the nature of the business.73 When a sale
of a piece of land or any interest
therein is through an agent, the authority of
the latter shall be in writing; otherwise, the
sale shall be void.74
An example of a law which gives a right
to certain persons to represent another is the
332 ObligatiOns and COntraCts art. 1317
Text and Cases
Family Code of the Philippines.75 Specifically, the
parents and those exercising parental authority have
the right and duty to represent their
unemancipated children in all matters affecting their
interests.76 The father and the mother shall be
the legal guardian of the property of the
unemancipated common child without the necessity of
a court appointment.77 In case of disagree-ment,
the father’s decision shall prevail unless there is a
judicial order to the contrary.78 Parents can enter
into contract with respect to properties of their
children even without court approval if this will
involve only simple acts of administration like
repairs of properties owned by the children.
However, with respect to acts of dominion
like selling, encumbering or alienating the
properties of their children, court authority is
needed; otherwise the contract shall be considered
void. To protect the interest of the children, the
law requires that where the value of the
property or the annual income of the child
exceeds P50,000.00, the parent concerned shall be
required to furnish a bond in such amount as
the court may determine, but not less than
ten per centum (10%) of the value of the
property or annual income, to

Regal Films, Inc. vs. Concepcion, G.R. No.

139532, August 9, 2001.
G.R. No. L-53820, June 15, 1992, 209 SCRA 763.
G.R. No. 139532, August 9, 2001, 152 SCAD 547.
guarantee the performance of the obligations
prescribed for general guardians.79
However, a contract entered into in the name
of another by one who ostensibly might have
but who, in reality, had no real authority
or legal representation, or who, having such
authority, acted beyond his powers, would be
unenforceable80 unless it is ratified, expressly or
impliedly, by the person on whose behalf it
has been executed, before it is revoked by
the other contracting party. In Yao Ka Sin vs. Court of
Appeals,81 where the president and chairman
of a corporation entered into a contract with
another corporation, but where such president and
 art. 1317 COntraCts 333General Provisions
chairman had no authority under the law
or the corporate bylaws to enter into such
agreement, the Supreme Court ruled that the
contract entered into by such corporate official was
unenforceable under Article 1317. The Supreme Court
reached this conclusion in the following
manner:
The respondent Court correctly ruled that
Exhibit “A” is not binding upon the
private respondent. Mr. Maglana, its President
and Chairman, was not empowered
to execute it. Petitioner, on the
other hand maintains that it is a
valid contract because Mr. Maglana has the
power to enter into contracts for the
corporation as implied from the following
provisions of the By-Laws of private
respondent:
a) The power of the Board of Directors
to “. . . enter into (sic)
agreement or contract of any kind
with any person in the name and
for and in behalf of the
corporation through its President,subject only
to the declared objects and purpose of
the corporation and the existing provisions
of law” (Exhibit “8-A”); and
b) The power of the Chairman of the
Board of Directors to “execute and sign,
for and in behalf of the
corporation, all contracts or agreements
which the corporation may enter into
(Exhibit “I-1”).
And even admitting, for the sake of
argument, that Mr.

Maglana was not so authorized under the

By-Laws, the private respondent, pursuant to the
doctrine laid down by this Court in
Francisco vs. Government Service Insurance System and Board of
Liquidators vs. Kalaw, is still bound by his
act for clothing him with apparent authority.
We are not persuaded.
334 ObligatiOns and COntraCts art. 1317
Text and Cases
Since a corporation, such as the
private respondent, can act only through
its officers and agents, “all acts within
the powers of said corporation may
be performed by agents of its
selection; and, except so far as limitations
or restrictions may be imposed by
special charter, by-laws, or statutory provisions,
the same general principles of law which
govern the relation of agency for a
natural person govern the officer or agent
of a corporation, of whatever status
or rank, in respect to his power
to act for the corporation; and
agents when once appointed, or members
acting in their stead, are subject to
the same rules, liabilities and incapacities
as are agents of individuals and
private persons. Moreover, “x x x
a corporate officer or agent may represent
and bind the corporation in
transactions with third persons to the
extent that authority to do so has
been conferred upon him, and this includes
powers which have been intentionally conferred,
and also such powers as, in the
usual course of the particular business, are
incidental to, or may be implied from,
the powers intentionally conferred, powers
added by custom and usage, as usually
pertaining to the particular officer or
agent, and such apparent powers as the
corporation has caused persons dealing with
the officer or agent to believe that
it has conferred.”
While there can be no question that
Mr. Maglana was an officer — the
President and Chairman — of private
respondent corporation at the time
he signed Exhibit “A,” the above provisions
of said private respondent’s By-Laws do
not in any way confer upon the
President the authority to enter into contracts
for the corporation independently of
the Board of Directors. That power is
exclusively lodged in the latter.
Nevertheless, to expedite or facilitate the
execution of the contract, only the President
 art. 1317 COntraCts 335General Provisions
— and not all the members of
the Board, or so much thereof as
a required for the act — shall
sign it for the corporation. This
is the import of the words through
the president in Exhibit “8-A” and the
clear intent of the power of the
chairman “to execute and sign for and
in behalf of the corporation all
contracts and agreements which the
corporation may enter into” in Exhibit
“I-1.” Both powers presuppose a prior
act of the corporation exercised through
the Board of Directors. No greater power
can be implied from such express, but
limited, delegated authority. Neither can it

be logically claimed that any power greater than

that expressly conferred is inherent in Mr.
Maglana’s position as president and chairman
of the corporation.
Although there is authority “that if the
president is given general control and
supervision over the affairs of the
corporation, it will be presumed that
he has authority to make contracts and
do acts within the course of its
ordinary business,” We find such
inapplicable in this case. We note
that the private corporation has a
general manager who, under its By-Laws has,
inter alia, the following powers: “(a) to have
the active and direct management of
the business and operation of the
corporation, conducting the same according
to the order, directives or resolutions
of the Board of Directors or of
the president.” It goes without saying
then that Mr. Maglana did not have
a direct and active hand in the
management of the business and operations
of the corporation. Besides, no evidence
was adduced to show that Mr. Maglana
had, in the past, entered into contracts
similar to that of Exhibit “A” either
with the petitioner or with other parties.
Petitioner’s last refuge then is his alternative
proposition, namely, that private respondent
336 ObligatiOns and COntraCts art. 1317
Text and Cases
had clothed Mr. Maglana with the apparent
power to act for it and had
caused persons dealing with it to believe
that he was conferred with such power.
The rule is of course settled that
“[a]lthough an officer or agent acts
without, or in excess of, his actual
authority if he acts within the scope
of an apparent authority with which the
corporation has clothed him by holding
him out or permitting him to
appear as having such authority, the
corporation is bound thereby in favor
of a person who deals with him
in good faith in reliance on such
apparent authority, as where an officer is
allowed to exercise a particular authority with
respect to the business, or a parti-cular
branch of it, continuously and publicly,
for a considerable time.” Also, “if
a private corporation intentionally or
negligently clothes its officers or agents
with apparent power to perform acts for
it, the corporation will be estopped
to deny that such apparent authority is
real, as to innocent third persons dealing
in good faith with such officers or
agents.” This “apparent authority may result from
(1) the general manner by which the
corporation holds out an officer or
agent as having power to act or,
in other words, the apparent authority with
which it clothes him to act in
general, or (2) the acquiescence in
his acts of a particular nature, with
actual or constructive knowledge thereof,
whether within or without the scope of
his ordinary powers.”
It was incumbent upon the petitioner to
prove that indeed the private respondent
had clothed Mr. Maglana with the apparent
power to execute Exhibit “A” or any
similar contract. This could have been easily
done by evidence of similar acts executed
either in its favor or in favor of
other parties. Petitioner miserably failed to
do that. Upon the other hand, private
respondent’s evidence overwhelmingly shows that no
 art. 1317 COntraCts 337General Provisions
contract can be signed by the president
without first being approved by the Board
of Directors;such approval may only be
given after the contract passes through, at
least, the comptroller, who is the
NIDC representative, and the legal counsel.
The cases then of Francisco vs. GSIS and Board of
Liquidators vs. Kalaw are hopelessly unavailing
to the petitioner. In said cases,
this Court found sufficient evidence, based on
the conduct and actuations of the
corporations concerned, of apparent authority
conferred upon the officer involved which bound
the corporations on the basis of
ratification. In the first case, it
was established that the offer of
compromise made by plaintiff in the
letter, Exhibit “A,” was validly accepted by
the GSIS. The terms of the offer
were clear, and over the signature of
defendant’s general manager, Rodolfo Andal, plaintiff
was informed telegraphically that her proposal
had been accepted. It was sent by
the GSIS Board Secretary and defendant did
not disown the same. Moreover, in
a letter remitting the payment of P30,000
advanced by her father, plaintiff quoted verbatim
the telegram of acceptance. This was
in itself notice to the corporation
of the terms of the allegedly
unauthorized telegram. Notwithstanding this notice,
GSIS pocketed the amount and kept silent
about the telegram. This Court then ruled
that:
“This silence, taken together with the
unconditional acceptance of three other
subsequent remittances from plaintiff, constitutes
in itself a binding ratification of
the original agreement (Civil Code, Art.
1393).
‘ART. 1393. Ratification may be effected
expressly or tacitly. It is understood
that there is a tacit ratification
if, with knowledge of the reason
which renders the contract voidable and such
reason having ceased, the person who has
a right to invoke it should execute
338 ObligatiOns and COntraCts art. 1317
Text and Cases
an act which necessarily implies an
intention to waive his right.’ ”
In the second case, this Court found:
“In the case at bar, the practice of
the corporation has been to allow
its general manager to negotiate and execute
contracts in its copra trading activities for
and in NACOCO’s behalf without prior
board approval. If the by-laws were to
be literally followed, the board should give
its stamp of prior approval on all
corporate contacts, but that board itself, by
its acts and through acquiescence, practically
laid aside the by-law require-ment of
prior approval.
Under the given circumstances, the Kalaw
contracts are valid corporate acts.”
The inevitable conclusion then is that
Exhibit “A” is an unenforceable contract
under Article 1317 of the Civil Code
which provides as follows:
ARTICLE 1317. 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.
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, unless it is ratified, expressly
or impliedly, by the person on
whose behalf it has been executed, before
it is revoked by the other
contracting party.”

The unenforceable contract however can be ratified

expressly or impliedly by the person on
whose behalf it has been executed, before it
is revoked by the other contracting party. In
Regal Films vs. Concepcion,82 the agent of a
certain movie actor entered into an agreement with
Regal Films designed to constitute as an
addendum to the original agreements between the
movie actor and Regal Films so that the
lawsuit between the movie actor and Regal Films will
finally be settled. The movie actor however disavowed
 art. 1317 COntraCts 339General Provisions
the agreement entered into by the agent
contending that, by the time the agent
transacted the addendum, she was not anymore his
agent. Hence in the preliminary conference in
court, Regal Films intimated to the movie actor
that it was willing to release him from the
original contracts instead of pursuing the addendum.
Thereupon, the movie actor surprisingly manifested
to the court that he was accepting the
addendum. On the basis of this acceptance,
a decision by way of a compromise
agreement was entered by the court. On
appeal to the Supreme Court by Regal Films, the
Supreme Court ruled that the compromise agreement
which was the basis of the decision cannot be
enforced. The Supreme Court said:
A compromise is an agreement between
two or more persons who, for preventing
or putting an end to a lawsuit,
adjust their respective positions by mutual
consent in the way they feel they
can live with. Reciprocal concessions
are the very heart and life of
every compromise agreement, where each
party approximates and concedes in the
hope of gaining balanced by the danger
of losing. It is, in essence, a
contract. Law and jurisprudence recite three
minimum elements for any valid contact —
(a) consent; (b) object certain which is
the subject matter of the contract; and
(c) cause of the obligation which
is established. Consent is manifested
by the meeting of the offer and
the acceptance upon the thing and
the cause which are to constitute the
agreement. The offer, however, must be
certain and the acceptance seasonable
and absolute; if qualified, the acceptance
would merely constitute a counter-offer.
In this instance, the addendum was flatly
rejected by the respondent on the
theses (a) that he did not give
his consent thereto nor authorized anyone
to enter into the agreement, and
(b) that it contained provisions grossly
disadvantageous to him. The outright rejection
340 ObligatiOns and COntraCts art. 1317
Text and Cases
of the addendum made known to
the other ended the offer. When
respondent later filed his Manifestation,
stating that he was, after all, willing
to honor the addendum, there was
nothing to still accept.
Verily, consent could be given not only
by the party himself but by anyone
duly authorized and acting for and
in his behalf. But by respondent’s
own admission, the addendum was
entered into without his knowledge and
consent. A contract entered into in the
name of another by one who ostensibly
might have but who, in reality, had
no real authority or legal representation,
or who, having such authority, acted beyond
his powers, would be unenforceable. The
addendum, let us then assume resulted
in an unenforceable contract, might it
not then be susceptible to
ratification by the person on whose
behalf it was executed?The answer would
obviously be in the affirmative; however,
that ratification should be made before
its revocation by the other
contracting party. The adamant refusal of
respondent to accept the terms of
the addendum constrained petitioner,
during the preliminary conference held
on 23 June 1996, to instead express
its willingness to release respondent
from his contracts prayed for in his
complaintand to thereby forego the rejected
addendum. Respondent’s subsequent attempt to
ratify the addendum came much too
late for, by then, the addendum had
already been deemed revoked by petitioner.
art. 1317 COntraCts 341General Provisions
art. 1317 COntraCts 321 General Provisions
322 ObligatiOns and COntraCts Text
and Cases

Chapter 2

ESSENTIAL REQUISITES OF CONTRACTS

General Provisions

Article 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established. (1261)

When the law uses the word “concur,” it

means that all the three (3) requisites must
be present. The absence of one requisite negates the
existence of a contract. The requisites are
discussed in more detail in the next
sections. Absence of any one of the requisites
creates an inexistent contract. It produces no
effect.
So also, inexistent contracts can be invoked by
any person whenever juridical effects founded thereon
are asserted against him. A transferor can
recover the object of such contract by
accion reinvidicatoria and any possessor may
refuse to deliver it to the transferee,
who cannot enforce the transfer.189

189
Modina vs. Court of Appeals, G.R. No. 109355,
October 29, 1999, 115 SCAD 130, 317 SCRA
696.
The rule on pari delicto as between the parties does not
apply in cases of inexistent contracts.190

322
323

SECTION 1. — Consent

Article 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract.
The offer must be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does not bind the offerer except from
the time it came to his knowledge. The contract, in such a case, is presumed
to have been entered into in the place where the offer was made. (1262a)

Article 1320. An acceptance may be express or implied. (n)

Consent is the concurrence of the wills of

the offerer and the acceptor as to the thing
and the cause which constitute a contract. An
offer is a manifestation of a willingness
to enter into a bargain so made as to
justify another person in understanding that his
assent to that bargain is invited and will
conclude it.1
But even though the offer is made
with the intention that its acceptance
will create mutual obligations, it will

190
Ibid.
 not accomplish this purpose unless its
terms are sufficiently complete. It must
be so complete that its acceptance
will form an agreement containing
all the terms necessary and intended by
the parties, for it is obvious that
there can be no agreement until
its terms are settled, and that an
offer which is not complete is merely
a step in the negotiations.191

Making an offer means inviting an acceptance

which, if given, will finally create a contract. The
offer therefore empowers the person offered to
create a contract.
A negotiation is formally initiated by an
offer. An imperfect
promise1John D. Calamari(policitacion and
Joseph) is merely M. Perillo, an offer. The Law of
Contracts, Public advertisements Third edition,
West Publishing Co., St. Paul., Minn., 1987, page 32,
citing Restatement, Second, Contracts, 39.

191
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
Indianapolis, The Bobbs-Merrill Company, 1913, Page
30.

323
346 ObligatiOns and COntraCts arts
Text and Cases

. 1319-1320

or solicitations and the like are ordinarily construed

as mere invitations to make offers
or only as proposals. These relations,
until a contract is perfected, are not
considered binding commitments. Thus, at
any time prior to the perfection
of the contract, either negotiating party
may stop the negotiation. The offer,
at this stage, may be withdrawn;
the withdrawal is effective immediately
after its manifestation, such as by
its mailing and not necessarily when
the offeree learns of the withdrawal
(Laudico vs. Arias, 43 Phil. 270).192

If there is no acceptance, there can be

no concurrence of will and therefore no
consent to form a contract. In Salonga vs. Farrales 193
where, by way of compromise, the defendant
merely offered the property but which offer was not
accepted, the Supreme Court ruled that it is
quite obvious that there was no consent and
stated:
It is elementary that consent is an
essential element of the existence of a
contract, and when it is wanting, the
contract is non-existent. The essence of
consent is the conformity of the
parties on the terms of the contract,
the acceptance by one, of the
offers made by the other. The contract
to sell is a bilateral contract. Where
there is merely an offer by one
party, without the acceptance of the
other, there is no consent.

192
Ang Yu Asuncion vs. Court of Appeals, G.R. No.
109125, December 2, 1994, 57 SCAD 163, 238
SCRA 602.
193
G.R. No. L-47088, July 10, 1981, 105 SCRA 359.
 COntraCts 347
Essential Requisites of Contracts
Sec. 1 — Consent

It appears in this case that the offeree,

the defendantappellee Julita B. Farrales not
only did not accept, but rejected the
offer of the plaintiffs-appellants, spouses
Salonga, to buy the land in question.
There being no consent, there is, therefore,
no contract to sell to speak of.

Once there is acceptance, it must be

absolute.It may be express or implied.194 In
Adelfa Properties, Inc. vs. Court of Appeals,195196 the Supreme Court had
the occasion to explain how acceptance can be
made particularly in a contract of sale, to
wit:
The rule is that except where a
formal acceptance is so required, although
the acceptance must be affirmatively
and clearly made and must be evidenced
by some acts or conduct communicated
to the offeror, it may be made
either in a formal or an informal
manner, and may be shown by acts,
conduct, or words of the accepting party
that clearly manifest a present intention or
determination to accept the offer to
buy or sell. Thus, acceptance
arts. 1319-1320

may be shown by the acts, conduct or

words of a party recognizing the existence of
the contract of sale.

Acceptance must be unconditional. It must be

identical to the terms of the offer. It must
not vary from the proposal either by way of
omission, addition or alteration.7 If it does,

194
Limson vs. Court of Appeals, G.R. No. 135929, April
20, 2001, 147 SCAD 887.
195
G.R. No. L-111238, January 25, 1995, 58 SCAD 462,
240 SCRA 565.
196
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
348 ObligatiOns and COntraCts arts
Text and Cases

neither party is bound197 as the acceptance is

qualified. But an acceptance is not
conditional because the acceptor expresses dissatisfaction
with the offer, yet nevertheless gives his
unqualified assent, nor because he adds immaterial
words.198If the acceptance is qualified, it
is considered by the law as a
counter-offer and, space between “s” and “in” in
this regard,
both the modified acceptance and an
unconditional assent after such modified
acceptance are in effect nothing more
than counter propositions that must be
assented to by the original offerer before
any binding obligation is fastened on
the parties. In case the original proponent
accedes to the modification imposed and
gives notice to that effect, the contract
is concluded. It is not necessary
in every instance that an express assent
to the modified acceptance be shown.
If the parties proceed with their contract
as if the condition of the
acceptance were a part of it,
this is as effectual as an
acceptance as if the changes had
been formally assented to.199

In Jardine Davies vs. Court of Appeals200201 where the

company accepted the bid or offer of a
particular supplier based on the latter’s proposals
and stated in its letter of acceptance that
the awarding of the project to the said
supplier was subject to certain basic terms and
conditions such as: 1) payment shall be on
a progress billing basis with a guarantee bond;
2) the project shall be undertaken pursuant to

197
Id.
198
Id., Pages 44-45.
199
Id., Pages 50-51.
200
G.R. No. 128066, June 19, 2000, 128 SCAD 20,
333 SCRA 684.
201
G.R. No. 124045, May 21, 1998, 94 SCAD 679,
290 SCRA 532; Romero vs. Court
 COntraCts 349
Essential Requisites of Contracts
Sec. 1 — Consent

the attached specifications; 3) all materials that

will be used in the project shall be brand
new; 4) the project must commence immediately
and completed within 20 working days; 5) the
supplier must submit a performance bond and a
contractor’s all-risk insu-rance; 6) there is a
warranty of one year against defective material
and/or workmanship, the Supreme Court said that the
“terms and conditions” stated in the letter of
acceptance were not tantamount to a
qualified acceptance, thus:
While the same letter enumerated certain “basic terms
and conditions,” these conditions were
imposed on the performance of
Indianapolis,the obligation The Bobbs-Merrill rather than
Company, on the perfection 1913, Page
of 46. the contract. Thus
. 1319-1320

the first “condition” was merely a reiteration of the

contract price and billing scheme based on
the Terms and Conditions of Bidding
and the bid or previous offer of
respondent FEMSCO. The second and
third “conditions” were nothing more than
general statements that all items and
materials including those excluded in the list
but necessary to complete the project shall
be deemed included and should be brand
new. The fourth “condition” concerned
the completion of the work to
be done, i.e., within twenty (20) days
from the delivery of the generator set,
the purchase of which was part of
the contract. The fifth “condition” had
to do with putting up of a
perfomance bond and an all risk
insurance, both of which should be
given upon commencement of the project.
The sixth “condition” related to the
standard warranty of one (1) year. In
fine, the enumerated “basic terms and
350 ObligatiOns and COntraCts arts
Text and Cases

conditions” were prescriptions on how

the obli-gation was to be performed
and implemented. They were far from
being conditions imposed on the perfection
of the contract.
In Babasa vs. Court of Appeals,12 we distinguished
between a condition imposed on the perfection
of a contract and a condition imposed
merely on the performance of an
obligation. While failure to comply with
the first condition results in the failure
of a contract, failure to comply with
the second merely gives the other party
options and/or remedies to protect interests.
xxx xxx xxx
But even granting arguendo that the 12
December 1992 letter of petitioner
PUREFOODS constituted a “conditional
counter-offer,” respondent FEMCO’s
submission of the performance bond
and contractor’s all-risk insurance was an
implied acceptance, if not a clear
indicationof its acquiescence to, the
“conditional counter-offer,” which expressly stated
that the performance bond and
contractor’s all-risk insurance should be given
upon the commencement of the contract.
Corollarily, the acknowledgment thereof by
petitioner PUREFOOD, not to mention its
return of FEMSCO’S bidder’s bond, was
a concrete manifestation of its
knowledge that respondent FEMSCO
indeed consentedto the “conditional counter-
offer.” After all, as earlier adverted to,
an acceptance may be express or
implied, and this can be inferred from
the contemporaneous and subsequent acts
of the contracting parties.

The law likewise provides that acceptance made by

letter or telegram does not bind the offerer
except from the time it came to his
knowledge.of Appeals, G.R. The No. requirement
 COntraCts 351
Essential Requisites of Contracts
Sec. 1 — Consent

107207, November is that 23, 1995the person, 65

SCAD making 621, 250 the SCRA offer 223 must;
Lim vs. Court of Appeals, G.R. No.
118347, October 24, 1996, 75 SCAD 574.
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
art COntraCts 352
Essential Requisites of
Contracts Sec. 1
— Consent

. 1321

have actual knowledge of the acceptance. Hence, if

A offered to B his property and B,
through telegram, sent his acceptance but,
before A actually received the telegram, he
informs B of the revo-cation of his offer,
no contract can be perfected.
Article 1321. The person making the offer may fix the time, place, and
manner of acceptance, all of which must be complied with. (n)

The offerer can indicate the manner of acceptance

and the time when and the place where it
should be made. The offerer will not be
bound by an acceptance made by the
acceptor in any other manner than that specified
by the offerer unless the latter acquiesces in
the change.13 In Matias vs. Court of Appeals14
where a subsequent new owner of a
leased property offered to sell to the lessee the
property subject of the lease but which offer was
ignored by the lessee who instead filed a suit
to compel the new subsequent owner to sell
the property in an amount and in a
manner which the lessee feels reasonable, the
Supreme Court rejected the appeal of the lessee after
he lost in the lower court by stating:
During the early stages of the
negotiations, petitioners have already been
in arrears in the payment of rentals,
which delinquency lasted up to the
time of the consummation of the
sale of the Hacienda. In spite
of such failure, the new owner of
the Hacienda gave them top priority to
purchase their respective lots. This is
a clear indicationthat the partnership
complied with the conditions attached to
the sale; otherwise, it could have
art COntraCts 353
Essential Requisites of
Contracts Sec. 1
— Consent

right then and there demanded the

ejectment of petitioners as delinquent
tenants. Instead of discussing with the
new owner the terms and conditions
they wish to impose on the projected
sale, petitioners insist on their claim
that the price of the lots are
exorbitant; and that their right to
purchase the lot at a price fixed
in the complaintwas disregarded.
Petitioners’ insistence as to the price
of the lot rests on the false
assumption that the fixing of the
price of the lot they wanted to
purchase is one of the rights granted
to them by law. To sustain such
idea would run counter to the provision
of Article 1321 of the New Civil
Code which states that
“The person making the offer may fix
the time, place and manner of
acceptance, all of which
must be complied with.”

In a contract of sale, the manner of

payment of the purchase
Indianapolis, The Bobbs-Merrill Company, 1913, Page
32.
G.R. No. L-48436, January 30, 1986, 141 SCRA 217.
San Miguel Properties, Inc. vs. Huang, G.R. No. 137290, July
31, 2000, 130
. 1322-1323

price is an essential element before a valid and

binding contract of sale can exist.15 The parties must also
meet on the terms or manner of payment of
the price, otherwise there is no sale. An
agreement on the manner of payment goes into
the price such that a disagreement on the
manner of payment is tantamount to a
354 ObligatiOns and COntraCts arts
Text and Cases

failure to agree on the price.202 Hence, even if

the parties have agreed as to the object of
the sale and the purchase price but still has
to agree on the manner of how and when
the downpayment and the installments are to
be paid, the contract is not perfected and
there is no contract of sale.203
Article 1322. An offer made through an agent is accepted from the time
acceptance is communicated to him. (n)
By the contract of agency, a person binds
himself to render some service or to do
something in representation or on behalf of
another, with the consent or authority of the
latter.204 The principal must comply with all the
obligations which the agent may have contracted
within the scope of his authority.205 As for
any obligation wherein the agent has exceeded
his power, the principal is not bound except when
he ratifies it expressly or tacitly.206 If
the offer is made through an agent, acceptance
of the offer can be made to such an
agent. However, when a sale of a piece
of land or any interest therein is through an
agent, the authority of the latter shall be
in writing, otherwise the sale shall be
void.207208
Article 1323. An offer becomes ineffective upon the death, civil interdiction,
insanity, or insolvency of either party before acceptance is conveyed. (n)

202
Toyota Shaw, Inc. vs. Court of Appeals, 61 SCAD
310, 244 SCRA 320.
203
Velasco vs. Court of Appeals, 51 SCRA 439;
Uraca vs. Court of Appeals, G.R.
No. 115158, September 5, 1997, 86 SCAD 734, 278
SCRA 702.
204
Article 1868 of the 1950 Civil Code.
205
Article 1910 of the 1950 Civil Code.
206
Id.
207
Article 1874 of the 1950 Civil Code.
208
G.R. No. L-114870, May 26, 1995, 61 SCAD 373.
art COntraCts 355
Essential Requisites of
Contracts Sec. 1
— Consent

If either party dies, suffers civil interdiction, or

becomes insane or insolvent before acceptance is
conveyed, there can be no contract not
simply because there is no acceptance but, more
importantly, because the offer has become ineffective.
When an offer becomes ineffective, nothing can be
accepted. The phrase “before acceptance is
conveyed” means before acceptance has come to
the actual knowledge of the offeror. Hence, a
letter of acceptance may be sent by mail
but
SCAD 713; Navarro vs. Sugar Producers Cooperative
Marketing Association, Inc., 1 SCRA 1161.
. 1323

if, before such mail is received and actually read

by the offeror, either the offeror or the
acceptor died, there is still no contract because the
offer has become ineffective.
In Villanueva vs. Court of Appeals22 where a person
offered to a particular bank the purchase of
a certain foreclosed property, and where such
offer was accepted by the bank through a board
resolution which however was not relayed to the
person making the offer, and which the latter was
able to know after the bank was placed under
receivership by the Central Bank as said bank
became insolvent, the Supreme Court ruled that, in
this particular case the offer became ineffective
and therefore there was no contract created.
Pertinently, the Supreme Court said:
There is no doubt that the approval
of Ong’s offer constitutes an
acceptance, the effect of which is
to perfect the contract of sale upon
notice thereof to Ong. The peculiar
circumstances in this case, however, pose
a legal obstacle to his claim of
a better right and deny support to
356 ObligatiOns and COntraCts arts
Text and Cases

the conclusion of the Court of

Appeals.
Ong did not receive any notice of
the approval of his offer. It was
only sometime in mid-April1985 when he
returned from the United States and inquired
about the status of his bid that
he came to know of the approval.
It must be recalled that the PVB was
placed under receivership pursuant to the
MB Resolution of 3 April 1985
after a finding that it was insolvent,
illiquid, and could not operate profitably,
and its continuance in business would
involve probable loss to its depositors and creditors. x x x
Under Article 1323 of the Civil Code,
an offer becomes ineffective upon the
death, civil interdiction, insanity, or insolvency
of either party before acceptance is
conveyed. The reason for this is
that:
The contract is not perfected except by
the concurrence of two
wills which exist and continue
until the moment that they
occur. The contract is not yet
perfected at any time before
acceptance is conveyed;
hence, the disappearance of
either party or his loss of
capacity before perfection prevents the
contractual tie from being
formed. x x x
In a nutshell, the insolvency of
a bank and the consequent
appointment of a receiver restrict the
bank’s capacity to act especiallyin relation
to its property. Applying Article 1323 of

Spouses Buot vs. Court of Appeals, G.R. No.

119679, May 18, 2001; Laforteza
357 ObligatiOns and COntraCts art
Text and Cases
. 1324

the Civil Code, Ong’s offer to purchase the

subject lots became ineffective because the
PVB became insolvent before the Bank’s
acceptance of the offer came to
his knowledge. Hence, the purported contract
of sale between them did not reach
the stage of perfection. Corollarily,
he cannot invoke the resolutionof the
bank approving his bid as basis
for his alleged right to buy the
disputed properties.

Article 1324. When the offerer has allowed the offeree a certain period to
accept, the offer may be withdrawn at any time before acceptance by
communicating such withdrawal, except when the option is founded upon a
consideration, as something paid or promised. (n)

An option is a contract granting a privilege to

buy or sell at a determined price
within an agreed time.23 In Ang Yu Asuncion vs. Court of
Appeals,24 the Supreme Court summarized the rules
in case the offerer has allowed the offeree a
certain period, otherwise known as an option
period, to accept the offer, to wit:
(1) If the period is not itself founded
upon or supported by a
consideration, the offeror is still
free and has the right to
withdraw the offer before its
acceptance, or, if an
acceptance has been made, before
the offeror’s coming to know of
such fact, by communicating that
withdrawal to the offeree (See
Art. 1324, Civil Code; see also
Atkins, Kroll & Co. vs. Cua, 102 Phil. 948,
holding that this rule is applicable
to a unilateral promise to sell
under Art. 1479, modifying the
previous decision in South Western Sugar vs. Atlantic Gulf,
97 Phil. 249; see also Art. 1319,
Civil Code; Rural Bank of Parañaque, Inc. vs.
Remolado, 132 SCRA 409; Sanchez vs. Rigos,
358 ObligatiOns and COntraCts art
Text and Cases
45 SCRA 368). The right to
withdraw, however must not be
exercised whimsically or arbitrarily;
otherwise it could give rise to
a damage claim under Article 19
of the Civil Code which ordains
that “every person must, in the
exercise of his rights and in
the performance of his duties,
act with justice, give everyone his
due, and observe honesty and good
faith.”
(2) If the period has a separate
consideration, a contract of “option”
is deemed perfected, and it would
be a breach of that contract
to withdraw the offer during the
agreed period. The option however is
an independent contract

vs. Machuca, G.R. No. 137552, June 16, 2000, 127

SCAD 798.
24
G.R. No. 109125, December 2, 1994, 57 SCAD
163, 238 SCRA 602.
25
G.R. No. 103338, January 4, 1994, 47 SCAD 55,
229 SCRA 60; See also Adelfa . 1324

by itself, and it is to be
distinguished from the projected main
agreement (subject matter of the
option) which is obviously yet to
be concluded. If, in fact,
the optioner-offeror withdraws the
offer before its acceptance (exercise
of the option) by the optionee-
offeree, the latter may not sue
for specific performance on the
proposed contract (“object” of the option)
since it has failed to reach
its own stage of perfection.
The optioner-offeror, however, renders himself
liable for damages for breach of
the option. In these cases, care
should be taken of the real
nature of the consideration given,
for if, in fact, it has
been intended as part of the
art COntraCts 359
Essential Requisites of
Contracts Sec. 1
— Consent
consideration for the main contract
with a right of withdrawal
on the part of the optionee,
the main contract could be deemed
perfected;a similar instance would be
an earnest money in a contract
of sale that can evidence its
perfection (Art. 1482, Civil Code).

In Serra vs. Court of Appeals,25 the Supreme Court had

the occasion to briefly discuss what an “option”
contract founded on a separate consideration involves,
thus:
Jurisprudence has taught us that an
optional contract is a privilege existing only
in one party — the buyer. For
a separate consideration paid, he is
given the right to decide to purchase
or not, a certain merchandise or
property, at any time within the agreed
period, at a fixed price. This being
his prerogative, he may not be
compelled to exercise the option to
buy before the time expires.
On the other hand, what may be regarded as
a con-
sideration separate from the price is discussed
in the case of Vda. de Quirino vs. Palarca
wherein the facts are almost on all
fours with the case at bar. The
said case also involved a lease contract
with the option to buy where we
had the occasion to say that “the
consideration for the lessor’s obligation
to sell the leased premises to the
lessee, should he choose to exercise his
option to purchase the same, is the
obligation of the lessee to sell
to the lessor the building and/or
improvements constructed and/or made by
the former, if he fails to exercise
his option to buy said premises.”
In the present case, the consideration is
even more onerous on the part of
the lessee since it entails, transferring
360 ObligatiOns and COntraCts art
Text and Cases
of the building and/or improvements on
the property to petitioner, should
respondent bank fail to exercise its
option within the

Properties, Inc. vs. Court of Appeals, G.R. No.

111238, January 25, 1995, 58 SCAD 462, 240 SCRA
565.
26
San Miguel Properties Philippines, Inc. vs. Huang, G.R.
No. 137290, July 31, 2000, 130 SCAD 713, 336
SCRA 737.
. 1325

period stipulated.
Consideration in an option contract may be
anything of value, unlike in sale where it must
be the price certain in money or its
equivalent.26
An option money in an option contract must be
differentiated from an earnest money. Earnest money is
considered part of the price in a
contract of sale and can be a proof of
209
the perfection of the contract of sale.
However, it is not the giving of the
earnest money per se, but the proof of the
concurrence of all the essential elements of the
contract of sale which establishes the existence
of a perfected sale.210 Likewise, if the buyer
and the seller agreed that an “earnest deposit”
should be made by the seller merely to
guarantee that the buyer will not back out
from the sale, such earnest deposit is not
earnest money that can be considered as proof
of the perfection of the contract.211

209
Article 1482 of the Civil Code.
210
San Miguel Properties Philippines, Inc. vs. Huang, G.R.
No. 137290, July 31, 2000, 130 SCAD 713,
336 SCRA 737.
211
San Miguel Properties Philippines, Inc. vs. Huang, G.R.
No. 137290, July 31, 2000, 130 SCAD 713,
336 SCRA 737.
art COntraCts 361
Essential Requisites of
Contracts Sec. 1
— Consent
Upon the expiration of the option period and
the person given such option does not manifest his
or her acceptance, the offeror may offer the
intended contract to somebody else. Any contract
perfected with such other person shall be
considered to have been done in good
faith.212213214215
Article 1325. Unless it appears otherwise, business advertisement of things
for sale are not definite offers, but mere invitations to make an offer. (n)
Generally, advertisement of things for sale are
mere invitations to make an offer. Thus, if
a seller advertises that he intends to sell
his house to any willing purchaser, it is
an invitation for the purchaser to make
an offer or to negotiate as to how
he intends to buy the house. The offer of
the purchaser should of course include all the
essential requirements to make a valid contract such
as the price of the house. The phrase
“unless it appears otherwise” connotes that the
advertisement may constitute an offer which is
certain. Article 1326. Advertisements for bidders are simply

212
Limson vs. Court of Appeals, G.R. No. 135929, April
20, 2001, 147 SCAD 887.
213
G.R. No. 128066, June 19, 2000, 120 SCAD 20,
333 SCRA 684.
214
Executive Order No. 209 as amended which took
effect on August 3, 1988.
215
Id., Article 234.
 COntraCts 362
Essential Requisites of Contracts Sec. 1 —
Consent
arts. 1326-1327

invitations to make proposals, and the advertiser is not bound to accept the
highest or lowest bidder, unless the contrary appears. (n)

A person who entertains an advertisement to

bid does not automatically become the other party
to a contract. He is only allowed to make
his proposals or his offer. If he
makes his bid, he thereby makes an offer
which is not binding unless it is accepted.
In Jardine Davies, Inc. vs. Court of Appeals,31 the Supreme Court
said that when a company starts the
process of a bidding and disseminates the
document denominated the “Terms Conditions of
the Bidding” to the bidders, the dissemination
of the said documents constitutes an
“advertisement” to bid in the project. The bid
proposals or quotations submitted by the
prospective suppliers are the offers. The
favorable reply of the company to one
of the prospective suppliers is the
acceptance.

Article 1327. The following cannot give consent to a contract:

(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who do not know
how to write. (1263a)

Under the Family Code of the Philippines,32

emancipation takes place by the attainment of
majority age33 and, unless otherwise provided,
majority commences at the age of eighteen
years.216 Emancipation shall terminate parental authority
over the person and property of the child who
shall be qualified and responsible for all acts
of civil life, save the exceptions established
by existing laws in special cases.217 Any contract
entered into by an unemancipated person is

216
Id.
217
Id., Article 236.
 COntraCts 363
Essential Requisites of Contracts Sec. 1 —
Consent
annulable or voidable. However, it must
be important to point out that persons who
are capable cannot allege the incapacity of those
with whom they contracted218 219to annul the
contract. For instance, only the minor can invoke the
ground that a contract is annulable because, at
the time it was entered into, he was still
a minor. Also, when the defect of the
contract consists in the incapacity of one of
the parties, the incapacitated person is not
obliged to make any restitution except
. 1327

insofar as he has been benefited by the

thing or price received by him.37 Accordingly, if
a person of age bought property from a minor
and the latter received the purchase price, the
person of age cannot file a case to annul
the contract on the ground that the other party
is a minor. If the minor, upon coming of
age, timely files a case to annul the
contract, he is not obliged to return that part
of the purchase price which he had spent
which did not redound to his benefit, such as
losses from gambling, but he is obliged to
pay or reimburse the other party for
amounts which he has spent for his benefit like
payment of tuition fees in school.
In Braganza vs. De Villa Abrille38 where two minors
signed a promissory note, without telling the
creditor their ages, and where the debtor sought to
enforce the promissory note against them, the
Supreme Court ruled that the minors can set up
the defense of minority to resist the claim,
thereby overruling the decision of the Court of
Appeals which based its decision on the case of
Mercado vs. Espiritu39 holding that minors who misrepresent
their ages cannot be absolved from the contract they

218
Article 1397 of the 1950 Civil Code.
219
Article 1399 of the 1950 Civil Code.
364 ObligatiOns and COntraCts art
Text and Cases
entered into. Pertinently, the Supreme Court said in
the Braganza case:
x x x From the minors, ‘failure to
disclose their minority in the same
promissory note they signed, it does
not follow as a legal proposition,
that they will not be permitted thereafter
to assert it. They had no juridical
duty to disclose their inability. In fact,
according to Corpus Juris Secundum, 43, p.
206 ;
“* * *. Some authorities consider that
a false representation as to age
inducing a contract is a part of
the contract and accordingly hold that
it cannot be the basis of an
action in tort. Other authorities hold
that such misrepresentation may be the
basis of such an action, on the
theory that such misrepre-sentation is not
a part of, and does not grow
out of, the contract, or that the
enforcement of liability for such
misrepresentation as a tort does not
constitute an indirect method of enforcing liability
on the contract. In order to hold
the infant liable, however, the fraud must
be actual and not constructive. It
has been held that his mere silence
when making a contract as to his
age does not constitute a fraud which
can be made the basis of an
action of deceit.” (Italics Ours)

G.R. No. L-12471, April 13, 1959, 105 Phil. 456.

G.R. No. 11872, December 1, 1917, 37 Phil. 215.
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
1913 edition, Indianapolis, The Bobb-Merrill Company, Pages
469-470.
Id., Page 575.
art. 1327

“The fraud of which an infant may

be held liable to one who contracts
with him in the belief that he
 COntraCts 365
Essential Requisites of Contracts Sec. 1 —
Consent
is of full age must be actual
not constructive, and mere failure of
the infant to disclose his age is
not sufficient.” (27 American Jurisprudence,
p. 819)
The Mercado case cited in the decision
under review is different because the document
signed therein by the minor specifically
stated he was of age; here Exhibit
A contained no such statement. In
other words, in the Mercado case, the
minor was guilty of active misrepresentation;
whereas in this case, if the minors
were guilty at all, which we doubt,
it is of passive (or constructive)
misrepresentation. Indeed there is a growing
sentiment in favor of limiting the scope
of the application of the Mercado
ruling, what with the consideration that
the very minority which incapacitated minors
from contracting should likewise exempt them
from the results of misrepresentation.
We hold, at this point, that being
minors, Rodolfo and Guillermo Branganza
could not be legally bound by their
signatures in Exhibit A.
It is argued, nevertheless, by respondent
that inasmuch as this defense was interposed
only in 1951, and inasmuch as Rodolfo
reached the age of majority in 1947,
it was too late to invoke it
because more than 4 years had elapsed
after he had become emancipated upon
reaching the age of majority. The provisions
of Article 1301 of the Civil Code
are quoted to the effect that “an
action to annul a contract by reason
of minority must be filed within 4
years” after the minor reached majority age.
The parties do not specify the exact
date of Rodolfo’s birth. It is
undenied, however, that in October 1944, he
was 18 years old. On the basis
of such datum, it should be held
that in October 1947, he was 21
years old, and in October 1951, he
366 ObligatiOns and COntraCts art
Text and Cases
was 25 years old. So that when
this defense was interposed in June
1951, four years had not yet
completely elapsed from October 1947.
Furthermore, there is reason to doubt the
pertinency of the 4-year period fixed
by Article 1301 of the Civil Code
where minority is set up only as
a defense to an action, without the
minors asking for any positive relief from
the contract. For one thing, they have
not filed in this case an action
for annulment. They interposed an
excuse from liability.
Upon the other hand, these minors may
not be entirely absolved from monetary
responsibility. In accordance with the
provisons of the Civil Code, even if
their written contract is unenforceable because
of non-age, they shall make restitution
to the extent that they may have
profited by the money they received. (Art.
1340) There is testimony that the funds
delivered
. 1327

to them by Villa Abrille were used for

their support during the Japanese occupation.
Such being the case, it is but
fair to hold that they had profited to
the extent of the value of such
money, which value has been authoritatively
established in the so-called BallantineSchedule:
in October 1944, P40.00 Japanese notes were
equivalent to P1 of current Philippine
money. Wherefore, as the shares of
these minors was 2/3 of P70,000 or
P46,666.66, they should now return P1,166.67.
Their promise to pay P10,000 in Philippine
currency (Exhibit A), can not be enforced,
as already stated, since they were minors
incapable of binding themselves. Their liability,
to repeat, is presently declared without regard
of said Exhibit A, but solely in
pursuance of Article 1304 of the
Civil Code.
 COntraCts 367
Essential Requisites of Contracts Sec. 1 —
Consent
Contracts entered into by insane or demented
persons are likewise annullable. Such contracts are
valid up to the time they are rendered
ineffective by the courts. They are not void
ab initio. The law therefore clearly presumes that the
contract has been entered into by competent
persons. To annul a contract, it is always
important to prove the insanity of the other
party at the time of the perfection of
the contract.
Persons suffering from a mental incapacity
to a greater or less degree may
be divided into three classes. They are:
idiots, lunatics, and those who are not
legally totally incapacitated, but are mentally
weak. An idiot is one who has
been insane from birth. A lunatic is
one who was at one time sane,
but who from some cause or other
has lost use of his reason. The
third class includes all forms of mental
weakness which do not render the person
affected totally incapable of transacting business
or managing his affairs.
The contract of one who is insane
as to be unable to understand
its nature and effect is voidable at
his option, except for necessaries. This
is a privilege personal to the insane
party and the agreement cannot be
avoided by the other party or a
third person. However, it is generally true
that when the insane person is not
under a guardian or conservator and
the other contracting party has no
reasonable cause to believe him otherwise
insane, the agreement is valid if
equitable and beneficial to such insane person,
and it has been so far executed
that the other party cannot be placed
in status quo. A person of unsound
mind is liable on his contract for
necessities. Nor does mere mental weakness
from whatever cause, which does not totally
destroy the ability to comprehend the
nature and effect of the transaction,
368 ObligatiOns and COntraCts art
Text and Cases
furnish ground for the avoidance of
a contract entered into by such persons
in the absence of evidence showing fraud,
duress or undue
art. 1328

influence.40
Moreover, the insanity alleged must have a
direct bearing on the agreement. A
monomania or delusion unconnected with
the subject-matter of the contract or
which does not prompt the agreement
does not destroy its binding force. On
the other hand, if the insane delusion
is so connected with the subject-
matter of the agreement as to
render one of the parties thereto incapable
of understanding the nature or effect
of the contract, it is thereby rendered
voidable at the option of the party
so afflicted.41

Contracts entered into by deaf-mutes who do

not know how to write is also annullable.
The law is clear that being a deaf-mute
alone is not enough to make the contract
voidable. This is so because the success
accomplished by modern methods in instructing those
who are deaf-mute to understand what they
are doing has enabled these persons to act
reasonably with discernment in entering into
transaction. For the contract to be annullable,
the deaf-mute must likewise not know how to
write. The provision is clearly designed to
prevent fraud for the protection of handicapped
people.

Article 1328. Contracts entered into during a lucid interval are valid.
Contracts agreed to in a state of drunkenness or during a hypnotic spell are
voidable. (n)

Lucid interval is that period of time when an

insane person acts with reasonable understanding,
comprehension and discernment with respect to what
he is doing. Hence,
 COntraCts 369
Essential Requisites of Contracts Sec. 1 —
Consent
lunacy may be intermittent in character;
if so, a valid contract may be
entered into during a lucid interval. However,
where one is shown to have been
mentally deranged at a recent period anterior
to the execution of the contract, that
condition is presumed to continue and the
burden is on the other party to
show that the agreement was entered
into during a lucid interval or after
recovery, provided the derangement is not
caused by a temporary or transient
ailment, such as fever, fits or the
like.220

Contracts entered into in a state of

drunkenness may likewise be annulled. However,
the intoxication must be of such a
character as to perpetuate an undue
advantage over the drunken person. Also,
. 1328

it is now well settled that an agreement

other than for necessities, made by a
person when so drunk as to be
incapable of understanding its nature and effect,
is voidable at the intoxicated person’s
option. The contracts of an intoxicated
person may be voidable under any one
of the following:

first, when it appears that the

drunkenness was brought about by the
opposite party; second, that a fraudulent
advantage was taken of it; and third,
that the drunkenness was so complete
as to deprive the party of his
reason of an agreeing mind.43
The mere fact that one of the
parties is drunk at the time the

220
Id., Pages 575-576.
43
Id., Pages
650-651. 44Id., Pages
651-652.
370 ObligatiOns and COntraCts art
Text and Cases
agreement is entered into is no
ground for setting it aside unless one
or more of the above-mentioned influences
was or were operative at the time
the minds of the parties met on
the terms of the contract. Drunkenness
which only clouds or darkens the reason
does not render a contract entered into
while in such a condition voidable unless
procured under such circumstances as to
justify the inference that it was obtained
by fraud or circumvention. Intoxication
which merely prevents the party from giving
proper attention to what he is doing
or from fully realizing the nature of
his acts is insufficient to invalidate
a contract. Mere intoxication unmixed with
any inequitable conduct on the part
of the other party to the agreement
is insufficient to invalidate a contract
entered into while in such condition unless
the party so situated is so drunk
as to be incapable of understanding
the nature and effect of the
agreement, or its consequences, that
is to say, he must be rendered
incapable of intelligent assent and deprived
of the power to know what he
is doing.44
It is well settled that if one party
to a transaction procures the
intoxication of the other and then
takes advantage of his condition to
obtain the contract or conveyance it
will be voidable at the intoxicated
person’s option, notwithstanding the degree of
drunkenness may not have been
excessive.221

A contract entered into during a hypnotic spell is

likewise voidable. Hypnosis is an artificially
induced state, resembling sleep, but characterized by

221
Id., Pages 654-655.
 COntraCts 371
Essential Requisites of Contracts Sec. 1 —
Consent
exaggerated suggestibility and continued responsiveness
to the voice of the hypnotist.222223
Article 1329. The incapacity declared in Article 1327 is subject to the
modifications determined by law, and is understood to be without prejudice
to special disqualification established in the laws. (1264)

arts. 1329-1331

Article 1330. A contract where consent is given through mistake, violence,

intimidation, undue influence, or fraud is voidable. (1265a)

To create a contract, the meeting of the mind

must be free, voluntary, willful and with a
reasonable understanding of the various obligations
the parties intend to be bound. Mistake, violence,
intimidation, undue influence and fraud as
grounds to annul a contract have one thing in
common: there is no real assent to the
contract. Intimidation, violence and undue influence can
be classified as acts of duress where, as
a result of which, the coerced party is
compelled to execute the contract against his will.

Freedom of will is essential to the

validity of an agreement. Where duress
is exerted on one of the parties
of such a kind as to overcome
his will and compel a formal assent
to an undertaking when he does
not really agree to it, and so
as to make that appear to be
his act which is not his, but
another’s,imposed on him through fear which
deprives him of self-control, the agreement
is not binding unless the other deals
with him in good faith, in ignorance
of the improper influence and in the

222
The New Lexicon: Webster’s Dictionary, 1991 Edition,
Lexicon Publishing, Inc., New York, Page 477.
223
Am Jur 2d 504, citing Klussman vs. Day, 107
Or 109, 213, P 787, 214 P
372 ObligatiOns and COntraCts art
Text and Cases
belief that the party is acting
voluntarily.47

A contract obtained through duress or mistake is

voidable or annullable under Article 1390.
Article 1331. In order that mistake may invalidate consent, it should refer to
the substance of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to enter into the
contract.
Mistakes as to the identity or qualifications of one of the parties will vitiate
consent only when such identity or qualifications have been the principal
cause of the contract.
A simple mistake of account shall give rise to its correction. (1266a)

For mistake to make a contract voidable or

annullable, the law states that the consent must
either refer to the substance of the thing
which is the object of the contract, or to
those conditions which principally induced the parties to enter
into a contract. The said
conditions348; Gorringe must vs. Reed, not 116 be
Kans mere 374 incidents, 226 P 714. to
the consideration.48
De Leon vs. Court of Appeals, G.R. No. 80965,
June 6, 1990, 186 SCRA 345.
Sherwood vs. Walker, 66 Mich. 568, 33 N.W. 919,
11 Am. St. 531 cited in Commentaries on the Law of
Contracts by William F. Elliott, Volume 1, 1913
edition, . 1331

Thus, where the contract for the sale

of a cow was entered into, both
parties believing her to be barren, which
supposition proved to be untrue, it was
held that mistake was not as to
the mere quality of the animal sold, but
went to the very nature of the thing
and that the vendor had a right
to rescind the agreement.49

It is also clear in the law of

contracts that
a unilateral mistake in the making of an
agreement, of which the other party
 COntraCts 373
Essential Requisites of Contracts Sec. 1 —
Consent
is entirely ignorant and to which he
in no way contributes, will not
affect the agreement or afford ground
for its avoidance or rescission,
unless it is such a mistake as
goes to the substance of the agreement
itself.50

In Spouses Heinzrich Theis and Betty Theis vs. Court of Appeals51 where
the seller, via a deed of sale, sold to
the buyer a pro-perty which was however not
the one appearing in the deed of sale,
and where the mistake was not the fault of
the parties but was due to mistake in the
survey made on the property, and where the
seller, upon learning of this, immediately offered the
buyer another property instead or a refund of
money double the amount paid for the property,
but which offer was unreasonably refused by the
buyers prompting the seller to file for
annulment of the contract based on mistake, the
Supreme Court ruled that the contract can be
invalidated on the basis of Article 1331 as
it involved mistake as to the substance of
the thing and the seller was
in good faith. The Supreme Court, citing Tolentino,52
likewise stated that:
mistake as contemplated under Article 1331
involved either ignorance which is the absence
of knowledge with respect to a
thing and mistake properly speaking, which is
a wrong conception about said thing,
or a belief in the existence of
some circumstance, fact, or event, which
in reality does not exist. The mistake
committed by the private respondent
in selling parcel No. 4 to the
petitioner falls within the second type. Verily,
such mistake invalidated its consent and
as such, annulment of the deed
of sale is proper.

Mistake can also refer to those conditions

which have principally moved one or both
parties to enter into the contract. Thus, if A
lent
374 ObligatiOns and COntraCts art
Text and Cases

Indianapolis, the Bobbs-Merill Company, Page 179.

50
17 Am Jur 2d 493.
51
G.R. No. L-126013, February 12, 1997, 79 SCAD
434.
52
Tolentino, Civil Code of the Philippines,
p. 476, Vol. 4 (1992 ed.).
53
William F. Elliott, Commentaries on the Law of Contracts by
Volume 1, 1913 edition, Indianapolis, The Bobbs-Merill
Company, Page 172.
art COntraCts 375
Essential Requisites of
Contracts Sec. 1
— Consent
. 1331

money to X only because he was informed

that it was the special request of Z to
A, who owed Z a favor which A
wanted to reciprocate, and only because there was
an apparent assurance from Z that he will
be a solidary debtor; and X knew that, had
it not been for the request of A
and his engagement as a solidary debtor, the
loan would not have been consummated; and it
eventually turned out that there was no
request and no assurance coming from Z who,
in reality merely vouched for the credit worthiness
of X, the said loan agreement can be
annulled by A on the ground that there was
an invalid consent as the condition which
principally moved both parties to enter into the
contract was a mistake.
The law also provides that mistakes as to the
identity or qualifications of one of the
parties will vitiate consent only when such identity or
qualifications have been the principal cause of the
contract.
When the identity of one of the
parties is a material element of the
contract, a mistake in respect thereto invalidates
the agreement. Mistakes as to the
identity of the person with whom the
contract is made arise where A contracts
with X believing him to be M;
that is, where the offerer has in
contemplation a definite person with whom
he intends to contract. One has the
right to select the person with whom
he wishes to contract, especiallywhere the
nature of the transaction is such
that it is important that performance
be had by a particular individual,
as agreements with a painter, writer,
or which call for the performance
of any act requiring skill such as
the one sought to be contracted
376 ObligatiOns and COntraCts art
Text and Cases
with is supposed to possess. In such
cases one may contract with whomever
he may choose and the sufficiency
of his reasons for so doing is
immaterial. Thus, where one sends an
order for goods or other proposal to
another, a third person cannot without the
knowledge of the one sending the
order or making the proposal become a
party to the agreement by accepting
such proposal.53

A simple mistake of account shall give rise to

its correction. A simple accounting error does
not go into the essentials of a
contract.

Article 1332. When one of the parties is unable to read, or if the contract is
in a language not understood by him, and mistake or fraud is alleged, the
person enforcing the contract must show that the terms thereof have been
fully explained to the former. (n)

Torres vs. Court of Appeals, G.R. No. 134559,

December 9, 1999, 117 SCAD . 1332 224

In entering into a contract, the parties are

presumed to have understood the terms of
the contract they voluntarily signed especially when
there is proof that they are educated.54
Courts are not authorized to extricate
parties from the necessary consequences of
their acts, and the fact that the
contractual stipulations may turn out
to be financially disadvantageous will
not relieve parties thereto of their
obligations. They cannot now disavow the
relationship formed from such agreement
due to their supposed misundertanding of
its terms.225

224
, 320 SCRA 428.
225
Ibid.
art COntraCts 377
Essential Requisites of
Contracts Sec. 1
— Consent

However, the Article 1332 provides that, when one

of the parties is unable to read, or if
the contract is in a language not
understood by him, and mistake or fraud is
alleged, the person enforcing the contract must show
that the terms thereof have been fully explained
to the former.
Before the benefits of Article 1332 can be
availed of, the person invoking the same must first
prove that he has the conditions described
in Article 1332. Thus, if he is unable to
read or he does not understand the
language of the contract, he must first prove
such fact or circumstance. Only after sufficiently
adducing evidence proving the fact that he
cannot read or that he does not understand
the language of the contract will the
burden of proof shift to the one enforcing
the contract to show that the terms thereof have
been explained to the person who is
unable to read or who does not understand
the language of the contract.226
In Lustan vs. Court of Appeals,227 228where the dispute was
whether or not the Deed of Definite Sale was
in reality an equitable mortgage wherein the
subject property was merely intended to secure an
existing debt by way of mortgage, the
Supreme Court ruled that the document was an
equitable mortgage based on the clear
evidence supporting such contract and based on the
finding that the illiterate owner of the same was
made to understand that the deed of sale
signed by her merely evidenced an indebtedness
to the creditor, to wit:

226
Sales vs. Court of Appeals, G.R. No. 40145, July
29, 1992.
227
G.R. No. 111924, January 27, 1997, 78 SCAD 351.
228
G.R. No. 55201, February 3, 1994, 48 SCAD 28,
229 SCRA 616.
378 ObligatiOns and COntraCts art
Text and Cases
Petitioner had no knowledge that the contract she
signed
. 1332

is a deed of sale. The contents of the

same were not read nor explained to her
so that she may intelligently formulate
in her mind the consequences of her
conduct and the nature of the rights
she was ceding in favor of Parangan.
Petitioner is illiterate and her condition
constrained her to merely rely on
Parangan’s assurance that the contract only
evidenced her indebtedness to the
latter. When one of the contracting
parties is unable to read, or if
the contract is in a language not
understood by him, and mistake or
fraud is alleged, the person enforcing the
contract must show that the terms thereof
have been fully explained to the former.
Settled is the rule that where a
party to a contract is illiterate or
cannot read or cannot understand the
language in which the contract is written,
the burden is on the party interested
in enforcing the contract to prove that
the terms thereof are fully explained to
the former in a language understood
by him. To our mind, this burden
has not been satisfactorily discharged.

In Lim vs. Court of Appeals58 where a Deed of

Confirmation of Extrajudicial Partition written in
English allegedly executed by an elderly woman, who
did not even know English, was upheld by the
lower court because fraud was not proven, the
Supreme Court reversed the decision of the lower court
and upheld the ruling of the Court of
Appeals by explaining thus:
We now determinethe next crucial issue
of fact, i.e., whether or not the
above mentioned Deed of Confirmation
of Extra Judicial Settlement of the
Estate of Tan Quico and Josefa Oraa
(Exhibit “E” or “1”) is valid. The
respondent court, reversing the trial court,
art COntraCts 379
Essential Requisites of
Contracts Sec. 1
— Consent

held that the evidence failed to establish

that it was signed by the late
Cresencia as a result of fraud, mistake
or undue influence. We hold this ruling
erroneous. In calibrating the credibility
of the witnesses on this issue, we
take our mandate from Article 1332 of
the Civil Code which provides:

x x x. This substantial
law came into being due to the
finding of the Code Commission that
there is still a fairly large number
of illiterates in this country, and documents
are usually drawn up in English or
Spanish. It is also in accord with
our state policy of promoting social
justice. It also supplements Article 24
of the Civil Code which calls on
court to be vigilant in the protection
of the rights of those who are
disadvantaged in life. In the petition
at bench, the questioned Deed is
written in English, a language not
understood by the late Crescencia,
an illiterate. It was prepared by Lorenzo,
a lawyer and CPA. For reasons difficult
to divine, respondent Lorenzo did not
cause the notarization of the Deed.

G.R. No. 123490, August 9, 2000, 131 SCAD 463,

337 SCRA 464.
60
17 Am Jur 2d 492.
61
25 N.W. 42; 64 Wis. 265.
62
17 Am Jur 2d 505.
. 1332

Petitioners alleged that the Deed was signed by

the late Cresencia due to mistake, fraud or
undue influence. They postulated that respondent
Lorenzo took advantage of the late
Cresencia’s trust and confidence. Testifying
380 ObligatiOns and COntraCts art
Text and Cases
on the trust of the late Cresencia
on respondent Lorenzo, petitioner Jose Lim
declared:
xxx
“Q.Now, will you tell the Court how the
relation between your mother and your uncle
Lorenzo Tan before September 1967 ?
A. My mother was so close to this
brother, Lorenzo Tan. My mother always asked
him advice because he is considered
by my mother as God to her.
x x x.”
Considering the circumstance, the burden was
on private respondents to prove that
the content of the Deed was explained
to the illiterate Crescencia before she
signed it. In this regard, the evidence
adduced by the respondents failed to
discharge this burden.

In Arriola vs. Mahilum,59 a sister of an

illiterate was able to have a document
signed by the latter on the misrepresentation that
properties other than his property awarded by a
cadastral court to him will be partitioned
among the heirs of their parent. It turned out
however that the document included such property.
The property was therefore fraudulently distributed
to the other heirs. The illiterate filed suit to
recover his property alleging fraud and misrepresentation.
The Supreme Court sustained the cause of the
illiterate and said:
We agree with the Court of Appeals
that the partition of the same lot
was fraudulent. Rosario knew that there
was no other way to obtain the
partition of the subject property than having
her brother Simeon sign a deed of
partition, making the latter believe that the
deed pertained to the three other lots.
The scheme was simple enough considering
that Simeon was illiterate. The law however
requires that in case one of the
parties to a contract is unable to
read and fraud is alleged, the person
art COntraCts 381
Essential Requisites of
Contracts Sec. 1
— Consent

enforcing the contract must show that the

terms thereof have been fully explained to
the former.
We are not persuaded that Rosario
clearly and fully explained the contents of
the deed of partition to her brother
Simeon. Petitioners’ allegations are negated
by the fact that Simeon not only
strongly opposed the survey of the land
in 1970 but also filed a complaint
for annulment of reconstituted title
in 1973. Consent, having been obtained by
fraud, the deed

G.R. No. L-12035, March 29, 1961, 1 SCRA

876.
. 1333

entered into could be annulled. Hence, if the

deed was null, the reconstituted title and transfer
titles arising therefrom were also void.

Article 1333. There is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract. (n)

If the parties indicate an intention not to

be bound unless certain facts exist, the
performance of such facts prevents any
contractual duty, such being intended to
operate, and operating, as a condition
precedent to the obligation. But where
the parties to an agreement indicate
an intention to be bound irrespective
of the existence of certain facts and
take the risk of their non-existence,
the validity of their agreement is
not at all dependent upon the
existence of such facts. Where the parties
are conscious that the existence of particular
facts is doubtful and make their agreement
382 ObligatiOns and COntraCts art
Text and Cases
on this assumption, the non-existence
of such facts does not affect the
validity of the agreement, the risk
of their existence being taken by the
parties. Where all the parties voluntarily
enter into an agreement in the
fact of their conscious, present want
of knowledge of facts, which they
all then manifestly concluded would
not influence their action or induce them
to refrain from entering into the
agreement, whatever the facts might be,
there is no such a mistake as
affects the validity of the agreement.
The view is taken that if the
parties are conscious of their ignorance as
to the existence of some facts, the
non-existence of such facts is of
no consequence; this is said to
be predicated upon common experience
that if people contract under such
circumstances, they usually intend to abide
by the resolutioneither way of the
known uncertainty, and have insisted on,
and received, consideration for taking that
chance. There seems, however, to be some
authority to the effect that where, although
the parties must know that the existence
of a fact is at least somewhat
doubtful, they nevertheless make an agreement
on the assumption that it exists,
its nonexistence affects the validity of
the agreement.60

An illustrative case is Wood vs. Boynton61

where a seller not knowing the nature of the
stone he found sold it to a purchaser
for only one dollar after they discussed their
ignorance as to the quality and nature of
the stone which they surmised to be
probably a Topaz, but which eventually turned out
to be a Diamond worth about US
$1,000, the court ruled that the contract cannot be
annulled or rescinded as there was legally no
mistake as to the nature of the stone
because when they transacted the purchase, there
was conscious uncertainty and that the
art COntraCts 383
Essential Requisites of
Contracts Sec. 1
— Consent

parties took the risk that it could have been

some other
384 ObligatiOns and COntraCts
Text and Cases
arts. 1334-1335

valuable object capable of being sold at a

higher price.
Article 1334. Mutual error as to the legal effect of an agreement when the
real purpose of the parties is frustrated, may vitiate consent. (n)

A unilateral mistake of law as to the

legal effect of an agreement is generally
not a ground to annul a contract. This is
so because, in such a situation, the
document embodying the agreement is
drafted the way the parties have intended it to
be such that only its legal effect is
different from what the parties have assumed.
However, a mistake of law may vitiate
consent if the following requisites are
present: first, the mistake as to the legal effect of
the agreement must be mutual and, second, such
mutual mistake frustrates the real purpose of the
parties. Hence, if A leases to B a
property where the latter will construct a four-
story building but it turned out that such
building cannot be erected in the said city
because of an ordinance prohibiting the same,
the contract can be annulled.
Article 1335. There is violence when in order to wrest consent, serious or
irresistible force is employed.
There is intimidation when one of the contracting parties is compelled by a
reasonable and well-grounded fear of an imminent and grave evil upon his
person or property, or upon the person or property of his spouse, descendants
or ascendants, to give his consent.
To determine the degree of the intimidation, the age, sex and
condition of the person shall be borne in mind.
A threat to enforce one’s claim through competent authority, if the claim is
just or legal, does not vitiate consent. (1267a)

There is total absence of free will in case

a person is compelled to enter into a
contract through violence. The violence must however be
art COntraCts 385
Essential Requisites of
Contracts Sec. 1
— Consent
serious and irresistible. Thus, if A coerces B
into a contract by continually beating him until
he signs the contract, A, in effect, imposes his
will on B and therefore, no valid
consent is obtained from B. The contract is
clearly annullable.
As to intimidation, the law states that there
must be a reasonable

G.R. No. L-16590, January 30, 1965, 13 SCRA 27.

William F. Elliot, Commentaries on the Law of Contracts, Volume 1, 1913

. 1335

and well-grounded fear of an imminent and

grave evil upon his person or property, or
upon the person or property of his spouse,
descendants or ascendants, to give his
consent. To determine the degree of the
intimidation, the age, sex and condition of
the person shall be borne in mind. It is
necessary that the threats and circum-stances be
of a character as to excite the
reasonable apprehensions of a person of
ordinary courage, and that the agreement be made
under the influence of such threats or
menace; the threat must be tangible and direct.62 Thus
63
in Vda. De Lacson vs. Granada where it was contended
that a contract entered into during the Japanese
occupation should be nullified because one of the
parties was constrained to enter the contract and
to accept Japanese currency for fear that, if he
would not do so, he might endanger his
life and the life of his family, the
Supreme Court rejected the notion that there was
legally an intimidation enough to annul the
contract because
the duress or intimidation must be more
than the “general feeling of fear” on
the part of the occupied over the
show of might by the occupant. In
386 ObligatiOns and COntraCts art
Text and Cases
other words, aside from such “general” or
“collective apprehension,” there must be
specific acts or instances of such nature
and magnitude as to have, of
themselves, inflicted fear or terror upon
the subject thereof that his execution of
the questioned deed or act can
not be considered voluntary. No
such specific act of duress was cited
— and none could be found —
in the case at bar.

In the case of Laperal vs. Rogers64 where,

during the Japanese occupation, a person was
directly told by the Japanese military authorities that
he should sell his house and warned him that
his refusal to sell was bad because it will
be considered as a sign of hostility to
the Japanese, and where, fearing for his life
and that of his family, he sold the
house, the Supreme Court ruled that the contract can
be annulled as the consent was coerced by direct
intimidation and does not fall within the
purview of “collective” or “general” duress.
The law likewise provides that a threat to
enforce one’s claim through competent authority, if
the claim is just or legal, does not
vitiate consent. In this regard, it is well-settled
that
ordinarily the institution or threatened
institution of a civil suit, or
ordinary legal proceedings to enforce a
legal demand does not constitute duress, even
though it may be made in a
period of business depression. Thus, an
agreement or settlement in-duced

edition, Indianapolis, the Bobbs-Merill Company, Pages 257-

259.
66
G.R. No. 80965, June 6, 1990, 186 SCRA
345.
. 1335
art COntraCts 387
Essential Requisites of
Contracts Sec. 1
— Consent
by a threat to commence legal
proceedings for the removal of a
dam, or for the collection of a
debt contracted during infancy, to foreclose
a chattel, or mortgage, to sue
out a writ of attachment or
levy executions, or a threat by
an officer to arrest an execution debtor
and take him to jail unless he
secures the debt, the officer having in
his possession at the time legal
process requiring him to take the debtor
into custody, has in each of the
foregoing instances been held not to have
been procured through duress. The mere threat
to bring a good faith action,
maintainable at law, does not amount
to duress. If the party threatened
would rather pay than resort to litigation
he is remediless. However, if a
civil proceeding actually begun or threatened
is wrongful and oppressive in its
nature and brought or threatened with
the intention of coercing the adverse party
and does in fact coerce such party
into the payment of money or the
formation of a contract, such payment or
contract is made under duress and may
be avoided. Thus a threat to institute
receivership proceedings against a certain
company at a time when it would
ruin the company’s business and affect
the reputation of the defendant,
constitutes such duress as will avoid
the defendant’s contract to pay a
specified sum of money in order to save the
business of the company and his own
reputation. Likewise, it has been held
that a bond given, or money paid
from being falsely attached to release property
seized in attachment proceedings
oppressively instituted or conducted may
be cancelled or recovered. It has
also been held that when an invalid
and unfounded claim for a lien
upon real property is filed and the
necessities of the defendant’s business
388 ObligatiOns and COntraCts art
Text and Cases
require that this lien be immediately
discharged, payment under such circumstances
was made under duress and that it
might be recovered. A threatened
civil action may also amount to duress
where the parties are not on an
equal footing. Thus, threats made against a
person of inferior intellect, or an aged
weakenedin body and mind to the
effect that certain civil proceedings will
be instituted,have been held such duress
as will avoid a contract induced thereby.
Threatening litigation while the defendant is
ill, or to continue litigation when the
circumstances are oppressive has been
held to amount to duress.65

In De Leon vs. Court of Appeals66 where the mother

claims that she was intimidated into entering a
letter agreement by the estranged wife of
her son because the said wife threatened to
bring her son to court for support, to
scandalize their family by filing baseless suits and,
by agreeing to the agreement, the wife
would pardon the said mother’s son for possible
crimes of adultery and/or concubinage subject to the
transfer of certain properties, the Supreme Court said
that such

Parkers Admr. v. Parker, N.J. Eg. 224, 126 Atl.

537 cited in Commentaries on
. 1336

so-called threat did not fulfill the legal requirements

to constitute intimidation, to wit:
In order that the intimidation may vitiate
consent and render the contract invalid, the
following requisites must concur: (1) that the
intimidation must be the determining
cause of the contract, or must have
caused the consent to be given; (2)
that the threatened act must be
unjust or unlawful; (3) that the threat
be real and serious, there being an
evident disproportion between the evil and
art COntraCts 389
Essential Requisites of
Contracts Sec. 1
— Consent
the resistance which all men can offer,
leading to the choice of the contract
as the lesser evil; and (4) that
it produces a reasonable and well-
grounded fear from the fact that the
person from whom it comes has the
necessary means or ability to inflict the
threatened injury.

Article 1336. Violence or intimidation shall annul the obligation, although

it may have been employed by a third person who did not take part in the
contract. (1268)

The violence or intimidation may emanate not only

from any of the contracting parties but also
from third persons not a party to the
contract. Indeed, the contracting party who is not
the subject of the violence or the intimidation
may not even know that the other party has
been coerced. Thus, if A is coerced to enter
into a contract with X because G threatens
to kill all the children of A if he
does not do so, such contract may be
annulled whether or not X knew of the
intimidation.
Article 1337. There is undue influence when a person takes improper
advantage of his power over the will of another, depriving the latter of a
reasonable freedom of choice. The following circumstances shall be
considered: the confidential, family, spiritual and other relations between the
parties, or the fact that the person alleged to have been unduly influenced
was suffering from mental weakness, or was ignorant or in financial distress.
(n)

The law provides that there is undue influence

when a person takes improper advantage of
his power over the will of another, depriving
the latter of a reasonable freedom of
choice. Annulling a contract based on undue
influence “is based upon principles of
highest morality, it reaches every case and
grants relief where the Law of Contracts by William F. Elliott,
Volume 1, 1913 edition, Page 241. 68William F. Elliott,
Commentaries on the Law of Contracts, Volume 1, 1913 edition,
Indianapolis, The Bobbs-Merill Company, Page 241.
390 ObligatiOns and COntraCts art
Text and Cases
G.R. No. L-30351, September 11, 1974, 59 SCRA 15.
. 1337

influence is acquired and abused, or where

confidence is reposed and betrayed.”67 Hence, the
following circumstances shall be considered: the
confidential, family, spiritual and other relations between the
parties, or the fact that the person alleged to
have been unduly influenced was suffering from
mental weakness, or was ignorant or in
financial distress. However, not all influence is
prohibited by law.
The influence which the law not only
refuses to recognize, but repudiates,
is undue influence, denominated “undue” because
it is unrighteous, illegal and designed
to perpetratea wrong. It must amount
to fraud or coercion. The grantor must
be overreached and deceived by some
false representation, stratagem or by coercion,
physical or moral. It is generally held
that solicitations and entreaties, fair
argument and persuasion, or appeals to
the emotions or affections will not amount
to undue influence unless they overcome the
will of the person and take away
his ability to act as a free
agent.68

In Bañez vs. Court of Appeals69 where the respondent

contended that the letter of a senator
unduly influenced the People’s Homesite and Housing
Corporation (PHHC) to approve the transfer of rights
of a certain property not to him but to
another person, the Supreme Court held that there was
no undue influence enough to annul the
contract, to wit:
assuming that the letter was written by
Senator Fernandez, it cannot be implied
from the facts of the case that
the transfer of rights from Basilio Laquihon
to petitioners herein was approved solely
on the strength of such letter, for
the approval of the transfer was
recommended as “extremely meritorious”
art COntraCts 391
Essential Requisites of
Contracts Sec. 1
— Consent
by the Head ExecutiveAssistant (Exh. “2”)
and by the Homesite Sales Supervisor
(Exh. F). Neither can it be said
that the approval of the transfer by
the Board of Directors was vitiated by
undue influence or that it was illegal.
That letter, even if it was written
really by Senator Fernandez, could not
destroy the free agency of the PHHC
Board of Directors,and it could not
have interfered with the exercise of the
Board’s independent discretion. This Court
has already said that solicitation,
importunity, argument and persuasion are
not undue influence, and a contract is
not to be set aside merely because
one party used these means to the
consent of the others. Influence obtained by
persuasion or argument or by appeals
to the affections is not prohibited
either in law or morals and is
not obnoxious even in courts of
equity.
Such70 may be termed “due influence.”
(Martinez vs. Hongkong and G.R. No. 130998, August 10,
2001.
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
1913 edition, Page 135.
G.R. No. 37159, November 29, 1977, 80
SCRA 411.
. 1338

Shanghai Bank, 15 Phil. 252, 270).

In Marubeni Corporation vs. Lirag,70 where a consultancy

agreement was obtained from a government
agency because of the use of influence of
executive officials, the Supreme Court declared the
contract not only voidable but null and void, thus:
Any agreement entered into because of
the actual or supposed influence which the
party has, engaging him to influence executive
officials in the discharge of their duties,
which contemplates the use of personal
influence and solicitation rather than an
appeal to the judgment of the official
392 ObligatiOns and COntraCts art
Text and Cases
on the merits of the object sought
is contrary to public policy. Consequently,
the agreement, assuming that the parties
agreed to the consultancy, is null
and void as against public policy. Therefore,
it is unenforceable before a court
of justice.

Article 1338. There is fraud when, through insidious words or machinations

of one of the contracting parties, the other is induced to enter into a contract
which, without them, he would not have agreed to. (1269)

Generally, fraud, either at law or in

equity, is a false representation of a
material fact made by word or conduct with
knowledge of its falsehood or in
reckless disregard of its truth, in order to
induce and actually inducing another to act thereon to
his injury.71 There must always be damage or injury
in cases of fraud. For example, if A,
an expert jeweler and in order to be able
to sell his glass figurine, told X that such
figurine is made of Diamond from South
Africa and, on such false representation, X
bought the figurine, the contract of sale can be
annulled by X.
In Rivero vs. Court of Appeals72 where a nephew of
an old illiterate sickly woman took advantage of
her predicament by making her believe that the
“Kasulatan Sa Ganap na Bilihan” was a contract of
mortgage, and where, knowing that the old
woman merely wanted to borrow money secured by the
mortgage of the property, again took
advantage of the desperate condition of
the illiterate woman by making her sign the
Kasulatan where it appeared thereon that he was
the buyer of the property, the Supreme Court
ruled that the contract was annullable because the
consent of the old woman was obtained thru
fraudulent misrepresentation of the nephew that the
contract she was signing was one of mortgage.

The Principles of the American Law of Contracts at Law and in Equity by John
D. Lawson, Ll.D., 1905, 2nd Edition, Pages 291-
292.
art COntraCts 393
Essential Requisites of
Contracts Sec. 1
— Consent
G.R. No. L-32116, April 21, 1981, 104 SCRA 151.
. 1339

Article 1339. Failure to disclose facts, when there is a duty to reveal them,
as when the parties are bound by confidential relations, constitutes fraud. (n)

Each party is bound to be as diligent and

circumspect as possible in entering into a
contract and therefore each party is not
dutybound to make known to each other any
fact which is both within their knowledge or
within their opportunity to know. Also, the mere
fact that one of the parties has superior
knowledge of the value of the property
subject of the transaction than the other party
does not per se constitute fraud. There is only
fraud when, under the special and peculiar circumstances
of each case, a legal or equitable duty
is imposed upon the dominant party to
reveal certain facts material to the transaction or
when there is a confidential relationship
between the parties. Hence, an animal breeder has a
duty to disclose to an ordinary buyer that the
particular cow the buyer wants to buy is
suffering from a disease not detectable to
the naked eye. Also, a lawyer or an
agent, because of his confidential and trust
relation-ship with his principal or client, is duty
bound to reveal facts impor-tant to the
transaction; otherwise, non-disclosure will constitute
fraud.

Article 1340. The usual exaggerations in trade, when the other party had an
opportunity to know the facts, are not in themselves fraudulent. (n)

The law recognizes the practice in trade that

there are usual exaggerations employed by the
parties to consummate a particular transaction.
If a party is induced by such usual
exaggerations, there may be fraud amounting to
active misrepresentation. If it is within the
means of the other party to investigate the
394 ObligatiOns and COntraCts art
Text and Cases
truthfulness of such exaggeration and he does
not do so, there will be no fraud
despite the exaggerations.
Article 1341. A mere expression of an opinion does not signify fraud, unless
made by an expert and the other party has relied on the former’s special
knowledge. (n)

Opinions are generally not regarded as

representation of facts. Hence, if the opinion turns
out to be wrong, it is not considered
legally

Elliott, supra, Page 135.

Id. 77Id.
 COntraCts 395
Essential Requisites of Contracts Sec. 1 —
Consent
arts. 1340-1341

deceitful insidiously inducing a party to enter into

a contract. There are times when, without really
having any special knowledge as to the
object of the contract, a person expresses an
opinion about the same. At the same time, the
other party to whom the opinion was relayed may
equally have his own thoughts and observation that
would affect his judgment. In such cases, the
expression of an opinion will not vitiate
consent.
An illustration of the difference between
opinion and representation is found in
the difference between the vendor of
property saying that it is worth so
much, and his saying that he gave
so much for it. The first is
an opinion which the buyer may adopt
if he will, the second is an
assertion of fact which, if false to
the knowledge of the seller, is
fraudulent. Thus to say that the
subject matter of the sale was “good
oil land” or that a patent was
a valuable or useful improvement, or
that a certain land was suitable for
building purposes, is not fraudulent; while
to say that business is profitable,
or that a building is “fire proof”
or that a furnace will heat a
house, or that a rival seller will
sell for less, is.73

Under Article 1341, if the opinion is given by

one who is thoroughly knowledgeable or is
an expert in the field such that he
knows for a fact that his opinion will turn
out to be false and still induces the other
party to enter into the contract on the basis
of such false opinion, fraud can be invoked to
annul the contract. In such a case, the
opinion will be considered as a fact.
396 ObligatiOns and COntraCts art
Text and Cases
Article 1342. Misrepresentation by a third person does not vitiate consent,
unless such misrepresentation has created substantial mistake and the same
is mutual. (n)

Misrepresentationby a third person vitiates consent only

if it created substantial mistake and the same
is mutual. In Rural Bank of Caloocan vs. Court of Appeals74
where a person induced an elderly woman to co-
sign a promissory note as debtor and to
mortgage her property, without said woman
knowing the nature of the contract, and where the
same person successfully misrepresented to the bank
the qualification of the elderly woman to
induce the bank to grant the loan, the
Supreme Court said that the loan agreement
signed by the elderly woman can be annulled on
the ground of mistake in the giving of
consent by the parties. Pertinently, the Supreme Court
said:
“Thus, as a result of the fraud
upon Castro and the misrepresentation to
the bank inflicted by the Valencias,
both Castro and the bank committed
mistake in giving their consents
. 1342

to the contracts. In other words, substantial

mistake vitiated their consents given. For if
Castro had been aware of what she
signed and the bank of the true
qualifications of the loan applicant, it
is evident that they would not have
given their consents to the contracts.
Pursuant to Article 1342 of the Civil Code which
provides:
Article 1342. Misrepresentation by a
third person does not vitiate
consent, unless such misrepresentation has
created substantial mistake and the
same is mutual.
we cannot declare the promissory note (Exhibit
2) valid between the bank and Castro
and the mortgage contract (Exhibit 6) binding
 COntraCts 397
Essential Requisites of Contracts Sec. 1 —
Consent
on Castro beyond the amount of P3,000.00
for while the contracts may not be
invalidated insofar as they affect the
bank and Castro on the ground of
fraud because the bank was not a
participant thereto, such may however be
invalidated on the ground of substantial
mistake mutually committed by them as
a consequence of the fraud and
misrepresentation inflicted by the Valencias.
Thus, in the case of Hill vs. Velosos (31
Phil. 160), this Court declared that a
contract may be annulled on the ground
of vitiated consent if deceit by a
third person, even without connivance or
complicity with one of the
contracting parties, resulted in mutual error
on the part of the parties to
the contract.

Article 1343. Misrepresentation made in good faith is not fraudulent but

may constitute error. (n)

Misrepresentationis, in the main, inclusive of

the term fraud. Practically every fraud is a
misrepresentation, but every misrepresentation is not
fraudulent.75 Thus a misrepresentation as to the
subject-matter of or parties to a contract may
be innocently made, and, if so, it does
not amount to fraud, but is a
misrepresentation.76 Misrepresentations may be made
without the knowledge of its falsity77 and
therefore completely done in good faith. In
such a case it may constitute merely an
error.

Article 1344. In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting parties.

G.R. No. 89561, September 13, 1990, 189 SCRA 529.

G.R. No. 48194, March 15, 1990, 183 SCRA 1990.
See also J.R. Blanco vs. Quasha, G.R. No.
133148, November 17, 1999, 115 SCAD 522, 318 SCRA
373.
arts. 1343-1344
398 ObligatiOns and COntraCts art
Text and Cases
Incidental fraud only obliges the person employing it to pay damages. (1270)

The fraudulent act must be serious. There must

be an intention to injure and that damage or
injury in fact resulted. The parties must not be
in pari delicto. They must not have been mutually guilty
of fraud. It must not be dolo incidente which
is accidental and collateral fraud which does
not necessarily bear on the decision of the
party defrauded to enter into the contract. It
must be dolo causante which refers to the very
cause why the other party entered into the
contract. Article 1345. Simulations of a contract may be absolute or relative.
The former takes place when the parties do not intend to be bound at all; the
latter, when the parties conceal their true agreement. (n)

In Umali vs. Court of Appeals78 where it was

contended that the failure of one of the
parties to pay the consideration proved that the
contract was absolutely simulated and therefore
null and void, the Supreme Court rejected such
contention, to wit:
The evidence of record, on an overall
calibration, does not convince us of
the validity of the petitioners’ contention
that the contracts entered into by the
parties are either absolutely simulated or
downright fraudulent.
There is absolute simulation, which renders
the contract null and void, when the
parties do not intend to be bound
at all by the same. The basic
characteristic of this type of simulation
of contract is the fact that the
apparent contract is not really desired or
intended to either produce legal effects or
in any way alter the juridical situation
of the parties. The subsequent act
of Rivera in receiving and making use
of the tractor, subject matter of the
Sales Agreement and Chattel Mortgage,
and the simultaneous issuance of a
surety bond in favor of Bormaheco,
concomitant with the execution of the
Agreement of Counter Guaranty with the
Chattel/Real Estate Mortgage, lead to
 COntraCts 399
Essential Requisites of Contracts Sec. 1 —
Consent
the conclusion that petitioners had
every intention to be bound by these
contracts. The occurrence of these series
of transactions between petitioners and
private respondents is a strong indication
that the parties actually intended, or at
least expected, to exact fulfillment of
their respective obligations from one
another.

Ibid.
Tongoy vs. Court of Appeals, 123 SCRA 99.
See also J.R. Blanco vs. Quasha, G.R. No.
133148, November 17, 1999, 115
400 ObligatiOns and COntraCts
Text and Cases
arts. 1345-1346

Article 1346. An absolutely simulated or fictitious contract is void. A relative

simulation, when it does not prejudice a third person and is not intended for
any purpose contrary to law, morals, good customs, public order or public
policy binds the parties to their real agreement. (n)

In Javier vs. Court of Appeals79 where a party

assigned his timber license to another for a
consideration of P120,000 but the Deed of
Assignment dated February 15, 1966 stated that,
for such amount of money, the assignee shall
transfer his shares of stock in a corporation
to be known as Timberwealth Corporation, and
where the assignment was eventually implemented
but the assignee did not fully pay the
consideration, and where finally, to claim the
balance, the assignor sued the assignee who contended
that the contract was null and void because the
corporation was never set up and there was
no transfer to him of the shares of stock,
the Supreme Court ruled that the assignee should be
held liable considering that the assignment was
a relatively simulated contract which, though
containing a false consideration, was not null
and void per se. It cited Article 1346 which
pertinently provides that a relatively simulated
contract, when it does not prejudice a third
person and is not intended for any purpose
contrary to law, morals, good customs, public order or
public policy binds the parties to their real
agree-ment.80
In J.R. Blanco vs. Quasha,81 the owner of the
property entered into a contract of sale of her
property with a company payable in equal
annual installments of P25,000 per year.
Simultaneously, the company and the said
owner entered into a contract of lease of the
same property whereby the owner would lease the
property from the company for 25 years for
a monthly rental of P2,083.34 or P25,000.08
per year. The totality of the agreement was
called a Sale-Lease-Back Agreement. It is
 COntraCts 401
Essential Requisites of Contracts Sec. 1 —
Consent
contended that the sale-lease-back agreement was
simulated and therefore void because no actual
consideration passed from the buyer to the
seller. The Supreme Court rejected this claim. It
reasoned that although no actual exchange of
money was made, yet the payment was effected
between the vendee and the vendor by mutual
agreement whereby the montly rental which was due
the vendor was paid from the annual installment
of P25,000 due from the vendee pursuant to the
lease contract executed between them. The court found
nothing wrong with this arrangement for the same
is not contrary to law, morals, good customs, or
public policy, but rather for

SCAD 522, 318 SCRA 373.

84
G.R. No. 134992, November 30, 2000, 137 SCAD
932, 345 SCRA 233.
85
G.R. No. 136857, November 22, 2000, 138 SCAD
171, 345 SCRA 468.
art. 1346

the convenience of both parties.

Simulation of a contract may be absolute
or relative. The former takes place when
the parties do not intend to be
bound at all; the latter, when the
parties conceal their true agreement. An
absolutely simulated or fictitious contract is
void. A relatively simulated contract, when it
does not prejudice a third person and
is not intended for any purpose contrary
to law, morals, good customs, public order
or public policy, binds the parties to
their real agreement.82
The characteristic of simulation is
the fact that the apparent contract is
not really desired nor intended to produce
legal effects nor in any way alter
the juridical situation of the parties. Thus,
a person, in order to place his
property beyond the reach of his creditors,
simulated a transfer of it to another,
he does not really intend to divest
402 ObligatiOns and COntraCts
Text and Cases
himself of his title and control of
the property, hence the deed of transfer
is but a sham.83

In Pua vs. Court of Appeals84 where it was proven that

the person who allegedly entered into the
contract was not even conceived at the time
the contract was executed, the Supreme Court said
that the contract was definitely absolutely
simulated.
In Velasquez vs. Court of Appeals,85 a debtor was lured
by the creditor to make it appear that the
debtor sold to the creditor the collateralized
property of the debtor. The creditor told the
debtor that this scheme was necessary so that
the creditor can borrow money from a certain bank
and make use of the property as collateral.
After the loan was obtained, the creditor was
supposed to execute a reconveyance of the
property to the debtor who would then assume the
loan from the bank and use the proceeds of
the loan to pay off his loan to the
creditor. In the implementation of the scheme, three
documents were executed on the same day
namely: 1) a deed of cancellation of the
mortgage made by the debtor to the
creditor; 2) a deed of sale of the
property from the debtor to the creditor; and 3)
a document purporting to re-sell the
property to the debtor. It was contended by
the creditors that the sale of the property was
authentic after the debtor filed a case to
annul all the said documents. The Supreme Court
rejected the said contention of the creditor and
stated the contract of sale was clearly simulated
to facilitate the transaction with the bank as
there was absolutely no consideration at all
and the parties clearly did not intend to be
bound by the deed of sale and its

G.R. No. 138774, March 8, 2001.

art. 1346
 COntraCts 403
Essential Requisites of Contracts Sec. 1 —
Consent
accompanying documents.
In Francisco vs. Francisco-Alfonso86 where the two
illegitimate daughters claimed that they bought the
two properties in 1983 from their deceased
father via a “Kasulatan sa Ganap na Bilihan” in the total
amount of P25,000 but evidence showed that, even with
what they claimed as their respective jobs at
that time, they could not possibly have any
income to be able to have such amount of
money at the time of the sale, the
Supreme Court declared the contract as void for being
simulated because there was no consideration for
the same. In concluding that the sale was
void, the Supreme Court said that it was
impossible for one of the illegitimate
daughters to have money on hand in the
amount of P15,000 just selling goto or lugaw at the time
of the sale. Likewise, the Supreme Court said
that it was incredible for the other
illegitimate daughter, who was engaged in the
buying and selling of RTW, to have money on
hand in the amount of P10,000 at the time
of the sale. Aside from the fact that a
family friend testified that the illegitimate daughters
had no source of income at the time of
the sale, they likewise did not even present any
single witness to prove that the seller received the
purchase price.
404 ObligatiOns and COntraCts
Text and Cases
art. 1346 COntraCts 359
Essential Requisites of Contracts
Sec. 1 — Consent
360 ObligatiOns and COntraCts Text
and Cases

SECTION 2. — Object of Contracts

Article 1347. All things which are not outside the commerce of men,
including future things, may be the object of a contract. All rights which are
not intransmissible may also be the object of contracts.
No contract may be entered into upon future inheritance except in cases
expressly authorized by law.
All services which are not contrary to law, morals, good customs, public
order or public policy may likewise be the object of a contract. (1271)

Any property or service can be the object of

a contract provided that it is within the
commerce of man. Hence, one cannot sell the
Luneta or a public sidewalk as they are not
within the commerce of man. In Maneclang vs.
IAC,229 the Supreme Court ruled that:
The stipulation contained in the
Compromise Agreement partakes of the
nature of an adjudication of ownership
in favor of herein petitioners of
the fishpond in dispute, which, as clearly
found by the lower and appellate courts,
was originally a creek forming a tributary
of the Agno River. Considering that
as held in the case of Mercado
vs. Municipal President of Macabebe, 59 Phil. 592
[1934], a creek, defined as a recess
or arm extending from a river and
participating in the ebb and flow
of the sea, is a property belonging
to the public domain which is not
susceptible to private appropriation and
acquisitive prescription, and as a
public water, it cannot be registered under
the Torrens System in the name of
any individual [Diego vs. Court of Appeals, 102
Phil. 494; Mangaldan vs. Manaog, 38 Phil. 455];

229
G.R. No. L-66575, September 30, 1986, 144 SCRA 553.
 and considering further that neither the
mere construction of irrigation dikes by
the National Irrigation Administration which prevented
the water from flowing in and out
of the subject fishpond, nor its
conversion into a fishpond, alter or
change the nature of the creek as
a property of the public domain, the
Court finds the Compromise
Agreement null and void, and of no legal
effect, the same being

360
art. 1347 COntraCts 361
Essential Requisites of
Contracts Sec. 2 —
Object of Contracts

contrary to law and public policy.

An undertaking or service to assassinate a

particular dignitary cannot be the object of
a contract because it is contrary to law and
public order. Future things that can be reasonably
ascertained can be the object of a
contract. In a contract of sale, things having a
potential existence may be the object of such
contract;2 and the efficacy of the sale of
a mere hope or expectancy is deemed
subject to the condition that the thing will
come to existence.3 Hence, all future puppies of
a particular pregnant dog can be the
object of a contract although the puppies are not
yet born. However, the sale of a vain
hope or expectancy is void.4
Rights may likewise be the object of contracts
provided they are transmissible. Hence, one can sell
leasehold rights over a property provided that there
is no contractual and legal stipulation
prohibiting its transmissibility.
Except in cases authorized by law, future
inheritance cannot be the object of a
contract because its extent, amount or quantity is not
determinable. Future inheritance “is any property or
right not in existence or capable of
determination at the time of the contract, that
a person may in the future acquire by
succession.”230 Indeed one cannot determine with
certainty how much inheritance one would get from
his father, mother, or any person from whom he
is called upon to succeed or to inherit. This
is so because, it may happen that the
father, at the time of his death, may have
some debts to pay and, under the rules of
succession, these obligations have to be paid
first to the creditors before the exact amount of
the inheritance can be determined and
distributed. Also, it may happen that, at the
time of the death of the father or
mother, there are no more properties to
inherit. In Blas vs. Santos231 where the wife agreed to give
whatever her share in the conjugal partnership
property to her heirs once the husband dies, the
Supreme Court said that such agreement does not
involve future inheritance, to wit:
It is not an obligation or
promise made by the maker to transmit
one-half of her share in the conjugal
propertiesacquired with her husband, which properties
are stated or declared to be conjugal
propertiesin the will of the husband.
x x x The promise does not
refer to any propertiesthat the maker
would inherit 2
Article 1461 of the 1950
Civil Code.
3Id.
4Id.

230
Blas vs. Santos, G.R. No. L-14070, March 29, 1961,
1 SCRA 899.
231
Id., Pages 906-907.
409 ObligatiOns and COntraCts
Text and Cases
arts. 1348-1349

upon the death of the husband. The

document refers to existing propertieswhich she
will receive by operation of law on
the death of her husband, because it
is her share in the conjugal assets.

Article 1348. Impossible things or services cannot be the object of contracts.

(1272)

One cannot be bound to do the impossible.

Hence, a contract requiring a person to
become a monkey on a particular date is
impossible. It cannot be the object of a
contract.

Article 1349. The object of every contract must be determinate as to its kind.
The fact that the quantity is not 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. (1273)

The object must be one that can be

ascertained with reasonable certainty as to its
kind. Hence, a contract engaging a certain
person to perform a deed, without specifying what
deed it is, does not make the service
determinable and is therefore void. But a
contract engaging a person to sing in his
nightclub identifies the kind of deed
which is to be performed and therefore
valid. Likewise a contract requiring an
obligor to deliver a fruit is so general but,
if the contract is to deliver a kind of
fruit such as a mango or guava, the contract is
valid.
The law likewise states that the fact that the
quantity is not 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. Hence, a contract which engages a person to
supply all the ice which a restaurant needs
is valid because the quantity of ice is easily
410 ObligatiOns and COntraCts
Text and Cases

ascertainable without the need for a new

contract.
363

SECTION 3. — Cause of Contracts

Article 1350. In onerous contracts the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by the other;
in remuneratory ones, the service or benefit which is remunerated; and in
contracts of pure beneficence, the mere liberality of the benefactor.
(1274)

Cause is one of the essential requisites for

a contract to validly exist. “The cause of a
contract is the essential or more proximate
purpose which the contracting parties have in view
at the time of entering into the contract”
(8 Manresa, 697).232 It may or may not
be tangible. It can take different forms, such as
a prestation or promise of a thing or
service by another.2 It can be the giving of
a sum of money, an object or even an
expectation of profits from a subdivision
project.233 In Dihiansan vs. Court of Appeals,234 a corporation decided
to sell its property along an avenue and gave the
persons living near the said property a preferential
right to buy the same. One of the
persons given such right was approached by a
certain individual who requested that he be
allowed to buy the property with a commitment
to re-sell the same to the said person who
was originally given the preferential right. The

232
Republic vs. Cloribel, G.R. No. L-27905, December 28,
1970, 36 SCRA 534. 2Torres vs. Court of
Appeals, G.R. No. 134559, December 9, 1999, 117
SCAD 94, 320 SCRA 428.
233
Ibid.
234
G.R. No. L-49539, September 14, 1987, 153 SCRA 712.
latter agreed and an agreement was signed
embodying this commitment. This scheme was done
because, clearly, the corporation will not sell the
property to any other person except those given a
preferential right. Instead of re-selling to the
person given that preferential right, the purchaser
sold it to another. It was contended that
the contract between the person given preferential right
and the individual who requested to buy
the property was without consideration and therefore
null and void. The Supreme Court rejected this
position by stating:
Petitioner’s allegation that Exhibit “A” is null and
void for

363
art. 1351

lack of cause or consideration is untenable.

The consideration as found by the
lower court and affirmed by the Court
of Appeals is private respondent’s
preferential right to buy the property
from the owner. The contract Exhibit “A”
clearly stipulates that petitioner Dihiansan shall
re-sell the disputed property to private
respondent. The contract is the law
between the parties. When the words of
a contract are plain and readily under-
standable there is no room for
construction.

In an onerous contract, the cause is understood

to be, for each contracting party, the
prestation or promise of a thing or
235
service by the other. In Republic vs. Cloribel
where a compromise agreement designed to

235
Republic vs. Cloribel, G.R. No. L-27905, December 28,
6
1970, 36 SCRA 534. Penaco vs. Ruaya, G.R.
No. L-28102, December 14, 1981, 110 SCRA 46.
412 ObligatiOns and COntraCts
Text and Cases

terminate the case between litigating parties to

a suit was entered into, the cause of the
compromise was the mutual waiver and abandonment
of the parties of their claims against each other.
In reciprocal contracts, the obligation or
promise of each party is the consideration for
that of the other.6
In remuneratory contracts, the cause is the
service or benefit which is remunerated. Thus, when
a doctor agreed to diagnose a patient, the cause
for engaging the doctor is for him to
look at the patient and diagnose him. The fee
to be received by the doctor for his
diagnosis is the cause of the contract as
far as the doctor is concerned. In
contracts of pure beneficence, the mere
liberality of the benefactor is the cause
of the contract. It does not involve any
material thing but rather it involves only the
generosity of the benefactor. Thus, a
scholarship contract given by a school where an
indigent will not pay anything for his education
in the said school has for its cause the
liberality and generosity of the benefactor-
school.

Article 1351. The particular motives of the parties in entering into a contract
are different from the cause thereof. ( n )

Motive is different from cause. “Cause is the

essential reason for the contract, while motive is the
particular reason for a contracting party
which does not affect the other party and
which does not preclude the existence of a
different consideration.”236 Hence, a contract of sale of
a valuable relic has for its cause the
payment of the purchase price on the part of
the seller and the delivery of the thing sold
on the part of the buyer. The seller may
have been motivated by some

236
Republic vs. Cloribel, G.R. No. L-27905, December 28,
1970, 36 SCRA 534.
art COntraCts 413
Essential Requisites of
Contracts Sec. 3 —
Cause of Contracts
. 1351

expectation of profit while the buyer might have

been motivated to purchase the relic by the
beauty and rarity of the relic. Clearly, the
motivation of the parties is independent from
the cause of the contract and therefore does
not form an essential part of it. In
Philippine National Construction Corporation vs. Court of Appeals 237
where the lessee sought to release itself from
paying rentals and from the whole contract itself
contended that the purpose for which it
entered the contract did not materialize, the
Supreme Court rejected such contention by stating:
With regard to the non-materialization of
the petitioner’s particular purpose in entering
into the contract of lease, i.e., to use
the leased premises as a site of
a rock crushing plant, the same will
not invalidate the contract. The cause or
essential purpose in a contract of lease
is the use or enjoyment of
a thing. As a general principle, motive
or particular purpose of a party in
entering into a contract does not affect
the validity nor existence of the contract:
an exception is when the realization
of such motive or particular purpose has
been made a condition upon which the
contract is made to depend. The exception
does not apply here.

There are certain cases however where the cause is

equated to the motive when it is clear that
the motive predetermines the cause. This is
exemplified in the case of E. Razon vs. Philippine
Ports Authority238 involving a void contract because of
an illegal cause. The pertinent portions of the
decision are as follows:

237
G.R. No. 116896, May 5, 1997, 82 SCAD 377.
238
G.R. L-75197, June 22, 1987, 151 SCRA 233.
No.
414 ObligatiOns and COntraCts
Text and Cases

The Management Contract under consideration

was executed by and between petitioner E.
Razon, Inc. represented by its President,
herein co-petitioner Enrique Razon, and
respondent PPA, represented by its
then General Manager, E.S. Baclig, Jr. on
June 27, 1980 (Annex “A,” Petition, p.
18, Rollo). By petitioners’ own admission,
at the time of the execution of
the Management Contract, petitioner E. Razon,
Inc. later known as Metro Port Services,
Inc. was controlled by Alfredo “Bejo”
Romualdez, brother-in-law of deposed President
Marcos. Under Section 5 of the Anti-Graft
and Corrupt Practices Act (R.A. No. 3019)
Romualdez, by reason of his
relationship with the then President of
the Philippines, was prohibited from
intervening, directly or indirectly, in
any transaction or business with the
government. Thus, the Management Contract,
entered into by E. Razon, Inc., ostensibly
owned by petitioner Enrique Razon, but in
fact controlled by Alfredo Romualdez
as 60% equity owner thereof, is null
and void and of no effect, being
one expressly
art. 1351

prohibited by law (par. [7], Art. 1409, Civil Code

of the Philippines). Furthermore, as
will be shown later, the Management
contract is the direct result of a
previous illegal contract and, therefore, is itself
null and void under Article 1422 of
the Civil Code.
Petitioners attempt to evade the consequences
of the Romualdez connection by
alleging that the 60% equity of petitioner
E. Razon, Inc. was obtained thru force
and duress and without any monetary
consideration whatsoever. Otherwise stated,
the transfer of the shares of stock
art COntraCts 415
Essential Requisites of
Contracts Sec. 3 —
Cause of Contracts

to persons close to President Marcos, later

disclosed to be Alfredo “Bejo” Romualdez
was, at the very least, voidable for
lack of consent, or altogethervoid for
being absolutely fictitious or simulated.
Verily, the transfer of the shares of
stocks of petitioner E. Razon, Inc.
representing 60% equity to persons fronting
for Alfredo “Bejo” Romualdez was null
and void. The invalidity springs not from
vitiated consent nor absolute want of monetary
consideration, but for its having had
an unlawful cause-that of obtaining a
government contract in violation of law.
While the general rule is that the
causa of the contract must not be
confused with the motives of the parties,
this case squarely fits into the exception
that the motives may be regarded as
causa when it predetermines the purpose
of the contract. (Liguez vs. Court of Appeals, 102
Phil. 577). On the part of
Romualdez, the motive was to be
able to contract with the government
which he was then prohibited by
law from doing, and on petitioner Razon’s
part, to be able to renew his
management contract. For it is scarcely
disputable that Enrique Razon would not
have transferred said shares of stock
to Romualdez without an assurance from
the latter that he would be unduly
favored with a renewal of the
Management Contract. Thus, it came to
pass that by transferring 60% of
the shares in his company to
Romualdez, petitioner Enrique Razon was able
to secure an eight-year contract with
respondent PPA and for six years
before its cancellation benefit from the
proceeds thereof.
Petitioners’ attempt to dissociate or divorce
themselves from the illegality of the
transfer and, consequently, of the

No.
416 ObligatiOns and COntraCts
Text and Cases

management contract, as well as their

claim of innocence or being a
victim of the Marcos regime must fail
for the “view has been taken x
x x that a party is a
participant in the unlawful intention where
he knows and intends that the subject
matter will be used for an illegal
purpose and there would seem to be
no doubt that one may be deemed
to be a participant in the
other’s unlawful design if he shares in
the benefits of the violation of law.
However, whether he is to derive any
benefit from the unlawful use of the
subject matter is not the sole test.
A test which has been said to
. 1351

be more comfortable to sound morality is whether

he intends to aid the other in
the unlawful object. He may be deemed
to be a participant in the
unlawful purpose if, with knowledge thereof,
he does anything which facilitates the carrying
out of such purpose.” (17 Am Jur
2d 515-516).
The transfer of the control of petitioner
E. Razon, Inc. from petitioner Enrique Razon
to Alfredo “Bejo” Romualdez, which we
have resolved to be null and void,
served as the direct link to petitioner
company’s obtaining the Management Contract.
Being the direct consequence and result
of a previous illegal contract, the
Management Contract itself is null and
void as provided in Article 1422 of
the Civil Code.
Elementary in the law of contracts is
the principle that no judicial action is
necessary for the annulment of a
void contract. Any such action would be
merely declaratory. (Tolentino, Civil Code of the
art COntraCts 417
Essential Requisites of
Contracts Sec. 3 —
Cause of Contracts

Philippines, Vol. IV, 1973 ed., p. 594).

Thus, it was well within the rights
of respondent PPA to unilaterally
cancel and treat as avoided the
Management Contract and no arbitrariness
may be attached to its exercise of
this right.

In Uy vs. Court of Appeals239 where the National Housing

authority purchased certain lots and thereafter
cancelled the Deeds of Sale relative thereto
considering that the lots turned out to be
unsuitable for its housing project, the Supreme Court
sustained the dismissal of the case for
damages filed by the vendors. As to the claim
of the vendors that NHA rescinded the
contract without legal basis, the Supreme Court said that
the NHA did not rescind the sale pursuant to
Article 1191 of the Civil Code considering that
there was no breach of trust committed by
the sellers themselves who merely complied with
their obligation to deliver the properties.
Neither did NHA suffer any injury by the
performance by the vendors of their obligation.
The Supreme Court ruled that the cancellation was
valid as it was based on the negation of
the cause arising from the realization that the
lands, which were the object of the sale, were
not suitable for housing. The Supreme Court said that
for the vendee, NHA, the cause was the
acquisition of the land. For the seller, the
cause was to obtain the price. The motive of
the NHA, which was known to the seller, was
to use said lands for housing. The Supreme Court
thereafter stated that
it is clear, and petitioners do not
dispute, that NHA would not have entered
into the contract were the lands not
suitable for housing. In other words, the
quality of the land was an implied

239
G.R. 120465, September 9, 1999, 112 SCAD 63, 314 SCRA 69.
No.
418 ObligatiOns and COntraCts
Text and Cases

arts. 1352-1354

condition for the NHA to enter into the contract. On

the part of the NHA, therefore, the
motive was the cause for its being
a party to the sale.240

Article 1352. Contracts without cause, or with unlawful cause, produce no

effect whatever. The cause is unlawful if it is contrary to law, morals, good
customs, public order or public policy. (1275a)

Since cause is one of the essential elements of

a contract, its absence does not create a
contract as there can be no meeting of the
minds. This is also true if the cause is
unlawful. Hence a contract to engage a party
to steal is unlawful as it is against the
law. Likewise a contract between a husband and
wife to have their respective paramours is
contrary to morals. A contract to foment riots is
contrary to public order and a contract waiving the
right of an employee to receive what is
due him under the law is contrary to
public policy.

Article 1353. The statement of a false cause in contracts shall render them
void, if it should not be proved that they were founded upon another cause
which is true and lawful. (1276)

The general rule provided by the law is that

a false cause stated in a contract makes the
contract void. Thus, a contract of sale, which states
that the price of the object for sale is
P500 when in fact no such price has been
paid at all, is void.241 However, when a
contract, though stating a false consideration, has in

240
G.R. No. 120465, September 9, 1999, 112 SCAD 63,
314 SCRA 69.
241
See Mapalo vs. Mapalo, G.R. No. L-21489, May 19, 1966, 17
SCRA 114.
art COntraCts 419
Essential Requisites of
Contracts Sec. 3 —
Cause of Contracts

fact a real consideration, the contract is not

void. Thus, when a contract stating the consideration
of a ball pen is P1,000 but it is
only sold for P500 which the seller accepted,
the contract is valid. At the least, the
contract is a relatively simulated one.

Article 1354. Although the cause is not stated in the contracts, it is presumed
that it exists and is lawful, unless the debtor proves the contrary. (1277)

In Liam vs. Olympic Sawmill Co.,13 a loan of

P10,000 was entered into and, subsequently, another loan
agreement was executed increasing the original
amount of the previous loan by P6,000 “to
answer for attorney’s fees, legal interest and other
cost incident
. 1355

thereto to be paid unto the creditor” upon the

termination of the agreement. The debtor failed
to pay and a case was filed. By way
of summary judgment, decision was rendered
ordering the defendantdebtor to pay the principal
amount of P10,000 and the additional amount of
P6,000. The latter amount was contested as being
usurious. The Supreme Court ruled that, at the
time of the tran-saction, the usury law was
suspended and, moreover, it said:
Under Article 1354 of the Civil Code,
in regards to the agreement of
the parties relative to the P6,000.00
obligation, “it is presumed that it
exists and is lawful, unless the debtor
proves the contrary.” No evidentiary
hearing having been held, it has to
be concluded that defendants had
not proven that the P6,000.00 obligation
was illegal. Confirming the Trial Court’s
finding, we view the P6,000.00 obligation
as liquidateddamages suffered by plaintiff, as

No.
420 ObligatiOns and COntraCts
Text and Cases

of March 17, 1960, representing loss

of interest income, attorney’sfee and
incidentals.

Article 1355. Except in cases specified by law, lesion or inadequacy of cause

shall not invalidate a contract, unless there has been fraud, mistake or undue
influence. (n)

In Auyong Hian vs. Court of Tax Appeals14 where the

contract involving tobacco was assailed as invalid due
to inadequacy of price, the Supreme Court said,
Neither can the inadequate consideration, even
if true, invalidate the sale to the CTIP.
The other factor which, according to petitioner,
militates against the validity of the sale
is the measly sum of P1,500,000
paid by the CTIP for the tobacco
which had a value, according to petitioner,
of P7,000,000. What is really the
value of the imported tobacco? According
to the Tax Court, the records show
that when the tobacco arrived in the
Philippines, petitioner filed an Affidavit and Pro
Forma Invoice giving the invoice value of
the tobacco as US$103,453 and an
appraised value, for tax purposes, of P227,675.
Petitioner contends that this declaration is
merely its invoice value and does not include the other
expenses incurred in the importation. Because of
these different declarations, the Tax Court
confessed it was at a loss as
to which of petitioner’s declaration
was to be believed. When it suits
petitioner’s purpose he claims that the
tobacco was worth P227,675.00. For other
purposes the value was P7,000,000. If
the claim of petitioner

G.R. No. L-30771, May 28, 1984, 129 SCRA 439.

G.R. L-28782, September 12, 1974, 59 SCRA 110.
art. 1355
art COntraCts 421
Essential Requisites of
Contracts Sec. 3 —
Cause of Contracts

that the tobacco was really worth

P7,000,000, then there will be another
cause for forfeiture which would be
petitioner’s filing a false declaration
under Section 2530(m) of the Tariff and
Customs Code.
We cannot say that the appraisal of
the value of the tobacco was incorrect.
According to the Tax Court, the
Collector of Customs took precautionary measures
to insure a correct appraisal of the
tobacco. The appraisal was made by a
competent appraiser of the Bureau of
Customs, and both the Commissioner of
Customs and the Secretary of Finance, who
exercise supervisory authority over the Collector
of Customs and who were consulted on
the matter, approved the sale, or at
least, interposed no objection to the
sale. Anent this matter it has
been said that an appraisal
made by the Commissioner of Customs
under Section 1377 of the Revised
Administrative Code is presumed to be
correct, unless the contrary is proven by
the importer. (Lazaro vs. Commissioner of Customs, L-22511
and L-22343,
May 16, 1966, 17 SCRA 36, 41
and cases cited there-in.)
But, assuming arguendo, that the
consideration paid for the forfeited tobacco
was inadequate, such inadequate
consideration is not a ground for
the invalidity of a contract. Anent this
matter Article 1355 of the Civil Code
provides:
“Except in cases specified by
law, lesion or inadequacy of
cause shall not invalidate a
contract, unless there has been
fraud, mistake or undue influence.”
Petitioner has not shown that the instant
sale is a case exempted by law

No.
422 ObligatiOns and COntraCts
Text and Cases

from the operation of Art. 1355; neither

has petitioner shown that there was fraud,
mistake or undue influence in the sale.
Hence, this Court cannot but conclude with
the Court of Tax Appeals that “in
these circumstances, we find no reason
to invalidate the sale of said tobacco
to Consolidated Tobacco Industries of the
Philippines.”

In Penaco vs. Ruava15 where the inadequacy of

cause was again invoked to invalidate the sale
of a house, the Supreme Court said,
The appellants, nevertheless, contend that
the consideration is for the house
only since the lot on which it
is constructed is public land which
they cannot sell, and in view of
the inadequacy of the price, the
building alone having an assessed value of
P1,500.00 and the land is too
cheap for P5,000.00.
Indeed, the lot on which the building
sold a retro is constructed is public land
and the appellants have no right
to sell 15
G.R. No. L-28102, December 14, 1981, 110
SCRA 46.
art COntraCts 423
Essential Requisites of Contracts
Sec. — Cause of Contracts

. 1355

3.

it. What is sought to be transferred and

ceded, however, is not the ownership of
the land, but the rights, interests and
participation of the appellants “as
public land claimants thereof by virtue of
the decision of the Bureau of Lands,”
which rights could be waived, transferred
or alienated. By their contract, the appellants
have undertaken to effect legal transfer
of all their rights over the lot
to the vendee a retro and his assigns upon
the consolidation of the title over
the building in the vendee, and whether
or not the herein appellee is qualified
to acquire that land of the public
domain claimed by the appellants depends
upon the Director of Lands who has
executive control over the concession and
disposition of the lands of the
public domain. For this reason the land
should be raised in the administrative
proceedings.
The inadequacy of the price is
not sufficient proof that the consideration
of P1,000.00 was for the house
alone. The vendee a retro could not have
possibly bought the house alone without securing
from the vendors a retro a specific and
fixed arrangement regarding the lot on
which the house is built, otherwise,
he could be ejected therefrom at the
will of the vendors a retro. Besides, “a
valuable consideration, however small or nominal,
if given or stipulated in good faith
is, in the absence of fraud, sufficient.
A stipulation in consideration of
one dollar is just as effectual and
valuable a consideration as a larger
sum stipulated for or paid.”
372 ObligatiOns and COntraCts Text
and Cases
 Chapter 3

FORMS OF CONTRACTS

Article 1356. Contracts shall be obligatory, in whatever form they may have
been entered into, provided all the essential requisites for their validity are
present. However, when the law requires that a contract be in some form in
order that it may be valid or enforceable, or that a contract be proved in a
certain way, that requirement is absolute and indis-pensable. In such cases,
the right of the parties stated in the following article cannot be exercised.
(1278a)

In Dauden-Hernaez vs. De Los Angeles1 where a movie

actress filed a suit to recover her compensation
for her services as a leading lady in two
motion pictures and where the producers resisted such
claim on the ground that the contract was void
or invalid as there was no written agreement
to the same, the Supreme Court ruled in favor
of the movie actress by upholding the
contract, to wit:
In the matter of formalities, the
contractual system of our Civil Code
still follows that of the Spanish Civil
Code of 1889 and of the
“Ordamiento de Alcala” of upholding the
spirit and intent of the parties over
formalities: hence, in general, contracts are
valid and binding from their perfection
regardless of form, whether they be
oral or written. This is plain from
Articles 1315 and 1356 of the present
Civil Code. Thus, the first cited provision
prescribes:
“Art. 315 Contracts are perfected by mere
consent, and from that moment the parties
are bound not only to the fulfillment
of what has been expressly stipulated but
also to all the consequences which,
according to their nature, may be in
keeping with good faith, usage and law.”
Concordantly, the first part of Article 1356
of the Code provides:
art COntraCts 425
Forms of Contracts

G.R. No. L-27010, April 30, 1969, 27 SCRA 1276.

G.R. No. 132474, November 19,
1999, 115 SCAD
798, 318 SCRA
688. 372
. 1356

Art. 1356. Contracts shall be obligatory in

whatever form they may have been entered into,
provided all the essential requisites for their
validity are present. x x x.”
These essential requisites last mentioned are
normally: (1) consent, (2) proper subject matter,
and (3) consideration or causa for the
obligation assumed (Article 1318). So that
once the three elements exist, the contract
is generally valid and obligatory, regardless
of the form, oral or written, in
which they are couched.
To this general rule, the Code admits exceptions,
set forth in the second portion of
Article 1356:
“However, when the law requires that a
contract be in some form in order
that it may be valid, or
enforceable, or that a contract be
proved in a certain way, that
requirement is absolute and indispensable.
x x x.”
It is thus seen that to the general
rule that the form (oral or written)
is irrelevant to the binding effect inter
partes of a contract that possesses the
three validatingelements of consent, subject matter,
and causa, Article 1356 of the Code
establishes only two exceptions, to
wit:
a) Contracts for which the law itself requires
that they be in some particular form
(writing) in order to make them valid
and enforceable (the so-called solemn contracts).
 Of these the typical example is the
donation of immovable property that the
law (Article 749) requires to be embodied
in a public instrument in order
“that the donation may be valid,” i.e.,
existing or binding. Other instances are the
donation of movables worth more than P5,000.00
which must be in writing, “otherwise
the donation shall be void” (Article 748);
contracts to pay interest on loans (mutuum)
that must be “expressly stipulated in
writing” (Article 1956); and the agreements
contemplated by Articles 1744, 1773, 1847
and 2134 of the present Civil Code.
b) Contracts that the law requires to be
proved by some writing (memorandum) of
its terms, as in those covered by
the old Statute of Frauds, now Article
1403(2) of the Civil Code. Their existence
not being provable by mere oral testimony
(unless wholly or partly executed), these
contracts are excep-tional in requiring a
writing embodying the terms thereof for
their enforceability by action in court.
The contract sued upon by petitioner herein
(compensation for services) does not come
under the exception. x x x.

In Cenido vs. Apacionado,2 the Supreme Court upheld the

validity of a written contract of sale of real
property even if it were not in a
public3G.R. Nos. instrument 104805-07, January
because 13, 1993all the, 127 essential SCRA 49.
requisites of the
374 ObligatiOns and COntraCts art. 1356
Text and Cases

contract were proven. In addition, the Supreme Court made

the following elucidation:
Generally contacts are obligatory in whatever
form such contracts may have been entered
into, provided all the essential requisites for
their validity are present. When however, the
law requires that a contract be in
some form for it to be valid
or enforceable, that requirement must
be complied with.
art COntraCts 427
Forms of Contracts

A certain form may be prescribed by

law for any of the following purposes:
for validity, enforceability, or greater efficacy
of the contract. When the form required
is for validity, its nonobservance renders
the contract void and of no effect.
When the required form is for
enforceability, non-compliance therewith will not
permit, upon the objection of a party,
the contract, although otherwise valid, to be
proved or enforced by action. Formalities
intended for greater efficacy or convenience
or to bind third persons, if not
done, would not adversely affect the validity
or enforceability of the contract between
the contracting parties themselves.

In Deloso vs. Sandiganbayan3 where the contract was

assailed as anomalous on the ground that it
was originally made orally and then later
reduced into writing, the Supreme Court ruled that
contracts can generally be made in
whatever form, thus:
It is not true that as the
information state, said tractors were delivered
to the lessees “without any agreement
as to the payment of rentals for
the use of said tractor” or that,
as the Sandiganbayan avers, “the tractors
were given out to these beneficiaries
without thought of compensation for their
use.” For all the witnesses of the
defense as well as of the
Government uniformlyattested to the reality
of verbal agreements between the
Municipality and the tractor’s lessees, i.e.,
that all said lessees were made aware
of the obligations they were assuming
prior to the delivery thereof, they all
bound themselves in writing “to all
the terms and conditions which the
Municipality of Botolan, Zambales may impose.”
And the fact that the lease
agreements were not initially reduced to
writing, this having been done only some
time later by the Sangguniang Bayan
through a resolutionadopted for that purpose,
 certainly does not make the transactions
anomalous or felonious,nor preclude the
generation of the contractual relation
of lessor and lessee between the
Municipality and the farmers. It is
axiomatic that contracts may be entered into
in any form, orally or in writing,
or parol in part and written in
part, it being needful merely that the
essential requisites for their validity

G.R. Nos. L-46715-16, July 29, 1988, 163 SCRA

705.
G.R. No. 132474, November 19, 1999, 115 SCAD 798,
318 SCRA 688.
. 1357

be present — a precept of general

application unless “the law requires that
a contract be in some form in
order that it may be valid or
enforceable.” Quite obviously, the lease
of the tractors in this case is
not one of those required by law
to be in writing or other particular
form in order that it may be
valid or enforceable.

Article 1357. If the law requires a document or other special form, as in the
acts and contracts enumerated in the following article, the contracting
parties may compel each other to observe that form, once the contract has
been perfected. This right may be exercised simultaneously with the action
upon the contract. (1279a)

A party, who desires to have his contract

reduced in the particular form required by law,
can file an action to compel the other party
to comply with such form. If the requirement
of law is directory only and has no
bearing on the validity or enforceability of the
contract, the parties can enforce the contract and, at
the same time, demand that it be reduced in
the form required by law. In Zaide vs. Court of
Appeals4 where an unregistered contract of sale was
assailed as invalid, the Supreme Court ruled in favor
of the validity of the sale by stating:
art COntraCts 429
Forms of Contracts

However, although the first deed of sale

(Exh. 1) was genuine, it was so
far defective as to render it
unregistrable in the Registry of Property.
As already pointed out, it did not
set forth the name of the vendee’s
husband and was for this reason refused
registration by the Register of Deeds.
The defect was unsubstantial. It did
not invalidate the deed. The legal
dispositions are clear. Though defective in
form, the sale was valid; and the
parties could compel each other to do
what was needful to make the document
of sale registrable. The law generally
allows a contract of sale to be
entered into in any form, whether “in
writing, or by word of mouth, or
partly in writing and partly by word
of mouth, or (even) inferred from the
conduct of the parties,” but if the
agreement concerns “the sale of land
or of an interest therein,” the law
requires not only that “the same, or
some note or memorandum thereof, be
in writing, and subscribed by the
party charged” in order that it may
be enforceable by action, but also
that the writing be in the form
of a “public document.” The law
finally provides that “if the law requires
a document or other special form, as
in the acts and contracts enumerated
in x x x (Article 1358), the
contracting parties may compel each other
to observe that form, once the contract
has been perfected x x x

Tapec vs. Court of Appeals, G.R. No. 111952,

October 26, 1994, 56 SCAD 356,
376 ObligatiOns and COntraCts art. 1358
Text and Cases

(and such) right may be exercised simultaneously

with the action upon the contract.
Also in Cenido vs. Apacianado,5 the Supreme Court ruled
in favor of the validity of a private
conveyance of real property denominated as
“Pagpapatunay” as between the parties, but said:
The question as to whether the
“Pagpapatunay” is suffi-cient to transfer
and convey title to the land for
purposes of original registration or the
issuance of a real estate tax decla-
ration in respondent spouses’ names, as
prayed for by the respondent spouses,
is another matter altogether. For greater
efficacy of the contract, convenience of
the parties and to bind third persons,
respondent spouse have the right to
compel vendor or his heirs to execute
the necessary document to properly convey the
property.

Article 1358. The following must appear in a public document:

(1) Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property; sales of real property or of an interest
therein are governed by Articles 1403, No. 2 and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or
of those of the conjugal partnership of gains;
(3) The power to administer property, or any other power which has
for its object an act appearing or which should appear in a public
document, or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing
in a public document.
All other contracts where the amount involved exceeds five hundred pesos
must appear in writing, even a private one. But sales of goods, chattels or
things in action are governed by Articles 1403, No. 2 and 1405. (1280a)

The failure to put in a public or

private document or writing the transactions or
matters enumerated in Article 1358 will not
render the agreement void or invalid.6 They shall
still be effective as between the parties. The
requirement to put the agreement referred under

237 SCRA 749.

art COntraCts 431
Forms of Contracts

Article 1358 in a public instrument is only

for the purpose of greater
. 1358

efficacy, of convenience or of binding third

persons. Thus in the case of Dauden-Hernaez vs. De
Los Santos,242 the Supreme Court ruled that
Article 1358 nowhere provides that the absence
of written form in this case will
make the agreement invalid or
unenforceable. On the contrary, Article 1357
clearly indicates that contracts covered by Article
1358 are binding and enforceable by
action or suit despite the absence of
writing.

In Dalion vs. Court of Appeals,243 the Supreme Court reiterated

the jurisprudence laid down in previous cases that
the requirement under Article 1358 is merely for
convenience, thus:
Assuming authenticity of his signature and
the genuineness of the document,
Dalion nonetheless still impugns the validity
of the sale on the ground that
the same is embodied in a private
document, and did not thus convey
title or right to the lot in
question since “acts and contracts which have
for their object the creation, transmission,
modification or extinctionof real rights
over immovable property must appear in
a public instrument.” (Art. 1358, par.
1, NCC)
This argument is misplaced. The provision
of Art. 1358 on the necessity of
a public document is only for
convenience, not for validity or
enforceability. It is not a
requirement for the validity of a
contract of sale of a parcel of

242
G.R. No. L-27010, April 30, 1969, 27 SCRA 1276.
243
G.R. No. 78903, February 28, 1990, 182 SCRA 872.
 land that this be embodied in a
public instrument.
A contract of sale is a consensual
contract, which means that the sale is
perfected by mere consent. No particular form
is required for its validity. Upon perfection
of the contract the parties may
reciprocally demand performance (Art. 1475,
NCC), i.e., the vendee may compel transfer
of ownership of the object of
the sale, and the vendor may require
the vendee to pay the thing sold.
(Art. 1458, NCC)
The trial court thus rightly and legally
ordered Dalion to deliver to Sabesaje the
parcel of land and to execute the
corresponding formal deed of conveyance
in a public document. Under Art.
1498, NCC, when the sale is made
through a public instrument, the execution
thereof is equivalent to the delivery
of the thing. Delivery may either be
actual (real) or constructive. Thus, delivery
of a parcel of land may be
done by placing the vendee in control
and possession of the land (real)
or by embodying the sale in
a public instrument ( constructive ).
378 ObligatiOns and COntraCts art. 1358
Text and Cases
 379

Chapter 4

REFORMATION OF INSTRUMENTS (n)

Article 1359. When, there having been a meeting of the minds of the parties
to a contract, their true intention is not expressed in the instrument
purporting to embody the agreement, by reason of mistake, fraud,
inequitable conduct or accident, one of the parties may ask for the
reformation of the instrument to the end that such true intention may be
expressed.
If mistake, fraud, inequitable conduct, or accident has prevented a meeting
of the minds of the parties, the proper remedy is not reformation of the
instrument but annulment of the contract.

Reformation applies only to written contracts

contained in an instrument or series of
instrument.
And, when the terms of an agreement
have been reduced to writing, it is
considered to be containing all
the terms agreed upon and there can
be, between the parties and their
successors- in-interest, no evidence of
such terms other than the contents of
the written agreement, except when it
fails to express the true intent and
agreement of the parties thereto, in
which case, one of the parties may
bring an action for the reformation
of the instrument to the end
that such true intention may be
expressed.244

Reformation connotes a valid contract. The parties are

able to have a meeting of the minds but

244
Tuason vs. Court of Appeals, G.R. No. 119794,
October 3, 2000, 135 SCAD 28, 341 SCRA
707, citing National Irrigation Administration vs. Gamit,
215 SCRA 436.
434 ObligatiOns and COntraCts
Text and Cases
the instrument supposed to embody the
contract does not conform to such contract. In
actions for reformation what is reformed is
the instrument embodying the contract and not
the contract itself. Two fundamental matters therefore
must be shown before reformation can be
availed: first, that the instrument embodying the
contract does not reveal the true intention of the
parties and, second, the existence of a real
and

379
art. 1359

actual contract entered into by the parties. Failure to

prove these two matters may lead to the
creation of an entirely new contract not within the
contemplation of the parties.
Equity dictates that reformation of an
instrument in order that the true
intention of the contracting parties may
be expressed. The courts by the
reformation do not attempt to make
a new contract for the parties, but
to make the instrument express their
real agreement. The rationale of the
doctrine is that it would be unjust
and inequitable to allow the
enforcement of a written instrument
which does not reflect or disclose the
real meeting of the minds of the
parties. The rigor of legalistic rule that
a written instrument should be the
final and inflexible criterion and measure of
the rights and obligations of the
contracting parties is thus tempered to
forestall the effect of mistake, fraud,
inequitable conduct, or accident.245

245
Report of the Code Commission, Pages 55-56 cited
in Naga Telephone Company vs. Court of
Appeals, G.R. No. 107112, February 24, 1994, 48
SCAD 539, 230 SCRA 351.
 COntraCts 435Reformation of Instruments (n)

Reformation may be caused by mistake, fraud,

inequitable conduct or accident of the parties. In
actions for reformation, the onus probandi is upon
the party who insists that the contract should be
reformed.246 However, if these factors prevent a
meeting of the minds, annulment and not
reformation is the remedy.
An action for reformation is in personam,
not in rem, x x x even when
real estate is involved. x x x
It is merely an equitable relief granted
to the parties where through mistake or
fraud, the instrument failed to express
the real agreement or intention of
the parties. While it is a
recognized remedy afforded by the courts
of equity, it may not be applied
if it is contrary to well-settled
principles or rules. It is a long-
standing principle that equity follows the law.
It is applied in the absence of
and never against statutory law. x x
x Courts are bound by rules of
law and have no arbitrary discretion to
disregard them. x x x Courts of
equity must proceed with outmost caution especially
when rights of third parties may
intervene.247

An action for reformation can be filed

within ten (10) years from the time the cause
of action accrues, since the suit is based on
a written document.5 The cause of action
accrues upon the knowledge
art. 1360

of the ground for reformation,6 or from the

date of the execution of the instrument
embodying the contract if the cause or

246
Huibonhoa vs. Court of Appeals, G.R. No. 95897,
December 14, 1999, 117 SCAD 281, 320 SCRA
625.
247
Huibonhoa vs. Court of Appeals, G.R. No. 95897,
December 14, 1999, 117 SCAD 281, 320 SCRA
625; Toyota Motor Philippines Corporation vs.
Court of Appeals, G.R.
No. 102881, December 7, 1992, 216 SCRA 248.
436 ObligatiOns and COntraCts
Text and Cases
causes for reformation were already known at the
time of the execution of the said
instrument embodying the contract. Thus, in
Rosello-Bentir vs. Leanda7 where it was contended that,
at the time of the execution of the
248249250
contract on May , 1968, there was a
verbal agreement between the lessor and the lessee
that the lessee will be given the right of
first refusal should the lessor decide to sell his
property, and where the lessee only filed the
case for reformation on May 15, 1992 to
reflect such intention of the parties, the Supreme Court
ruled that the action for reformation has
already prescribed. The 10-year period started from May
5, 1968.
Also, the action may be barred by laches.251
An action for reformation of instrument is
instituted as a special civil action for
declaratory relief under the Rules of Court.252
Since the purpose of an action for
declaratory relief is to secure an
authoritative statement of the rights and
obligations of the parties for their
guidance in the enforcement thereof, or
compliance therewith, and not to
settle issues arising from an alleged breach
thereof, it may be entertained only
before the breach or violation of the
law or contract to which it refers.253

Thus, an action for reformation instituted after

the lessor allegedly breached the contract with
the lessee giving the lessee a right of first
refusal to buy the leased premises, and

248
Article 1144 of the 1950 Civil Code.
249
Naga Telephone Company, Inc. vs. Court of Appeals, G.R.
No. 107112, February 24, 1994, 48 SCAD 539,
230 SCRA 351.
250
G.R. No. 128891, April 12, 2000, 125 SCAD 322,
330 SCRA 591.
251
Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12,
2000, 125 SCAD 322, 330 SCRA 591.
252
Section 1, Rule 63 of the 1997 New Rules
of Civil Procedure.
253
Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12,
2000, 125 SCAD 322, 330 SCRA 591.
 COntraCts 437Reformation of Instruments (n)

which right of first refusal was the subject of

the action for reformation, cannot prosper.254
Article 1360. The principles of the general law on the reformation of
instruments are hereby adopted insofar as they are not in conflict with the
provisions of this Code.

Article 1361. When a mutual mistake of the parties causes the failure of the
instrument to disclose their real agreement,

254
Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12,
2000, 125 SCAD 322, 330 SCRA 591.
438 ObligatiOns and COntraCts arts
Text and Cases
. 1360-1361

said instrument may be reformed.

For mistake to be a cause for reformation,

the mistake must be mutual and must generally
involve factual matters. This is consistent with the
essential requisite in reformation that there must be
a prior meeting of the minds between the
parties. There must have been a valid existing
agreement to which the erroneous document
can be made to match or harmonize. In
Gonzalez Mondragon vs. Santos255 where one of the
parties to a contract contended that there was
a mistake relative to the documentation of the
contract because the real intent of the parties was
for the sale by the hectare and not for
a sum in gross as stated in the
document of sale, but where there was no
convincing evidence that the mistake was mutual, the
Supreme Court denied the reformation of the
contract of sale and stated:
The plaintiff’s evidence being as it is,
the integrity of the document Exhibit A
will, of necessity, have to be
maintained and equitable relief denied. This
would be true even if there were
doubts. Decisions of this court and of
American courts abound in favor of the
salutary doctrine that contracts solemnly and
deliberately entered into may not be
overturned by inconclusive proof or
by reason of mistake of one of
the parties to which the other in
no way has contributed.
Moran’s Comments on the Rules of Court, Vol. III, p.
195, summing up the rulings laid down
in various decisions of this court and
one of the United States Supreme Court,
says: “Relief by way of reformation
of a written agreement will not
be granted unless the proof of mutual mistake

255
G.R. No. L-1724, October 12, 1950, 87 Phil. 471.
 COntraCts 439Reformation of Instruments (n)
is of the clearest and most satisfactory character.
The amount of evidence necessary to sustain
a prayer for relief where it is
sought to impugn a fact in a
document is always more than a mere
preponderance of evidence.”
In the case of Joaquin vs. Mitsumine (34
Phil. 858), this court held that “An
alleged defect in a contract perfectly valid
and binding on its face, must be
conclusively proved. The validity and fulfillment
of contracts can not be left to
the will of one of the parties.”

In Atilano vs. Atilano256 where there was a

mutual mistake in the designation of the
particular lands owned by two brothers, the
Supreme Court said that the remedy was reformation.
However, if the correct properties were
already in the possession of the persons to
whom they should rightfully belong, there was no
more need
arts. 1360-1361

for reformation because the parties actually already

implemented the true intention of the contract. Particularly,
the Supreme Court said:
The logic and common sense of the
situation lean heavily in favor of the
defendants’ contention. When one sells
or buys real property — a piece
of land, for example — one sells
or buys the property as he sees
it, in its actual setting and by
its physical metes and bounds, and not
by the mere lot number assigned to
it in the certificateof title. In
the particular case before us, the portion
correctly referred to as Lot No. 535-A
was already in the possession of
the vendee, Eulogio Atilano II, who had
constructed the residence therein, even before
the sale in his favor; indeed, even
before the subdivision of the entire

256
G.R. No. L-22487, May 21, 1969, 28 SCRA 231.
440 ObligatiOns and COntraCts arts
Text and Cases

Lot No. 535 at the instance of

the owner, Eulogio Atilano I. In like
manner, the latter had his house on
the portion correctly identified, after the
subdivision, as Lot No. 535-E, even
adding to the area thereof by
purchasing a portion of an adjoining
property belongingto a different owner. The
two brothers continued in the possession
of the respective portions for the
rest of their lives, obviously ignorant of
the mistake in the designation of
the lot subject of the 1920 sale
until 1959, when the mistake was discovered
for the first time.
The real issue here is not
possession, but the real intention of
the parties to that sale. From all
the facts and circumstances we are
convinced that the object thereof, as
intended and understood by the parties,
was that specific portion where the vendee
was already residing, where he reconstructed
his house at the end of the
war, and where his heirs, the plaintiffs
herein, continued to reside thereafter; namely,
Lot No. 535-A; and that its
designation as Lot No. 535-E in
the deed of sale was a simple
mistake in the drafting of the document.
The mistake did not vitiate the consent
of the parties, or affect the validity
and binding effect of the contract between
them. The new Civil Code provides a
remedy for such a situation by means
of reformation of the instrument.
This remedy is available when, there having
been a meeting of the minds of
the parties to a contract, their true
intention is not expressed in the instrument
purporting to embody the agreement
by reason of mistake, fraud, inequitable
conduct or accident (Art. 1359, et seq.) In
this case, the deed of sale executed
in 1920 need no longer be reformed.
The parties have retained possession of
 COntraCts 441Reformation of Instruments (n)
their respective propertiesconformably to
the real intention of the parties to
that sale, and all they should do
is to execute mutual deeds of
conveyance.

Article 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true
intention, the former may ask for the reformation of the instrument.
. 1362-1364

If the mistake is unilateral and reformation

is sought, it must be shown that the other party
has acted fraudulently or inequitably resulting in
the drafting of a document which does not
correspond to the actual contract agreed upon by
the parties.
Also, a party may have known the facts of
the case but is ignorant of or has been
mistaken as to the legal consequences of
the same. Generally, mistake of law or
ignorance of the law is not a
ground for reformation because parties must, as a
rule, submit to the legal ramifications of their
written contracts clearly pursuant to their true intent
and meaning. But while mistake of law or
ignorance of the law
will not ordinarily relieve a party from
the performance of his written contract
where he executed the same with full
knowledge of all the facts, yet,
where, on account of misplaced
confidence, and because of some artifice
or deception fraudulently practiced upon him
by the other party, a material part
of the contract was omitted from the
writing, or he was otherwise misled, equity
will decree a reformation.14

Article 1363. When one party was mistaken and the other knew or believed
that the instrument did not state their real agreement, but concealed that fact
from the former, the instrument may be reformed.
442 ObligatiOns and COntraCts arts
Text and Cases

Knowledge by one party of the other’s

mistake regarding the expression of the
agreement is equivalent to mutual mistake.15
Hence, reformation of the contract can be
sought by the injured party.
Article 1364. When through the ignorance, lack of skill, negligence or bad
faith on the part of the person drafting the instrument or of the clerk or typist,
the instrument does not express the true intention of the parties, the courts
may order that the instrument be reformed.

If the person drafting or typing the instrument

is not able to come up with a
correct written document embodying the contract of
the parties because of failure to follow instructions
or because of ignorance, lack of skill,
negligence or bad faith, the mistake will be
deemed to be mutual,16 and therefore
reformation can be availed of. Hence, if the
typist wrongly types the amount of consideration in
a written instrument embodying the contract of
sale, the instrument
William F. Elliot, Commentaries on the Law of Contracts, Volume 3,
1913 edition, Indianapolis, The Bobbs-Merrill Company, Page
543.
15
12 Am Jur 631, citing Columbian Nat. L. Ins.
Co. vs. Black (C.C.A. 10th) 35 F. (2d) 571,
71 A.L.R. 128, quoting 3 Willston, Contracts, p. 2745.
arts. 1365-1366

may be reformed to conform to the real

consideration agreed upon by the parties.
In Huibonhoa vs. Court of Appeals17 where there was a
failure to prove what costly mistake allegedly
suppressed the intention of the parties prompting
the petitioner to admit that there was an
oversight in the drafting of the contract by
her counsel, the Supreme Court rejected the propriety
of reformation because, by such admission of
the petitioner, oversight may not be
attributed to all the parties to the
contract and therefore, it cannot be considered
 COntraCts 443Reformation of Instruments (n)
a valid reason for the reformation of the
same contract.
Article 1365. If two parties agree upon the mortgage or pledge of real or
personal property, but the instrument states that the property is sold
absolutely or with a right of repurchase, reformation of the instrument is
proper.

In Palileo vs. Cosio18 where the parties to a

contract intended that the house subject of the
agreement was to be a collateral for
a particular loan but the agreement
apparently states that the house was the
subject of a conditional sale of residential
building, the Supreme Court allowed the reformation of
the agreement. In a subsequent case by
the same parties, the Supreme Court said:
In reforminginstruments, courts do not make
another contract for the parties (See Civil
Code, Arts. 1359-1369 and the Report
of the Code Commission, p. 56).
They merely inquire into the intention of
the parties and, having found it, reform
the written instrument (not the contract)
in order that it may express the
real intention of the parties.

Article 1366. There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void.

Any disposition in a will or an

unconditional donation be-
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
1913 edition, Indianapolis, The Bobbs-Merrill Company, Page
188.
G.R. No. 95897, December 14, 1999, 117 SCAD 281,
320 SCRA 625. 1851 O.G. 6181 at 6184; also see
Cosio vs. Palileo, G.R. No. L-18452, May 31, 1965,
14 SCRA 170.
See Second Paragraph of Section 1, Rule 63 of
the 1997 New Rules of Civil . 1367-1369
444 ObligatiOns and COntraCts arts
Text and Cases

queathing or donating something is an act

of liberality. They are not cases where, prior
to the drafting of the instrument embodying
the will or the donation, there has been
a prior negotiation where both parties mutually agree
on the object of the contract. Wills and
donations are gratuitous. They do not
involve any meeting of the minds of the
parties before the document is even drafted.
Reformation implies that there must be a prior
agreement between the parties. If such prior
agreement is void, it cannot be given legal
effect. Hence, the instrument embodying the void
agreement cannot be made to conform to such
void agreement which is non-existent as to
its legal effect.

Article 1367. When one of the parties has brought an action to enforce the
instrument, he cannot subsequently ask for its reformation.

A party seeking to enforce an agreement

necessarily acknowledges that the instrument
embodies the contract intended by the parties and
therefore, he is estopped from filing a case
for reformation alleging that the contract does not
contain the true intent of the parties.

Article 1368. Reformation may be ordered at the instance of either party or

his successors in interest, if the mistake was mutual; otherwise, upon petition
of the injured party, or his heirs and assigns.

This particular article provides the persons who are

given legal standing to initiate an action for
reformation. If the mistake is mutual, either party
or his successor-in-interest may file the
action. If the cause for reformation is on
some other grounds, such as fraud or vitiated
consent, the injured party or his heirs and
assigns are the only persons given legal standing to
sue.
 COntraCts 445Reformation of Instruments (n)
Article 1369. The procedure for the reformation of instruments shall be
governed by rules of court to be promulgated by the Supreme Court.

An action for reformation of instrument may

be brought in accordance with the rules on
filing a special civil action for declaratory
relief.19 This is in accordance with Rule 63
of the 1997 New Rules of Civil Procedure
specifically promulgated by the Supreme Court
art COntraCts 446
Reformation of Instruments (n)

. 1369

which provides that, in an action for declaratory

relief, any person interested under a deed, will,
contract or other written instrument, or whose rights
are affected by a statute, executive order or
regulation, ordinance or any other governmental
regulation may, before breach or violation thereof, bring
an action in the appropriate Regional Trial
Court to determine any question of construction
or validity arising, and for the declaration of
his rights and duties, thereunder.20 If before the
final termination of the case, a breach or
violation of an instrument should take place, the
action may thereupon be converted into an
ordinary action, and the parties shall be allowed to
file such pleadings as may be necessary
or proper.21
 art. 1370 COntraCts 447Interpretation of Contracts

Procedure; Rosello-Bentir vs. Leanda, G.R. No. 128891, April

12, 2000, 125 SCAD 322, 330 SCRA 591.
20
Section 1, Rule 63 of the 1997 New Rules
of Civil Procedure.
21
Section 6, Rule 63 of the 1997 New
Rules of Civil Procedure.
388 ObligatiOns and COntraCts Text
and Cases

Chapter 5

INTERPRETATION OF CONTRACTS

Article 1370. If the terms of a contract are clear and leave no doubt upon
the intention of the contracting parties, the literal meaning of its stipulations
shall control.
If the words appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former. (1281)

The purpose of interpretation is to be able

to know the intent of the parties so that
the contract can be properly implemented. It is
the agreement of the parties which must be
enforced.
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
determination of the meaning attached to
the words written or spoken which make
the contract. On the other hand,
reformation is that remedy in equity
by means of which a written instrument
is made or construed so as to
express or conform to the real intention
of the parties.257

257
Huibonhoa vs. Court of Appeals, G.R. No. 95897,
December 14, 1999, 117 SCAD 281, 320 SCRA
The rules in statutory construction can likewise be
applied as a guide in interpreting ambiguous
provisions in a contract.258 Thus, in
Finman General Assurance Corporation vs. Court of Appeals 259260
where the insurance policy procured by the
insured did not include murder and assault as
incidents exempting the insurance company
from liability in case of the death of the
inured, the Supreme Court applied the statutory construction
rule of “expresso unius exclusio alterius” — the mention of
one thing implies the exclusion of another thing
— to make the insurance company pay
the beneficiaries arising from the

388
death261 of the insured from stab wounds inflicted by
unidentified men.
Generally, the intention of the parties is
reflected from the wordings of the contract and
therefore as a general rule, the literal
meaning of its stipulations shall control.4 In Adelfa
Properties, Inc. vs. Court of Appeals262 where, from the
various provisions of the contract, it can be
clearly determined that what was entered into by
the parties was not an option to purchase but
a contract to sell, the Supreme Court pertinently
stated:

625; National Irrigation Administration vs. Gamit, G.R.

No. 85869, November 6, 1992, 215 SCRA 436.
258
Oil & Natural Gas Commission vs. CA, G.R.
No. 114323, July 23, 1998, 96 SCAD 480,
293 SCRA 26.
259
G.R. No. 100970, September 2, 1992.
260
Hanil Development Company vs. Court of Appeals, G.R.
No. 113176, July 30,
261
, 152 SCAD 47; Capital Insurance vs. Central
Azucarera, G.R. No. 30770, April 7, 1993, 221
SCRA 98; Gonzales vs. Court of Appeals, 124
SCRA 630.
262
G.R. No. L-111238, January 25, 1995, 58 SCAD 462,
240 SCRA 565.
 art. 1370 COntraCts 449Interpretation of Contracts
The important task in contract interpretation
is always the ascertainment of the
intention of the contracting parties and
that task, is, of course, to be
discharged by looking to the words
they used to project that intention in
their contract, all the words not just
a particular word or two, and words
in context not words in isolation. x
x x In addition, the title of
a contract does not necessarily determine
its true nature. Hence, the fact that
the document under discussion is entitled
“Exclusive Option to Purchase” is
not controlling where the text thereof
shows that it is a contract to sell.

In Gaw vs. Intermediate Appellate Court,263 the Supreme Court

pertinently stated that parties to a contract must
be careful in examining the language or
the wordings of their contract, and they must
be diligent enough to read the same before
entering into it so that no complications can
arise in the future, to wit:
Thus, in the interpretation of the
provisions of a written contract, the
literal meaning of its stipulations must
prevail. It, therefore, behooves the parties to
examine the terms of a contract
thoroughly before signing the same,
particularly a businessman like Gaw
who may not, by any stretch of
imagination, be considered a tyro
in these matters. Had he given even
an iota’s attention and care to scrutinize
the subject contract, he would not have
failed to detect that some provisions
thereof contravened the terms and conditions
of his exclusive dealership agreement
with PWCC.

In Conde vs. Court of Appeals264265 where the contract was

written in the dialect known to the respondent,
and where the encumbrance of the property

263
G.R. No. 70451, March 24, 1993, 220 SCRA 405.
264
G.R. No. L-40242, December 15, 1982, 119 SCRA 245.
265
G.R. No. 93625, November 8, 1993, 227 SCRA 541.
subject of the contract was inscribed in the
title, the
451 ObligatiOns and COntraCts art
Text and Cases
. 1370

Supreme Court, in rejecting the positions of the

respondent that he signed the contract merely to
show his non-objection to the repurchase
constituting the lien and that he never
received the amount of P165.00 from the petitioner,
ruled:
Private respondent must be held bound
by the clear terms of the
Memorandum of Repurchase that he
had signed wherein he acknowledged the
receipt of P165.00 and assumed the obligation
to maintain the repurchasers in peaceful
possession should they be “disturbed
by other persons.” It was executed in
the Visayan language which he understood.
He cannot now be allowed to dispute
the same. “x x x If the
contract is plain and unequivocal in
its terms, he is ordinarily bound thereby.
It is the duty of every
contracting party to learn and know
its contents before he signs and delivers it.”

In Santi vs. Court of Appeals8where the lease contract

provided that the “20-year period of lease being
extendable for another period of 20 years” was
interpreted by the lower court as giving the
lessee an automatic renewal of the lease
period, the Supreme Court said:
In a wealth of cases and as provided
for in Articles 1370 and 1372 of
the Civil Code, we have ruled that
when the terms and stipulations embodied
in a contract are clear and leave
no room for doubt, such should be
read in this literal sense and that
there is absolutely no reason to
construe the same in another meaning xxx xx
x
To our mind, the stipulation “said period
of lease being extendable for another
period of twenty (20) years x x
x” is clear that the lessor’s intention
No.
452 ObligatiOns and COntraCts art
Text and Cases

is not to automatically extend the

lease contract but to give her time
to ponder and think whether to extend
the lease. If she decides to do
so, then a new contract shall be
entered into between the lessor and lessee
for a term of another twenty years
and a monthly rental of P220.00 This
must be so, for twenty (20) years
is rather a long period of time
and the lessor may have other plans
for her property.
If the intention of the parties were to
provide for an automatic extension of the
lease contract, then they could have easily
provided for a straight forty years contract
instead of twenty.

In Fernandez vs. Court of Appeals,9 the Supreme Court

likewise interpreted the provision as to the
extension of the period of lease in accordance
with the clear wordings of the contractual
provision, thus:
G.R. No. L-80231, October 18, 1990, 166 SCRA 577.
G.R. 136913, May 12, 2000, 126 SCAD 492, 332 SCRA 151.
On 31 July 1973, respondent Miguel
Tanjuanco, as lessor, and petitioner Celso
A. Fernandez, as lessee, entered into
a tenyear Contract of Lease over a
piece of land situated along Kahilum Street,
Pandacan, Manila, where petitioner would put
up the then proposed New Zamora Market.
The parties agreed that the lease, which
was scheduledto end on 1 July
1983, would be “renewable for another
ten (10) years at the option of
both parties under such terms, conditions
and rental reasonable at that time”
and that, upon expiration of the
lease, whatever improvements were then existing
thereon should automatically belong to the
lessor without having to pay the lessee.
Before the agreed term ended, or on
19 April 1983, respondent wrote petitioner
about the former’s intention not to extend
further or renew the lease. Petitioner replied,
No.
 art. 1370 COntraCts 453Interpretation of Contracts
through a letter dated 6 June 1983,
that he had opted to renew the
contract for another ten (10) years so
that he could recover all the ex-penses
he had incurred in the construction
of the market.
In another letter to petitioner dated 1 June
1983, respondent, through his lawyer, advised
that respondent could not accept
petitioner’s unilateral action to renew the
lease because, under the contract, any renewal
or extension thereof was possible only “at
the option of both parties.”
On 23 June 1983, petitioner commenced an
action against respondent before the Regional
Trial Court of Quezon City, Branch 84,
alleging that petitioner was entitled to renew
the lease contract, under paragraph3, Section
2 thereof, for another ten (10) years,
which paragraphin the contract should be
construed in a liberal manner and with
justice. In his prayer, he sought to
compel respondent to renew the lease
agreement for another term, or asked
the court to consider the original contract
renewed for another ten (10) years or
to fix another period for the renewal
of contract.
xxx xxx xxx
The only issue here relates to the
interpretation of the phrase “renewable
for another ten (10) years at the
option of both parties under such terms,
conditions and rental reasonable at
that time,” set out in paragraph(2)
of the lease contract in question.
The Court of Appeals read the above
contract language as comprising, not technical
terms or terms of legal art, but
rather just plain and ordinary words. As
such, the Court of Appeals understood
the above language as requiring —
“that the parties should mutually agree on
a new contract which may not be
the same as the original, under terms,
conditions and rental reasonable at
454 ObligatiOns and COntraCts art
Text and Cases

that time. It follows therefore that the

plaintiff [petitioner] cannot renew the lease
by his unilateral act of exercising
his option. Simply stated, the option must
be
. 1370

mutually and consen[s]ually exercised, and not

unilaterally as was erroneously done by the
plaintiff.
Applied to the lease contract under
consideration, it appears that the lease
has expressed in clear, unmistakable and
unambiguous terms the intention of the
parties that if the lease contract was
to be renewed, the option to renew
should be made by both parties.”
We agree with the respondent appellate
court’s reading: the intention of the parties
to the lease agreement is clearly
discernible in the words of the
agreement. The assent of both lessor
and lessee is essential for another contract
to spring into juridical existence upon expiration
of the original one. The contract clause
may be seen to consist of two
(2) parts: first, the contract is stipulated to
be “renewable” for another ten years
“at the option of both parties”; second,
the contract is specified to be
“renewable under such terms, conditions
and rental reasonable at that time.”
The first part of the clause stresses
that the option or faculty to renew
was given, not to the lessee alone
nor to the lessor by himself, but
to the two (2) simulta-neously who
hence must both exercise the option to
renew if a new contract is to
come about. The second portion of the
contract clause addresses the future and directs
the parties to negotiate and reach mutual
agreement on the terms and conditions

No.
 art. 1370 COntraCts 455Interpretation of Contracts
of the new contract, including the new
rental rate, which terms and conditions
must be reasonable under such situation
as may be extent when the time
for renewal arrives. The only term on
which there has been some pre-agreement
is the period of the new contract:
“another ten years.” Clearly, the requirement
of future mutual agreement as to
renewal, has here been specified with adequate
precision.

In Buce vs. Court of Appeals,10 the controversy centered on the

interpretation of the provision stating: “This lease
shall be for a period of fifteen (15) years
effective June 1, 1979, subject to renewal for
another ten (10) years, under the same terms and
conditions.” One party interpreted the provision
as allowing automatic renewal while the other party
contended that there was an option to
renew. In deciding the case, the Supreme Court said
that “renewal of a contract” connotes the
death of the old one and the birth or
emergence of a new one. In such a
case, there is an obligation to execute a
new lease contract for the additional term. A
clause providing for “extension of the
period of lease,” on the other hand, operated of
its own force to create an additional term.
The Supreme Court said that there was nothing in
the contract to show that automatic renewal was
the

G.R. L-87245, April 6, 1990, 184 SCRA 273.

intention of the parties. The fact that the lessee
was allowed to make improvements on the
property was not indicative of the intention to
automatically renew the lease. Since the contract was
also unclear as to who may exercise the
option to renew, the Supreme Court said that the
period of the lease must be construed to
be for the benefit of both parties and
further stated:

Renewal of the contract may be had

only upon their mutual agreement or
at the will of both of them.
456 ObligatiOns and COntraCts art
Text and Cases

Since the private respondents were not

amenable to a renewal, they cannot be
compelled to execute a new contract
when the old contract terminated on
1 June 1994. It is the owner-
lessor’s prerogative to terminate the lease
at its expiration. The continuance,
effectivity, and fulfillment of a
contract of lease cannot be made to
depend exclusively upon the free and
uncontrolled choice of the lessee between
continuing the payment of the rentals
or not, completely depriving the owner
of any say in the matter. Mutuality
does not obtain in such a contract
of lease and no equality exists between
the lessor and the lessee since the
life of the contract would be dictated
solely by the lessee.

In Universal Textile Mills, Inc. vs. National Labor Relations

Commission11 where a quasi-judicial body, namely the
National Labor Relations Commission (NLRC) misread and
therefore misapplied the provisions of a
collective bargaining agreement, the Supreme Court
said that “the NLRC, however cannot remake a
contract by eviscerating it, by deleting from it
words placed there by the parties. No court, no
interpreter and applier of a contract, has such
a prerogative.”
It is a fundamental principle that a
court may not make a new contract
for the parties or rewrite their contract
under the guise of construction. In
other words, the interpretation or
construction of a contract does not
include its modification or the creation
of a new or different one. It
must be construed and enforced according to
the terms employed, and a court
has no right to interpret the agreement
as meaning something different from what
the parties intended as expressed by the
language they saw fit to employ. A
court is not at liberty to revise,
modify, or distort an agreement while
No.
 art. 1370 COntraCts 457Interpretation of Contracts
professing to construe it, and has
no right to make a different contract
from that actually entered into by the
parties. Courts cannot make for the parties
better or more equitable agreements than
they themselves have been satisfied to
make, or rewrite contracts because they operate

12
17 Am Jur 2d 627-629.
458 ObligatiOns and COntraCts art. 1371
Text and Cases

harshly or inequitably as to one of the

parties, or to alter them for the benefit
of one party and to the detriment
of the other, or, by construction,
relieve one of the parties from terms
which he voluntarily consentedto, or
impose on him those which he did
not.12

Article 1371. In order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered.
(1282)

The reasons and surrounding circumstances

behind a contract’s execution are of
paramount importance to place the interpreter
in the situation occupied by the parties
concerned at the time of the writing.13
14
In Pingol vs. Court of Appeals where there was a
dispute as to whether the purchase agreement was
a contract to sell or an absolute sale, the
Supreme Court had to look at the
contemporaneous and subsequent acts of the
parties. Pertinently, the Supreme Court explained:
In Dignos vs. Court of Appeals, we held that a
deed of sale is absolute in nature
although denominated as a “Deed of
Conditional Sale” where there is no
stipulation in the deed that title
to the property sold is reserved in
the seller until the full payment of
the price, nor is there a stipulation
giving the vendor the right to
unilaterally resolve the contract the moment
the buyer fails to pay within a
fixed period. Exhibit “A” contains neither
stipulation. What is merely stated therein
is that “the VENDEEagrees that in
case of default in the payment of
the installments due the same shall
earn a legal rate of interest, and
to which the VENDOR likewise agrees.”

No.
art COntraCts 459
Interpretation of Contracts

Furthermore, as found by the Court of

Appeals, the acts of the parties,
contemporaneous and subsequent to the
contract, clearly show that an absolute deed
of sale was intended, by the parties
and not a contract to sell:
Pursuant to the deed, the vendor delivered
actual and constructive possession of
the property to the vendee, who occupied
and took such possession, constructed
a building thereon, had the property surveyed
and subdivided and a plan of
the property was prepared and submitted to
the Land Registration

Gonzales vs. Court of Appeals, G.R. No. 122611, March

8, 2001, 145 SCAD 384; Ridjo Tape &
Chemical Corp. vs. Court of Appeals, 91 SCAD 892,
286 SCRA 544.
G.R. No. 102909, September 6, 1993, 44 SCAD 498,
226 SCRA 118.
G.R. No. 109680, July 14, 1995, 62 SCAD 801,
246 SCRA 323.
G.R. 72703, November 13, 1992, 215 SCRA 580.
. 1371

Commission which approved it preparatory to

segregating the same and obtaining the
corresponding TCT in his name. Since
the sale, appellee continuously possessed and
occupied the property as owner up to
his death on July 13, 1984 and
his heirs, after his death, continued the
occupancy and possession of the
property up to the present. Those contem-
poraneous and subsequent events are
demonstrative acts that the vendor since
the sale recognized the vendee as
the absolute owner of the property sold.
All those attributes of ownership are
admitted by defendants in their answer,

No.
460 ObligatiOns and COntraCts art. 1371
Text and Cases

specially in paragraphs 7 and 9

of their special and affirmative defenses.
The contract here being one of absolute
sale, the ownership of the subject
lot was transferred to the buyer
upon the actual and constructive delivery
thereof. The constructive delivery of the
subject lot was made upon the execution
of the deed of sale while the
actual delivery was effected when the private
respondents took possession of and
constructed a house on Lot No.
3223- A.

In Rapanut vs. Court of Appeals15 where the controversy

involved the interpretation of a contractual
provision on the application of interest, the
Supreme Court again looked at the contemporaneous and
subsequent acts of the parties, thus:
The controversial provision in the
Supplemental Agreement reads: “x x
x the VENDOR/MORTGAGEE is willing
to sell said portion of her lot
to the VENDEE/MORTGAGOR for a
total price of P37,485.00 payable in
monthly installments of P500.00 with an
interest of 10% per annum on the
remaining balance until the full amount
is paid” (Rollo, pp. 25-26; Italics supplied).
Private respondent’s view is that the
10% interest must be paid every year.
Petitioner posits that the P500.00 monthly
installments include the 10% interest.
The interpretation of the provision in
question having been put in issue, the
Court is constrained to determinewhich
interpretation is more in accord with
the intent of the parties (cf. Capital
Insurance & Surety Co., Inc. vs. Central Azucarera del Danao, 221
SCRA 98 [1993]). To ascertain the intent
of the parties, the Court shall look
at their contemporaneous and subsequent

No.
art COntraCts 461
Interpretation of Contracts

acts (Civil Code of the Philippines,

Art. 1371).
The Deed of Conditional Sale with
Mortgage categorically provides for the date
of payment of the P500.00 monthly
installments, that is, not later than
the fifth of every month, and of
the P1,000.00 semi-annual installment,
that is, on June 30 and December
31. The Supplemental Agreement was
likewise 17G.R. 48194, March 5, 1990, 183 SCRA 171.
specific that petitioner shall pay private respondent “monthly
install-ments, of P500.00 with an interest
of 10% per annum on the remaining balance
until the full amount is paid.” (Rollo,
p. 26)
A liberal interpretation of the contract in
question is that at the end of
each year, all the installment payments
made shall be deducted from the principal
obligation. The 10% interest on the
balance is then added to whatever remains
of the principal. Thereafter, petitioner shall
pay the monthly installments on the
stipulated dates. In other words, the interests
due are added to and paid like
the remaining balance of the principal.
Thus, we must rule that the parties
intended that petitioner pay the monthly
installments at predetermined dates, until
the full amount, consisting of the
purchase price and the interests on the
balance, is paid.
Significant is the fact that private
respondent accepted the payments petitioner religiously
made for four years. Private respondents
cannot rely on the clause in the
contract stating that no demand is necessary
to explain her silence for four years
as to the 10% interest, as such
clause refers to the P500.00 monthly
installments.

No.
462 ObligatiOns and COntraCts art. 1371
Text and Cases

Even granting as acceptable private

respondent’s theory that the monthly
amortizations shall first be applied to
the payment of the interests, we must
still rule for petitioner.
The contracts provided for private respondent’s
right of rescission which may be exercised
upon petitioner’s failure to pay
installments for three months. Private
respondent’s failure to exercise her right
of rescission after petitioner’s alleged default
constitutes a waiver of such right.
Her continued acceptance of the
installment payments places her in estoppel.

In Caltex vs. Intermediate Appellate Court16 where one of the

parties to a deed of assignment contended
that the obligation was limited only to the
particular amount indicated in the deed of
assignment notwithstanding the fact that said deed
provided that the assignee shall be entitled to all
funds which the assignor may be entitled from a
certain administrative decision in payment of assignor’s
outstanding obligation plus any applicable
interest charges on overdue account, the Supreme Court ruled:
Likewise, the then Intermediate Appellate Court
failed to take into consideration the
subsequent acts of the parties which
clearly show that they did not intend
the Deed of Assignment

G.R. 124791, February 10, 1999, 103 SCAD 258.

No.
art COntraCts 463
Interpretation of Contracts

. 1371

to totally extinguish the obligation —

(1) After the execution of the Deed of
Assignment on July 31, 1980, petitioner
continued to charge respondent with interest
on its overdue account up to January
31, 1981. x x x This was
pursuant to the Deed of Assignment
which provides for respondent’s obligation
for “applicable interest charges on overdue
account.” The charges for interest were made
every month and not once did respon-
dent question or take exception to the
interest; and (2) In its letter of
February 16, 1981 (Annex “J,” Partial
Stipulation of Facts), respondent addressed
the following request to peti- tioner:
“Moreover, we would like to request for
a consideration in the following:
1. Interest charges be limited up
to December 31, 1980
only; and
2. Reduction of 2% on 18%
interest rate p.a.
We are hoping for your usual
consideration on this matter.”
In order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally
considered (Art. 1253, Civil Code). The
foregoing subsequent acts of the parties
clearly show that they did not intend
the Deed of Assignment to have
the effect of totally extinguishing the
obligation of private respondent without
payment of the applicable interest charges
on the overdue account.

In Javier vs. Court of Appeals,17 the Supreme Court, in

stating that the contemporaneous and subsequent acts
464 ObligatiOns and COntraCts art. 1371
Text and Cases

of the parties clearly indicated the intention of

the parties, ruled:
Petitioners contend that the deed of
assignment conveyed to them the shares
of stocks of private respondent in
Timber-wealth Corporation, as stated in
the deed itself. Since said corporation
never came into existence, no share of
stocks was ever transferred to them
hence the said deed is null and
void for lack of cause or
consideration.
We do not agree. As found by
the Court of Appeals, the true cause
or consideration of said deed was
the transfer of the forest concession
of private respondent to petitioners
for P120,000.00. This finding is supported
by the following consi-derations, viz.:
1. Both parties at the time of the
execution of the deed of assignment
knew that the Timberwealth Corporation
stated

Gonzales vs. Previsora Filipina, 74 Phil. 165.

therein was non-existent.
2. In their subsequent agreement, private
respondent conveyed to petitioners his
inchoate right over a forest concession
covering an additionalarea for his existing
forest concession, which area he had
applied for, and his application was
then pending in the Bureau of Forestry
for approval.
3. Petitioners, after the execution of the
deed of assignment, assumed the operation
of the logging concession of private
respondent.
4. The statement of advances to respondent
pre- pared by
art COntraCts 465
Interpretation of Contracts
petitioners stated: “P55,186.39 advances to
L.A. Tiro be applied to succeeding
shipments. Based on the agreement,
we pay P10,000.00 every after (sic)
shipment. We had only 2 shipments.”
5. Petitioners entered into a Forest
Consolidation Agreement with other holders
of forest concessions on the strength
of the questioned deed of
assignment.
The aforesaid contemporaneous and subsequent
acts of petitioners and private respondent reveal that the
cause stated in the questioned deed of
assignment is false. It is settled
that the previous and simultaneous and
subsequent acts of the parties are
properly cognizable indicia of their true
intention. Where the parties to a contract
have given it a practical construction
by their conduct as by acts in
partial performance, such cons-truction may
be considered by the court in
construing the con-tract, determining its
meaning and ascertaining the mutual intention
of the parties at the time of
contracting. The parties practical construction
of their contract has been characterized
as a clue or index to, or
as evidence of, their intention or meaning
and as an important, significant,
convincing, persuasive, or influential
factor in determining the proper
construction of the agreement.

In Carceller vs. Court of Appeals,18 the Supreme Court, as

a rule of interpretation, said that analysis and
construction, however, should not be limited to
the words used in the contact, as they may
not accurately reflect the parties’ true intent. The
reasonableness of the result obtained, after said
analysis, ought likewise to be carefully considered. In
the same case, the Supreme Court also said that,
in contractual relations, the law allows the
parties reasonable leeway on the terms of their
agreement, which is the law between them, and
that contracts should not be interpreted in
a harsh and in-equituous way.
466 ObligatiOns and COntraCts art. 1371
Text and Cases

The import of the word ultimately depends upon

a consideration of the entire provision, its
nature, object and the consequences that would
follow from construing it one way or the
other. Thus, if a
. 1372

provision demands a mandatory application, the

word “may” can be construed as “shall.”19
Conversely, the word “shall” can be construed
as “may” if the application demands a
directory application.

Article 1372. However general the terms of a contract may be, they shall not
be understood to comprehend things that are distinct and cases that are
different from those upon which the parties intended to agree. (1283)

Within the purview of this article are the

maxims noscitur a sociis and ejusdem generis. Noscitur a sociis
means that general and unlimited terms are
restrained and limited by particular terms that
follow.266 Ejusdem generis means that “a general term
joined with a specific one will be deemed to
include only things that are like, of the same
genus as, the specific one.”267268
However broad may be the terms of
a contract, it extends only to those
things concerning which it appears the
parties intended to contract. The terms employed
are servants, and not masters, of an
intent; they are to be interpreted
so as to subserve, and not to
subvert, such intent. Words which admit of

266
Cebu
Institute of Technology, et al. vs. Ople, G.R.
No. L-58870, December 18, 1987.
267
John H. Jackson and Lee C. Bollinger, Contract Law in
Modern Society, 1980 edition, St. Paul Minn., West
Publishing Company, Page 1025; See also Go Tiaco
vs.
Hermanos vs. Union Insurance Society of Canton, 40 Phil.
40.
268
Am Jur 2d 639.
art COntraCts 467
Interpretation of Contracts
a more extensive or more restrictive
signification must be taken in that
sense which will best effectuate what it
is reasonable to suppose was the
real intention of the parties. Words are
not to be taken in their broadest
sense if they are equally appropriate
in a sense limited to the object
and the intent of the contract. The
courts are sometimes required to restrict
the meaning of the words, and to
that end a word in the plural
may be restricted to the singular.22

Article 1373. If some stipulation of any contract should admit of several

meanings, it shall be understood as bearing that import which is most
adequate to render it effectual. (1284)

In Lao Lim vs. Court of Appeals269 where the contract of lease

specifically provided
that the term of the lease shall be
renewed every three years retroacting from
October 1979 to October 1982; after which the

269
G.R. No. 87047, October 31, 1990, 191 SCRA 150.
468 ObligatiOns and COntraCts art
Text and Cases
. 1373

above-named rental shall be raised automatically

by 20% every three years for as
long as defendant needed the premises and
can meet and pay the said increases,
the defendant to give notice of his
intent to renew sixty (60) days before
the expiration of the term,

the Supreme Court ruled that the said provision

can be interpreted as involving a
potestative suspensive condition making the
defendant stay in the premises for as long
as he needed the same, but examining the
provision in its entirety, the said provision
is actually to the effect that the last
portion thereof, which gives the private
respondent sixty (60) days before the
expiration of the term the right
to give notice of his intent to
renew, is subject to the first portion
of said paragraphthat “the term of
the lease shall be renewed every three
(3) years,” thereby requiring the mutual agreement
of the parties. The use of the
word “renew” and the designation of
the period of three (3) years clearly
confirm that the contract of lease is
limited to a specific period and that
it is not a continuing lease.
The stipulation provides for a renewal
of the lease every three (3) years;
there could not be a renewal if
said lease did not expire, otherwise there
is nothing to renew.
Resultantly, the contract of lease should be
and is hereby construed as providing for
a definite period of three (3) years
and that the automatic increase of rentals
by twenty percent (20%) will take effect
only if the parties decide to renew
the lease. A contrary interpretation will
result in a situation where the
continuation and effectivity of the
art COntraCts 469
Interpretation of Contracts
contract will depend only upon the will
of the lessee, in violation of Article
1308 of the Civil Code x x
x. The compromise agreement should
be understood as bearing that import
which is most adequate to render it
effectual. Where the instrument is
susceptible of two interpretations, one
which will make it invalid and illegal
and another which will make it valid
and legal, the latter inter-pretation should
be interpreted.

In Caltex vs. Intermediate Appellate Court24 where the only

issue was whether or not the deed of
assignment entered into by the parties completely
extinguished the obligation stated therein, the
Supreme Court by applying one of the basic rule
that provisions in the contract must be given
a construction as will give effect to them,
stated:
In the instant case, the then Intermediate
Appellate Court failed to take into account
the following express recitals of the Deed
of Assignment —

G.R. No. 72703, November 13, 1992, 215 SCRA 580.

G.R. No. 126074, February 24, 1998, 91 SCAD 892,
286 SCRA 544.
. 1373

“That Whereas, ASSIGNOR has an outstanding

obligation with ASSIGNEE in the amount of P4,072,682.13
as of June 30, 1980, plus any applicable interest on overdue
account (p. 2, Deed of
Assignment)
“Now therefore in consideration of the
fore-going premises, ASSIGNOR by
virtue of these presents, does
hereby irrevocably assign and
transfer unto ASSIGNEE any and
all funds and/or Refund of
Special Fund Payments, including all
its rights and benefits accruing out
470 ObligatiOns and COntraCts art. 1374
Text and Cases
of the same, that ASSIGNOR
might be entitled to, by
virtue of and pursuant to the
decision in BOE Case No. 80-
123, in payment of ASSIGNOR’s outstanding obligation plus
any applicable interest charges on overdue account and
other avturbo fuel lifting and deliveries that ASSIGNOR may
from time to time receive from the ASSIGNEE, and
ASSIGNEE does hereby accepts such assignment in its
favor.” (p.
2, Deed of Assign-ment) (Italics supplied)
Hence, it could easily be seen that
the Deed of Assignment speaks of
three (3) obligations — (1) the
outstanding obligation of P4,072,682.13
as of June 30, 1980; (2) the
applicable interest charges on overdue accounts;
and (3) the other avturbo fuel lifting
and deliveries that the Assignor (private
respondent) may from time to time
receive from the assignee (Petitioner). As
aptly argued by petitioner, if it
were the intention of the parties to
limit or fix respondent’s obligation
to P4,072,682.13, they should have so
stated and there would have been no
need for them to qualify the statement
of said amount with the clause “as
of June 30, 1980 plus any applicable
interest charges on overdue account” and the
clause “and other avturbo fuel lifting and
deliveries that ASSIGNOR may from time
to time receive from the ASSIGNEE.”
The terms of the Deed of
Assignment being clear, the literal meaning
of its stipulations should control. 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. (Rule 130, Sec.
9, Rules of Court).

In Ridjo Tape & Chemical Corporation vs. Court of Appeals,25 it was

held that construction of the terms of a
contract which would amount to impairment or loss
of right is not favored; conservation and
art COntraCts 471
Interpretation of Contracts
preservation, not waiver, abandonment or forfeiture
of a right, is the rule.

De Leon vs. Court of Appeals, G.R. No. 95511, January

30, 1992.
Article 1374. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from
all of them taken jointly. (1285)

Just like in statutory construction, the various

provisions of a contract must be read as
a whole and not in isolation. Each
provision must be related to each other in
order to clearly know the total import and
application of the law and so that a
harmonious whole will be attained.26
In Ruiz vs. Sheriff of Manila,27 the mortgage
contract provides:
“WHEREAS, the parties of the FIRST
PART, jointly and severally, has/have applied for
and jointly and severally obtained from the
party of the SECOND PART, a
loan in the sum of FIFTEEN
THOUSAND PESOS (P15,000.00), Philippine
currency, to be amortizedat the rate
of not less than P300.00 including interest
on unpaid balance, at the rate of
8% per annum, said interest and capital
amortization to be effected at the
end of each month. Failure to pay
two successive monthly amortizations will
cause this loan to be automatically
due and payable in its entirety.
Notwithstanding the foregoing, this loan
shall not run for more than 5
years.”

For failure to pay their indebtedness, appellants’

property was foreclosed. They filed a suit in
the lower court to annul the foreclosure but
failed. Hence, they went up to the Supreme Court
which affirmed the decision of the lower court.
Pertinently, the Supreme Court said:
472 ObligatiOns and COntraCts art. 1374
Text and Cases
x x x appellant lay stress on the
following last two sentences of the provision of
the mortgage contract quoted above, to wit:
“x x x Failure to pay two
successive monthly amortizations will cause
this loan to be automatically due
and payable in its entirety. Notwithstanding
the foregoing, this loan shall not
run for more than 5 years.”
Interpreting the above stipulation, the appellants
claim that despite the acceleration clause,
they had five years from January 18,
1961 within which to pay their mortgage
debt because of the phrase “notwithstanding
the foregoing” in the last sentence.
Since the five-year period had not yet
expired when the mortgage was foreclosed,
said foreclosure, they point out, was
premature.

G.R. No. L-24016, July 31, 1960, 34 SCRA 83.

G.R. No. L-10231, October 18, 1988, 166 SCRA 577.
G.R. No. 121158, December 5, 1996, 77 SCAD 125.
 art. 1374 COntraCts 473Interpretation of Contracts

The appellants’ interpretation is totally

without merit. To ascertain the meaning of
the provision of the mortgage contract relied
upon by the appellants, its entirety
must be taken into account and not
merely its last two sentences. A
reading of the entire provision will readily
show that while the appellants were
allowed to amortize their loan at the
rate of not less than P300.00 a
month, they were under obligation to
liquidate the same within a period of
not more than five (5) years from
the date of the execution of the
contract; but if they should fail to
pay two successive monthly amortizations,
then the entire loan would be due
and payable. It is obvious that the
phrase “notwith-standing the foregoing” does
not refer to the acceleration clause
but to the stipulation that the
loan had to be “amortized at
the rate of not less than P300.00,
including interest on unpaid balance, at the
rate of 8% per annum, said interest
and capital amortization to be effected
at the end of each month.” There
is nothing inconsistent between the
acceleration clause and the last sentence.
All that the parties meant is that
while monthly amortizations could be as
little as P300.00 the loan should anyway
be paid within 5 years; and that
failure to pay two successive
amortizations would render the entire loan
due and payable. Consequently, default having
been committed for twelve months, the
foreclosure of the mortgage was not
premature.

In Fernandez vs. Court of Appeals28 where the only issue

involved the interpretation of the phrase “renewable
for another ten (10) years at the option of
both parties under such terms and condi-tions and
rental reasonable at that time,” the Supreme Court
rejected the position that the word “renewable”
means that the lessee can unilaterally renew the
474 ObligatiOns and COntraCts art. 1374
Text and Cases

contract and that therefore the phrase “at the

option of the parties” was just a superfluity.
Pertinently, the Supreme Court said:
x x x the intention of the parties
to the lease agreement is clearly
discernible in the words of that
agreement. The assent of both the
lessor and lessee is essential for another
contract to spring into juridical existence upon
expiration of the original one. xxx
We do not believe that the use
of either “extendible” or “renewable”
should be given sacramental significance.
The important task in contract interpretation
is always the ascertainment of the
intention of the contracting parties and
that task is of course to be
discharged by looking to the words
they used to project that intention in
their contract, all the words not just a
particular word or two, and words in context
not words standing alone. In the case
at bar, the intent of the parties
is observable with sufficient clarity and
specificity in the language used.
In China Banking Corp. vs. Court of Appeals,29 the Supreme
Court, using Article 1374, interpreted the import and
application of a mortgage, thus:
Petitioners aver that the additionalloans extended in

favor of private respondents in excess of

P6,500,000.00 and P3,500,000.00 — amounts
respectively stipulated in the July 1989 and
August 10, 1989 mortgage contracts — are also
secured by the same collaterals or real
estate properties, citing as bases the
introductory paragraph(“whereas clause”) of the
mortgage contracts, as well as the stipulations
stated therein under the first and second
paragraphs. Private respondents for their part
argue that the additionalloans are clean loans,
relying on some isolated parts of the same
introductory paragraphand first paragraphof the
contracts, and also of the third paragraph.
 art. 1374 COntraCts 475Interpretation of Contracts

As both parties offered a conflicting

interpretation of the contract, then judicial
determination of the parties’ intention is
thus, inevitable. Hereunder are the
pertinent identical introductory paragraphs and
1 to 3 of the July 27,
1989 and August 10, 1989 mortgage contracts:
“WHEREAS, the MORTGAGEE has
granted, and may from time to
time hereafter grant to the
MORTGAGOR(S)/either of them/and/or
NATIVE WEST INTERNATIONAL
TRADING CORP. — hereinafter
called the DEBTOR(S) credit
facilities not exceeding SIX
MILLION FIVE HUNDRED
THOUSAND PESOS ONLY
(P6,500,000.00) Philippine Currency, and
the MORTGAGEE had required the
MORTGAGOR(S) to give collateral
security for the payment of any
and all obligations heretofore
contracted/incurred and which may
thereafter be contracted/incurred by the
MORTGAGOR(S) and/
or DEBTOR(S), or any one of them,
in favor of the
MORTGAGEE;
“NOW, THEREFORE, as collateral
security for the payment of the
principal and interest of the
indebtedness/obligations herein referred to
and the faithful performance by
the MORTGAGOR(S)
of
his (her, its)
obligations hereunder, the
MORTGAGOR(S) hereby execute(s) a
FIRST MORTGAGE, in favor of
the MORTGAGEE, free from all
liens and encumbrances of any
kind, that (those) certain parcel(s) of
land, together with all the
buildings/
476 ObligatiOns and COntraCts art. 1374
Text and Cases

G.R. No. L-32162, September 28, 1984, 132 SCRA 156.

William F. Elliott, Commentaries on the Law of Contracts, Volume 2,
1913
machineries/equipment/improvements now
existing thereon, and which may
hereafter be placed thereon, described in
the Schedule of mortgaged
propertiesdescribed hereunderand/or which is
hereto attached, marked Exhibit “A” and
made a part thereof.
“1. It is agreed that this
mortgage shall respond for all the
obligations contracted/incurred by the
MORTGAGOR(S) and/or DEBTOR(S) or
any one of them, in
favor of the MORTGAGEE up
to the said sum of SIX
MILLION FIVE HUNDRED
THOUSAND PESOS ONLY
(P6,500,000.00) regard-less of the
manner in which the said
obligations may have been
contracted/incurred by the MORT-
GAGOR(S) and/ or DEBTOR(S) —
whether by ad-vancesor loans
made to him (her, it) by
the MORT-GAGEE, by the
negotiation of mercantile
documents, including trust receipts, by
the execution by the
MORTGAGOR(S) and/or DEBTOR(S) of
money market instruments/ commercial
papers, under-takings of guaranty of
suretyship, or by endorsement
of negotiable instrument, or
otherwise, the idea being to
make this deed a
comprehensive and all embracing
security that it is.
“2. Payments on account of the
principal and interest of the
credit granted by the
MORTGAGEE to the
MORTGAGOR(S) and/or DEBTOR(S)
may be made from time to
time, and as often as the
 art. 1374 COntraCts 477Interpretation of Contracts

MORTGAGOR(S) may elect; provided,

however, that in the event of
such payments being so made that
the indebtedness to the
MORTGAGEE may from time to
time be reduced the
MORTGAGEE may make further
advances and all sums whatsoever
advanced by the MORTGAGEE
shall be secured by this
mortgage, and partial payments of
said indebtedness from time to
time shall not thereby be
taken to reduce by the
amount of such payments the
credit hereby secured. The said
credit shall extend to any
account, which shall, within the said
limit of P6,500,000.00* exclusive of
interest, be fluctuating and
subject to increase or decrease
from time to time as the
MORTGAGEE may approve, and this
mortgage shall stand as security for
all indebtedness of the
MORTGAGOR(S) and/or DEBTOR(S), or
any one of them, at any
and all times outstanding,
regardless of partial or full
payments at any time
or times
made by the MORTGAGOR(S)
and/or DEBTOR(S).
“3. It is hereby agreed that the
MORTGAGEE may from time to time
grant the MORTGA-
GOR(S)/DEBTOR(S) credit facilities exceeding
the amount secured by this
mortgage, without affecting the
liability of the MORTGAGOR(S)
under this mortgage up to the
amount stipulated.”
An important task in contract interpretation is
the ascertainment of the intention of
the contracting parties which is
accomplished by looking at the words
478 ObligatiOns and COntraCts art. 1374
Text and Cases

they used to project that intention in

their contract, i.e., all the words, not just
a particular word or two, and words
in context, not words standing alone. Indeed,
Article 1374 of the Civil Code, states
that “the various stipulations of a
contract shall be interpreted together, attributing
to the doubtful ones that sense which
may result from all of them taken
jointly.” Applying the rule, we find that
the parties’ intent is to constitute the
real estate propertiesas continuing securities
liable for future obligations beyond the
amounts of P6.5 million and P3.5 million
respectively stipulated in the July 27,
1989 and August 10, 1989 mortgage contracts.
Thus, while the “whereas” clause initially
provides that “the mortgagee has granted,
and may from time to time hereafter
grant to the mortgagors x x
x credit facilities not exceeding six
million five hundred thousand pesos only
(P6,500,000.00)**” yet in the same clause
it provides that “the mortgagee had
required the mortgagor(s) to give collateral
security for the payment of any and
all obligations theretofore contracted/incurred
and which may thereafter be contracted/incurred
by the mortgagor(s) and/ or debtor(s), or
any one of them, in favor of
the mortgagee” which qualifies the initial
part and shows that the collaterals
or real estate propertiesserve as securities
for future obligations. The first paragraph
which ends with the clause, “the idea
being to make this deed a
comprehensive and all embracing security
that it is” supports this qualification.
Similarly, the second paragraphprovides that “the
mortgagee may take further advances and
all sums whatsoever advanced by the
mortgagee shall be secured by this
mortgagee x x x.” And although
it was stated that “[t]he said credit
shall extend to any account which shall,
within the said limit of P6,500,000.00
exclusive of interest,” this part of the
 art. 1374 COntraCts 479Interpretation of Contracts

second sentence is again qualified by its

succeeding portion which provides that “this
mortgage shall stand as security for all
indebtedness of the mortgagor(s) and/or
debtor(s), or any one of them, at
any and all times outstanding . .
.” Again, under the third paragraph,
it is provided that “the mortgagee
may from time to time grant the
mortgagor(s)/debtor(s) credit facilities exceeding
the amount secured by this mortgage x
x x.” The fourth paragraph, in
addition, states that “x x x all
such withdrawals, and payments, whether
evidenced by promissory notes or
otherwise, shall be secured by this
mortgage” which manifestly shows that
the parties principally intended to constitute the real estate
properties as continuing securities for additional
advancements which the mortgagee may,
upon application, extend. It is well
settled that mortgages given to secure
future advancements or loans are valid
and legal contracts, and that the amounts
named as consideration in said contracts
do not limit the amount for which
the mortgage may stand as security if
from the four corners of the instrument
the intent to secure future and other
indebtedness can be gathered.

In Home Development Mutual Fund vs. Court of Appeals,270 the

consultancy agreement particularly reads:
“That this agreement takes effect on
January 1, 1985 to December 31,
1985: Provided, however, That either party who
desires to terminate the contract may serve
the other party a written notice at
least thirty (30) days in advance.”

It was the contention of the petitioner

in the said case that the first clause was
independent from the second clause such that after
December 31, 1985, the contract is deemed

270
G.R. No. 118972, April 3, 1998, 93 SCAD 378,
288 SCRA 617.
480 ObligatiOns and COntraCts art. 1374
Text and Cases

terminated. Hence, the notice of termination given

to the respondent nine days after December
31, 1985 was a compliance in good faith
of the above-mentioned agreement. Petitioner
likewise contended that, even before the expiration
of the contract, it had served the respondent
notice on December 26, 1985. It was
shown however by concrete evidence that, since 1981, the
practice of the petitioner and the respondent
was that, without renegotiation, the consultancy
contract was con-tinuously renewed so that the
respondent continued to serve the petitioner
even after the expiry date with the renewal-
contract signed in the first few months of the
year. Accordingly, applying Article 1374 of the Civil
Code and the rule in contract interpretation that several provisions in a
contract must be given a construction that will
give effect to all, the Supreme Court ruled that
the petitioner failed to comply with the 30-
day notice requirement for terminating the
contract and therefore, also considering the
yearly practice of the petitioner and the
respondent in the implementation and the
renewal of their consultancy agreement, the said
agreement must be deemed renewed. The
Supreme Court said that the first clause relating to
the term of the contract must be construed
together with the second clause on the 30-day
notice-requirement. The 30-day notice therefore
should be
481 ObligatiOns and COntraCts art
Text and Cases
. 1375

given prior to the expiration date of the

contract which was December 31, 1985. This
becomes more imperative especially considering that
the notice relates to the termination of the
contract. “Thus, the requirements of contract as to
notice — as to the time of giving, form
and manner of service thereof — must be
strictly observed because in an obligation
where a period is designated, it is
presumed to have been established for the
benefit of both the contracting parties. Thus, the
unilateral termination of the contract in
question by the herein petitioners is violative of
the principle of mutuality of contracts
ordained in Article 1308 of the Civil Code.”
Article 1375. Words which may have different significations shall be
understood in that which is most in keeping with the nature and object of the
contract. (1286)

In Pasay City Government vs. Court of First Instance of Manila, 31

where a compromise agreement provided that the

project was to be done in stages and that,
in accordance with sub-paragraph B paragraph
1 of the agreement, the contractor was
to submit “a new performance bond in the
amount required by pertinent law, rules and regulations,
in proportion to the remaining value or
cost of the unfinished work of the
construction as per approved plans and
specifications,” and where there was a dispute as
to whether the amount of the performance bond
covered the whole unfinished project or only the
next stage of work to be done, the
Supreme Court ruled that the provision on the
new performance bond
read together with the stage-by-stage
construction and payment approach, would inevitably
lead to the conclusion that the
parties to the compromise contemplated
a divisible obligation necessitating therefore
482 ObligatiOns and COntraCts art
Text and Cases
a performance bond “in proportion”
to the uncompleted work.
What is crucial in sub-paragraph B
of paragraph1 of the compromise
agreement are the words, “in proportion.” If
the parties really intended the legal rate
of 20% performance bond to refer
to the whole unfinished work, then
the provision should have required the plaintiff
contractor to submit and file a
new performance bond to cover the remaining
value/cost of the unfinished work
of the construction. Using the words
in proportion then significantly changed the meaning
of the paragraphto ultimately mean
a performance bond equal to 20%
of the next stage of work to
be done.

Edition, Indianapolis, The Bobbs-Merrill Company, Pages 1055-

1059.
. 1376

Article 1376. The usage or customs of the place shall be borne in mind in
the interpretation of the ambiguities of a contract, and shall fill the omission
of stipulations which are ordinarily established. (1287)

No principle of the law is better settled

than the one that an express contract
embodying in clear and positive terms
the intention of the parties cannot be
varied nor contradicted by evidence of
usage or custom. The usage must be
consistentwith the contract. The office of
the custom or usage is to explain
the meaning of words and phrases used
in a written contract and to annex
thereto certain incidents which circumstances indicate
the parties intended when the words used
do not necessarily exclude the operation
of such custom or usage but they
may not be used to contradictnor
vary the plain meaning of the contract.
“Usage may be admissible to explain
what is doubtful; it is never admissible
to contradictwhat is plain.” “This rule,”
art COntraCts 483
Interpretation of Contracts
says Mr. Justice Harlan, “is based upon
the theory that the parties, if aware
of any usage or custom relating to
the subject-matter of their negotiations,
have so expressed their intention as to
take the contract out of the operation
of any rules established by mere
usage or custom.” “The proper office of
a custom or usage in trade,” says
Mr. Justice Davis, “is to ascertain and
explain the meaning and intention of the
parties to a contract, whether written or
in parol, which could not be done
without the aid of this extrinsic evidence.
It does not go beyond this, and
is used as a mode of
interpretation on the theory that the
parties knew of its existence, and contracted
with reference to it. It is often
employed to explain words or phrases in
a contract of doubtful signification, or
which may be understood in different
senses, according to the subject-matter to
which they are applied. But if it
is inconsistent with the contract, or
expressly or by necessary implication
contradicts it, it cannot be received
in evidence to affect it.” On the
question of the right of one to
invoke a custom or usage to vary
or contradictan express contract it was
said by Mr. Justice Story: “The true
and appropriate office of usage or
custom is to interpret the otherwise
indeterminate intentions of the parties and
to ascertain the nature and extent of
their contracts, arising not from express
stipulations, but from mere implications
and presumptions, and acts of a
doubtful or equivocal character. * * *
But I apprehend, that it can
never be proper to resort to any
usage or custom to control or vary
the positive stipulations in a written
contract, and, a fortiori not in order to contradictthem.
An express contract of the parties is
always admissible to supersede or vary,
or control, a usage or custom; for
the latter may always be waived at
484 ObligatiOns and COntraCts art
Text and Cases
the will of the parties. But a
written and express contract cannot be controlled,
or varied, or contradicted by a
usage or custom; for that would
. 1377

not only be to admit parol evidence to

control, vary, or contradictwritten contracts; but
it would be to allow mere
presumptions and implications, properly arising
in the absence of any positive
expressions of intention, to control, vary
or contradictthe most formal and deliberate
declarations of the parties.32

Article 1377. The interpretation of obscure words or stipulations in a

contract shall not favor the party who caused the obscurity. (1288)

Words or stipulations that are susceptible to

different interpretations causing ambiguity in their
application shall be construed against the
person who chose to use such ambiguous
words or phrases.271 This is based on the
maxim verba accipiuntur fortius contra proferentem. The rule is called the
contra proferentem rule.
The expression means “against the profferer,”
i.e., against the person who drafted or
tendered the documents. If there is
an ambiguity in a document which
all the other methods of construction
have failed to resolve so that there
are two alternative meanings to certain
words, the court may construe the words
against the party who put forward the
document and give effect to the meaning
more favourable to the other party.34

Thus, in Capitol Insurance vs. Sadang,35 where an

ambiguity as to the scope of the
mortgage contract drafted by the lawyer of the

271
Tuason vs. Court of Appeals, G.R. No. 119794,
October 3, 2000, 135 SCAD 28, 341 SCRA
707; Villamil vs. Court of Appeals, 208 SCRA
643.
art COntraCts 485
Interpretation of Contracts
insurance company led to a corresponding
ambiguity in its application, the Supreme Court
ruled against the liability of the mortgagor on
the contract by stating that
if the mortgage contract as actually drafted seems
to be vague or ambiguous, the
doubt must be resolved against appellant, whose
lawyer prepared the document, and in
accordance with the real intention of
the parties as explained by defendant-appellees.

In Nacu vs. Court of Appeals36 where the dispute

involved the application of a real estate
mortgage to another loan, the Supreme Court,
applying basic rules on the interpretation of
contract said:
Finally, if the parties intended the 1982
real estate mortgage to apply to the
1983 loan transaction, respondent Bank
should have required petitioners spouses to execute the proper loan
documents clearly and categorically
constituting upon the same property a
real estate mortgage. The respondent
Bank failed in this regard and must
therefore suffer the consequences.
. 1377

In Orient Air Services and Hotel Representatives vs. Court of Appeals,

this Court upheld the doctrine that any
ambiguity in a contract whose terms
are susceptible of different interpretation,
must be read against the party who
drafted it.

Article 1378. When it is absolutely impossible to settle doubts by the rules

established in the preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests.
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. (1289)
486 ObligatiOns and COntraCts art
Text and Cases
In Central Philippine University vs. Court of Appeals37 where the
deed of donation to the donee required as a
condition that the donee was to construct
a medical school on the property donated, and
where the donee did not comply with the
condition but contended that the donation
should nevertheless be made effective considering the
length of time the donor did not seek the
enforcement of the condition, the Supreme Court
ruled in favor of the donor by decreeing
the revocation of the donation for non-
compliance with the condition, and stated:
“Finally, since the questioned deed of donation
herein is basically a gratuitous one, doubts
referring to incidental circumstances of a
gratuitous contract should be resolved in favor of
the least transmission of rights and interests.”
In Castelo vs. Court of Appeals38 where the application
of a provision relative to the payment of
interest was interpreted by the Supreme Court, the
latter applied the rule that, if the contract is
onerous, the doubt shall be settled in favor of
the greatest reciprocity of interests.The Supreme Court
pertinently ruled, thus:

Keating on Building Contracts, by The Hon. Sir

Anthony May, M.A., Sweet and Maxwell, London, 1995 Page
47.
G.R. No. L-18857, December 11, 1967, 21 SCRA 1183;
see also Nacu vs. Court of Appeals, G.R. No.
L-108638, March 11, 1994, 49 SCAD 598, 231 SCRA
237; Coscolluela vs. Valderrama, L-13757, August 31,
1961, 2 SCRA 1095; Solis vs. Salvador, G.R. No.

L-17022, August 14, 1965; Halili vs. Lloret, 95 Phil.

78.
G.R. No. L-108638, March 11, 1994, 49 SCAD 598,
231 SCRA 1994.
G.R. No. 112127, July 17, 1995, 63 SCAD
38
72, 246 SCRA 511. G.R. No. 96372,
May 22, 1995, 61 SCAD 175, 244
SCRA 180. . 1378
art COntraCts 487
Interpretation of Contracts
The stipulation in the “Deed of
Conditional Sale” requiring the payment of
interest is not unlawful. The validity of
the contract of conditional sale itself
has not been put to question by
private respondent dela Rosa and there
is nothing in the record to suggest
that the same may be contrary to
law, morals, good custom, public order or
public policy. Accordingly, the contractual
stipulation must be regarded as binding
and enforceable as the law between
the parties.
We turn, therefore, to the examination
of the contractual stipulation on
interest which we quoted in full earlier.
Under the terms of the stipulation,
private respondent was bound, and entitled,
to pay the balance of P163,408.00
on or before 31 December 1982
without incurring any liability for any interest
and penalty charges. During the grace period
of six (6) months, that is, from
1 January 1983 to 30 June 1983,
private respondent vendee was given the
right to pay the said balance or
any portion that had remained unpaid provided
that “interest at the rate of 12%
per annum shall be charged and 1%
penalty charge shall be imposed on the
remaining diminishing balance.” We observe
that residual ambiguity infects this particular
portion of the stipulation on payment
of interest. The question is whether, during
the period of 1 January 1983 up
to 30 June 1983, 12% interest per annum
plus 1% penalty charge a month was
payable “on the remaining diminishing
balance,” or whether during the period from
1 January 1983 to 30 June 1983,
only 12% per annum interest was payable while
the 1% per month penalty charge would
in addition begin to accrue on any
balance remaining unpaid as of 1
July 1983.
We believe that the contracting parties
intended the latter view of their stipulation
on interest; for if the parties had
488 ObligatiOns and COntraCts art
Text and Cases
intended that during the grace period from
1 January 1983 to 30 June 1983,
interest consisting of 12% per annum plus
another 12% per annum (equivalent to
1% per month), or a total of
24% per annum, was payable, then they
could have simply said so. Instead, the
parties distinguished between interest at the
rate of 12% per annum and the
1% a month penalty charge. The
interpretation we adopt is also supported
by the principle that in case of
ambiguity in contract language, that
interpretation which establishes a less
onerous transmission of rights or imposition
of lesser burdens which permits greater reciprocity
between the parties, is to be adopted.

In Gaite vs. Fonacier39 where Gaite transferred to

Fonacier all

G.R. No. L-11827, July 31, 1961, 2 SCRA 830.

G.R. No. L-60174, February 16, 1983, 120 SCRA 628.
. 1378

his goodwill, rights and interest on the

improvements he made on the area subject of
the mining claim and the 24,000 tons of iron
already extracted, all for a consideration of
P75,000, P10,000 of which was paid upon the
signing of the agreement, and where, according
to paragraph (b) of the agreement,
the balance of SIXTY-FIVE THOUSAND PESOS
(P65,000)will be paid from and out of the
first letter of credit covering the first shipment of
iron ores and of the first amount derived from
the local sale of iron ore made by the
Larap Mines & Smelting Co., Inc. its assigns, administrators, or
successors-in-interest, and where there was a dispute as
to whether paragraph b provides a suspensive
period or a suspensive condition, the
Supreme Court ruled that since the rules of
interpretation would incline the scales in favor of
“the greater reciprocity of interest” in onerous
art COntraCts 489
Interpretation of Contracts
contract, paragraph b must be interpreted as
providing a suspensive period and not a
suspensive condition. The Supreme Court pertinently
stated:
x x x there can be no question
that greater reciprocity obtains if the
buyer’s obligation is deemed to be
actually existing, with only its maturity (due
date) postponed or deferred, that if
such obligation were viewed as non-
existent or not binding until the ore
was sold.
The only rational view that can be
taken is that the sale of the
ore to Fonacier was a sale on
credit, and not an aleatory contract where
the transferor, Gaite, would assume the
risk of not being paid at all;
and that the previous sale or shipment
of the ore was not a suspensive
condition for the payment of the balance
of the agreed price, but was intended
merely to fix the future date of
the payment.

The law likewise provides that 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.
Hence, if the object of the contract is a
particular house of the seller in Quezon City
and he owns two houses in the said
locality, the contract will be considered void if
it cannot be determined which house is the
object of the contract.
Article 1379. The principles of interpretation stated in Rule 123 of the Rules
of Court shall likewise be observed in the construction of contracts. (n)

Rule 123 of the Rules of Court is now

Rule 130 of the New Rules
. 1379
490 ObligatiOns and COntraCts art
Text and Cases
of Court. Relevantly, the latter provides the
following provisions:
Section 10. 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.
(8)
Section 11. 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. (9)
Section 12. Interpretation according to intention; general and
particular provisions. — In the construction
of an 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. (10)
Section 13. 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. (11)
Section 14. 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 the agreement
must be construed accordingly. (12)
Section 15. Written words control printed. —
When an instrument consists partly of
written words and partly of a printed
art COntraCts 491
Interpretation of Contracts
form, and the two are inconsistent,
the former controls the latter. (13)
Section 16. Experts and interpreters to be used in explain-ing certain
writings. — When the characters in which
an instrument 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. (14)
Section 17. Of two constructions, which 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, and when different
construction of a provision are otherwise
equally proper, that is to be taken
which is the most favorable to the
party in
. 1379

whose favor the provision was made. (15)

Section 18. Construction in favor of natural right. —
When an instrument is equally
susceptible of two interpretation, one
in favor of natural right and the
other against it, the former is to
be adopted. (16)
Section 19. Interpretation according to usage. —
An instrument may be construed according
to usage, in order to determineits
true character. (17)

In Felipe vs. Heirs of Maximo Aldon,40 the Supreme Court

had occasion to say that the description that
a contact is “invalid”
is imprecise when used in relation to contracts
because the Civil Code uses specific names
in designating defective contracts, namely: rescissible
(Art. 1380, et seq.), voidable (Art. 1390, et seq.),
492 ObligatiOns and COntraCts art
Text and Cases
unenforceable (Art. 1403, et seq.), and void
or inexistent (Art. 1409, et seq.).
art COntraCts 493
Interpretation of Contracts
. 1379
 417

Chapter 6

RESCISSIBLE CONTRACTS

Article 1380. Contracts validly agreed upon may be rescinded in the cases
established by law. (1290)

The rescissible contracts under Article 1380 are valid, but may subsequently
be terminated on legal grounds. Their being rescissible is not principally
premised on a breach of trust by the other party, but on some economic damage
as a result of inequitable conduct by one party. If the contract is in fraud of
creditors, which is a ground for rescission, but it is likewise simulated in that
there is absolutely no consideration, the contract is not rescissible under this
chapter but clearly void ab initio. In Dilag vs. Court of Appeals,272 a contract
in fraud of creditors but completely simulated was considered void and not
merely rescissible, thus:
The appellate court ruled that the deed of sale was simulated since it was
executed in fraud of creditors having been entered into during the pendency
of Civil Case No. 8714. Said contract, being fictitious, is according to the
appellate tribunal, inexistent and necessarily the adverse claim of private
respondents is likewise a nullity because an inexistent contract cannot give
life to anything at all. Hence, the filing of the present petition for certiorari
by the Dilag children with the following issues:
1. Whether or not petitioners as plaintiffs below, are the owners of Lots
288 and 1927, of the Dumangas Cadastre at the time of the levy on
execution in Civil Case No. 8714.
2. Whether or not the decision and the consequent writ of execution in
Civil Case No. 8714 of the court below are operative against petitioners
who admittedly were not parties to said civil case.
Petitioners’ contentions do not hold water.
It is not disputed that, at the time of the levy on execution

417

272
G.R. No. L-72727, July 30, 1987, 152 SCRA 459.
art COntraCts 495
Rescissible Contracts
. 1380

in Civil Case No. 8714, the Dilag spouses were still the registered owners
of Lot 288 as shown in TCT No. 30137 and they were also the declared
owners of Lot 1827 as shown in Tax Declaration No. 411900-3039. On the
other hand, it is alleged by private respondent herein and not refuted by
petitioners herein that the title in the name of herein petitioners was issued
on August 14, 1981, several days ahead of the deed of sale, dated August
26, 1981 on which the new title in the name of the petitioners was based,
and inscribed on August 27, 1981. Clearly, the Deed of Absolute Sale in
favor of petitioners herein executed in 1974 after the filing of Civil Case
No. 8714 was a simulated and fictitious transaction to defraud Arellano
who obtained a money judgment against the parents of petitioners.
The supposed sellers, spouses Pablo and Socorro Dilag who sold the lot in
question to their children (petitioners herein) for an insufficient
consideration continued exercising acts of ownership over Lot No. 288 by
leasing the same to David Diancin and turning over material possession
thereof to the latter as lessee. In fact, when the deed of sale in favor of
Arellano was executed on August 30, 1982, by virtue of the failure of the
former owners to redeem the property within the period prescribed by law,
the actual possessor was David Diancin. He, however, recognized
Arellano’s right of ownership when he was notified of the delivery of
possession to Arellano by the Provincial Sheriff as evidenced by a signed
delivery receipt, dated December 12, 1983. Diancin ceased performing acts
of cultivation on the fishpond situated within the lot in question and he
merely requested for an extension of his stay while he looked for another
place to stay. Subsequently, Arellano sold the lot to Marcelino Florete and
Leon Coo. When Diancin was paid the value of the fish fry he placed in the
fishpond, he executed a Discharge and Release Claim in favor of Florete,
one of the vendees, on July 2, 1983. When the Dilag children (petitioners
herein) filed Civil Case No. 15085 on July 5, 1983, they were not in
possession of the property in question. There was therefore no factual and
legal basis for the restraining order dated July 8, 1983 of the lower court
ordering Arellano and/or his agents to desist from entering Lot No. 288.
Thus Rule 39, Sec. 13 relied upon by petitioners will not apply in the case
at bar.
Likewise it cannot be denied that in securing the cancellation of TCT No.
30137 covering Lot No. 288 in the names of Pablo and Socorro Dilag,
petitioners had to rely on an another deed of absolute sale supposedly executed
by their parents in their favor in 1981, instead of relying on the first deed of
sale executed in 1974, an indication that petitioners do not really consider the
1974 Deed of Sale valid and legal.
The records of the case do not support petitioners’ contention
. 1381
496 ObligatiOns and COntraCts art
Text and Cases
that the obligation of spouses Pablo and Socorro Dilag was already
extinguished when Arellano acknowledged the receipt of payment of the
money judgment, by virtue of their own admission thru counsel in Civil
Case No. 12832 that payment was only partial and did not cover the whole
amount of the money judgment in Civil Case No. 8714. It is also an
indisputable fact that the compromise agreement in Civil Case No. 8714
was denied by the trial court in its order of October 24, 1979. This order of
denial had become final and executory because no appeal was taken by
petitioners’ predecessors-interest. Furthermore, even assuming that
petitioners became the valid and legal owners of the lot in question by
virtue of the deed of sale executed in their favor in 1981, they nonetheless
failed to avail themselves of their right as registered owners to redeem the
property from the private respondent herein (buyer in the sale by public
auction) within the period provided for by law.

Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter
suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in
any other manner collect the claim due them;
(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to
rescission. (1291a)

Lesion implies an economic damage. In case of a guardian with respect to the

properties of his ward, any act of ownership or disposition undertaken by the
guardian on behalf of his ward without court approval is void. If there is court
approval, the transaction is valid whether or not there is lesion. If the guardian,
however, performs acts of administration, such as buying materials to repair
the roof of the ward’s house, and the ward suffers economic loss because there
. 1381

was, in fact, no need to make a useless purchase, then the contract entered into
by the guardian is rescissible provided that the ward suffers lesion by more
than one-fourth of the value of the things which are the object of the contract.

When a person disappears from his domicile, his whereabouts being unknown,
and without leaving an agent to administer his property, the judge, at the
art COntraCts 497
Rescissible Contracts
instance of an interested party, a relative, or a friend, may appoint a person to
represent him in all that may be necessary. 273 This is a case of provisional
absence. Two years having elapsed without any news about the absentee or
since the receipt of the last news, and five years in case the absentee has left a
person in charge of the administration of his property, his absence may be
declared by the court. The court may appoint an administrator or a
representative to manage the properties of the absentee. 274 The same rule
governing rescission of contract entered into by a guardian shall apply to
administrators or representatives of absentees.

A contract entered into in bad faith by the parties to the said contract, which
was purposely designed to evade the due obligations in favor of creditors who
have no other way to collect their debts, is considered done in fraud of creditors
and therefore rescissible. In Bobis vs. Provincial Sheriff of Camarines
Norte, 275276 the Supreme Court, in finding that there was no fraud, ruled as
follows:
In dismissing the complaint filed in the instant case, the trial court found
that the sale of the land to Fermin Bobis and Emilia Guadalupe was tainted
with fraud since the said sale was made during the pendency of Civil Case
No. 273, and that the price was inadequate.
The rule, however, is that fraud is not presumed. As fraud is criminal in
nature, it must be proved by clear preponderance of evidence. In order that
a contract may be rescinded as in fraud of creditors, it is essential that it be
shown that both contracting parties have acted maliciously and with fraud
and for the purpose of prejudicing said creditors, and that the latter are
deprived by the transaction of all means by which they may effect
collection of their claims. All these circumstances must concur in a given
case. The presence of only one of them is not enough. In this particular
case, there is no evidence that the spouses Rufina Camino and Pastor Eco
connived with the spouses Fermin Bobis
. 1381

and Emilia Guadalupe to defraud Alfonso Ortega. Nor is there evidence to

show that the sale of the land to Fermin Bobis and Emilia Guadalupe
tended to deprive Alfonso Ortega of means to collect his claim from the
spouses Rufina Camino and Pastor Eco. As a matter of fact, no oral or
docu-mentary evidence was presented by the parties, and the trial court
merely assumed that the sale to Fermin Bobis and Emilia Guadalupe was
fraudulent because of the inadequacy of the price, and that the sale was
executed during the pendency of Civil Case No. 273. While these
circumstances may be considered badges of fraud, the sale cannot be

273
Article 381 of the 1950 Civil Code.
274
Articles 383 and 387 of the 1950 Civil Code.
275
G.R. No. L-29838, March 18, 1983, 121 SCRA 28.
276
G.R. No. L-19160, December 26, 1963, 9 SCRA 783.
498 ObligatiOns and COntraCts art
Text and Cases
considered in fraud of creditors in the absence of proof that the vendors
Rufina Camino and Pastor Eco, had no other property except that parcel of
land they sold to the spouses Fermin Bobis and Emilia Guadalupe. Besides,
Alfonso Ortega knew of such sale and did nothing to have it annulled as in
fraud of creditors. Nor did he cause a cautionary notice to be inscribed in
the certificate of title to protect his interests. Moreover, the sale was not
fictitious, designed to escape payment of the obligation to Alfonso Ortega.
The tenacity by which Emilia Guadalupe had clung to her property to the
extent of undergoing imprisonment is indicative of their good faith.
Also, the phrase “in fraud of creditors” necessarily refers to actual creditors of
the debtor or obligee. In Marsman Investment Ltd. vs. Philippine Abaca
Development Company,5 the Supreme Court, in disallowing the assertion that
there was fraud of creditors, ruled:
Nevertheless, the duly accredited waiver and release in 1959 (two years
before the present action was filed by Marsman Investments Ltd. and
Marsman & Co., Inc.) of the credits they held against defendant PADCO,
and the absence of any allegation or evidence of invalidity of the corporate
release, operate to deprive the rescissory action of any legal basis. Until
and unless those releases are set aside, the plaintiff corporations ceased to
be creditors of the transferor PADCO as of 1959, and were thereafter
deprived of any interest in assailing the validity of the transfer of its
properties to appellee Mary A. Marsman; for under the Civil Code, only
actual creditors can ask for the rescission of the conveyance made by their
debtors in favor of strangers. So that with the proof of the release executed
by the creditors, plaintiffs appear to have no cause of action against
defendants-appellees.

Another contract which is rescissible is that which refers to things under

litigation, if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority. For
example, in a suit for replevin wherein the 6G.R. No. 130722, December 9, 1999, 117
SCAD 74, 320 SCRA 405.
. 1382

plaintiff seeks to recover personal property from the defendant, the latter,
during the pendency of the suit, cannot sell in bad faith the property being
litigated to any third person. If he does and the transferee also acts in bad faith,
the contract is rescissible.

In Litonjua vs. L.R. Corporation6 where the creditor lent the money to the
debtor who, in turn, collateralized his property to secure the loan, the Supreme
Court said that the failure of the debtor to recognize or implement the stipulated
right of first refusal contained in the loan-mortgage agreement in favor of the
creditor makes any sale of the property to a third person rescissible at the
instance of the creditor. The right of first refusal means that, in the event debtor
art COntraCts 499
Rescissible Contracts
decides to sell his property, he must first offer the same to the creditor. The
consideration for the loan-mortgage includes the consideration for the right of
first refusal. To deprive the creditor of this right of first refusal will surely
prejudice the creditor in his substantial interests to be able to own the property.
A contract of sale therefore, entered into in violation of a right of first refusal
of another person, while valid, is rescissible.277

Article 1382. Payments made in a state of insolvency for obligations to whose

fulfillment the debtor could not be compelled at the time they were affected,
are also rescissible. (1292)

A debtor whose liabilities already exceed his assets and who can barely pay
off his debts is considered in a state of insolvency. If he pays off a creditor
whose credit has not yet become due, that payment can be rescinded. It is not
necessary here that a prior judicial declaration of insolvency of the debtor is
obtained. In De La Paz vs. Garcia278 where 279the transfer of property was made
after an insolvency proceeding was filed with the competent court, and where
such transfer was also claimed as in fraud of creditors, the Supreme Court held
that the transfer was not rescissible under the Civil Code but void under the
Insolvency Law.

Article 1383. The action for rescission is subsidiary; it cannot be instituted

except when the party suffering damage

. 1383

has no other legal means to obtain reparation for the same. (1294)

A cause of action for rescission under this chapter can only be made
in a proper and direct action filed for that purpose and not on a mere motion
incidental to another case. In Air France vs. Court of Appeals,9 the Supreme
Court pertinently ruled:
Multinational Food and Iolani Dionisio, not being parties to the case, the
property covered by TCT No. 353935 may not be levied upon to satisfy the
obligations of private respondent spouses and the Multinational Travel
Corporation.

277
Rosencor Development Corporation vs. Inquing, G.R. No. 140479, 76 SCAD 467, March 8,
2001, 145 SCAD 484; Guzman vs. Bonnevie, 206 SCRA 668; Equatorial Realty vs. Mayfair, 76
SCAD 407, 264 SCRA 483; Parañaque Kings Enterprises vs.
Court of Appeals, 79 SCAD 936, 268 SCRA 727.
278
G.R. No. L-18500, November 24, 1966, 18 SCRA 779.
279
G.R. No. L-104234, June 30, 1995, 62 SCAD 228, 245 SCRA 485.
500 ObligatiOns and COntraCts art
Text and Cases
Petitioner’s contrary claim that the property belongs to private respondent
spouses, if true, requires a rescissory action which cannot be done in the
same case, but through the filing of a separate action.
Recission is a relief which the law grants on the premise that the contract
is valid for the protection of one of the contracting parties and third persons
from all injury and damage the contract may cause, or to protect some
incompatible and preferential right created by the contract.
Under Art. 1381 of the Civil Code, the following contracts are rescissible: x x
x
Rescissible contracts, not being void, they remain legally effective until
set aside in a rescissory action and may convey title. Nor can they be
attacked collaterally upon the grounds for rescission in a land registration
proceeding.
An action for rescission may not be raised or set up in a summary
proceeding through a motion, but in an independent civil action and only
after a full-blown trial. As Article 1383 of the Civil Code provides:
“Art. 1383. The action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to obtain
reparation for the same.”
Regarding contracts undertaken in fraud of creditors, the existence of the
intention to prejudice the same should be determined either by the
presumption established by Article 1387 or by the proofs presented in the
trial of the case. In any case, the presumption of fraud established by this
article is not conclusive, and may be rebutted by satisfactory and
convincing evidence. To repeat, an independent action is necessary to
prove that the contract is rescissible.

Khe Hong Cheng vs. Court of Appeals, G.R. No. 144169, March 28, 2001, 146
. 1383

Under Article 1389 of the Civil Code, an “accion pauliana,” the action to
rescind contracts made in favor of creditors, must be commenced within
four years.
Clearly, the rights and defenses which the parties in a rescissible contract
may raise or set up cannot be properly ventilated in a motion but only in a
full trial.
The appellate court did not err in holding that the trial court acted with
grave abuse of discretion in resolving these matters through mere motion
of petitioner.
It is likewise subsidiary in that it must be the last remedy. If there are other
means to claim reparation, such other means must be availed of before filing a
case for rescission. An action to rescind or an accion pauliana must be of last
resort.10 All possible ways to enforce the obligation, including the filing of a
art COntraCts 501
Rescissible Contracts
court case, must first be undertaken. And when the implementation of the
decision of this court case fails, then a subsequent court case for rescission of
the contract can be filed.
An accion pauliana thus presupposes the following: 1) 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. It requires that the creditor has exhausted the
property of the debtor. The date of the decision of the trial court is
immaterial. What is important is that the credit of the plaintiff antedates
that of the fraudulent alienation by the debtor of his property. After all, the
decision of the trial court against the debtor will retroact to the time when
the debtor became indebted to the creditor.11
In Goquiolay vs. Sycip,12 the Supreme Court said:
A final and conclusive consideration: The fraud charged not being one
used to obtain a party’s consent to a contract (i.e., not being deceit or dolus
in contrahendo), if there is fraud at all, it can only be a fraud of creditors
that gives rise to a rescission of the offending contract. But by express
provision of law (Article 1294, Civil Code of 1889; Article 1383, New
Civil Code), “the action for rescission is subsidiary; it can not be instituted
except when the party suffering damage has no other legal means to obtain
reparation for the same.” Since there is no allegation, or evidence, that
Goquiolay cannot obtain reparation from the widow

SCAD 587.
11Ibid.
12
G.R. No. L-11840, December 10, 1963, 9 SCRA 663.
13
17 Am Jur 2d 995.
 COntraCts 502Rescissible Contracts
arts. 1384-1385

and heirs of Tan Sin An, the present suit to rescind the sale in question is
not maintainable, even if the fraud charged actually did exist.

Article 1384. Rescission shall be only to the extent necessary to cover the
damages caused. (n)

Since rescission presupposes a valid contract, it need not be rescinded totally

considering the law provides that such remedy shall be only up to the extent
necessary to cover the damages caused. For example, A is indebted to X for
P5,000 and, to defraud X, A transfers his two houses each worth P5,000 to B
who is also in bad faith. Rescission can be had only with respect to one house
worth P5,000 because it is only up to this amount that X has been damaged.

Article 1385. 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; consequently, it can be carried out only when he who demands
rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of
the contract are legally in the possession of third persons who did not act in
bad faith.
In this case, indemnity for damages may be demanded from the person
causing the loss. (1295)

In restitution, the parties shall be placed in the same position where they were
before they entered into the assailed contract. The objective is to restore the
parties to their original position. Not only should the parties return the object
subject of the rescissible contract but also the fruits or interest, if any. If the
object of the contract cannot be restored because of loss, damages may be
claimed from the person responsible for the loss.
An attempted restoration of the status quo is an essential part of the
rescission of a contract, and in accordance with the general rule requiring
restoration, a party cannot rescind and at the same time retain the
consideration, or a part of the consideration, received under the contract.
One cannot have the benefits of rescission without assuming its burdens.13
It must be noted, however, that rescission cannot take place when the things
which are the object of the contract are legally in the possession of third persons
who did not act in bad faith. Hence, even
arts. 1386-1387
art COntraCts 503
Rescissible Contracts
if a father, with the intention to put beyond reach, his properties from his
creditors, sold the property to his son for a valuable consi-deration but below
the fair market value of the same, such a sale is valid and not even rescissible
if the son was without any knowledge of the ulterior motive of his father to
defraud his creditors. Mere inadequacy of price does not invalidate a contract.
For the son therefore the consideration can still be considered a fair price. In
short, the son was clearly in good faith and therefore the contract of sale cannot
be rescinded.
It is axiomatic that good faith is always presumed unless contrary evidence
is adduced. A purchaser in good faith is one who buys the property of
another without notice that some other person has a right or interest in such
a property and pays a full and fair price at the time of the purchase or before
he has notice of the claim or interest of some other person in the property.14

Article 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not
take place with respect to contracts approved by the courts. (1296a)

Approval by the courts implies that the parties were given their day in court to
justify to the court the necessity and reasonableness of the contract to be
entered into. Hence, once judicially approved, such contract cannot anymore
be the subject of rescission.

Article 1387. All contracts by virtue of which the debtor alienates property
by gratuitous title are presumed to have been entered into in fraud of
creditors, when the donor did not reserve sufficient property to pay all debts
contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by
persons against whom some judgment has been rendered in any instance or
some writ of attachment has been issued. The decision or attachment need
not refer to the property alienated, and need not have been obtained by the
party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be
proved in any other manner recognized by

Rosencor Development Corporation vs. Inquing, G.R. No. 140479, March 8, 2001 , 145 SCAD
484.
G.R. No. L- 25152, February 26, 1968, 22 SCRA 798.
Khe Hong Cheng vs. Court of Appeals, G.R. No. 144169, March 28, 2001, 146 . 1387

the law of evidence. (1297a)

504 ObligatiOns and COntraCts
Text and Cases
Article 1387 provides rebuttable presumptions. Presumptions can only exist
from facts or a set of facts. For example, B is indebted to D for P10,000, E for
P7,000, and F for P13,000. All of the debts are due. B has money in the bank
in the amount of P60,000. B donates P55,000 to X. The donation is presumed
to be fraudulent as he has not reserved sufficient property to pay all debts
contracted before the donation. If the debts are not yet due, it shall likewise be
presumed fraudulent because the only requirements of the law are that the debts
are contracted prior to the donation, and that there is no reservation of sufficient
property to pay all debts contract before the donation. The maturity of the debts
is not a requirement. The presumption, however, can be controverted by
convincing evidence that the donation was not in fraud of creditors.

Another set of facts which gives rise to a presumption of a fraudulent

transaction is when alienation by onerous title has been made “by persons
against whom some judgment has been rendered in any instance or some writ
of attachment has been issued.” The presumption, however, can be rebutted by
convincing evidence to the contrary. It must be observed that an alienation
made during the pendency of a suit is not enough. There must already be a
decision or a writ of attachment. For example, A is able to obtain a writ of
attachment against debtor B. The attachment effectively places his property in
Mandaluyong under the custody of the court so that, in the event A wins the
case, such property, if necessary, can be sold to pay the judgment debt.
Subsequently B sells his property in Laguna to Z. There is a presumption here
of a fraudulent alienation even if the Laguna property is not the subject of the
attachment. This is so because the attachment need not refer to the property
alienated. A can seek the rescission of the sale by B to Z of the property in
Laguna. Likewise, if a decision has been rendered against B in favor of another
creditor X, and B sells the property in Laguna to M, there is also a presumption
of fraudulent transaction, and A can file a case to rescind the sale even if the
decision has not been obtained by him but by X.

The case of Provincial Sheriff of Pampanga vs. Court of Appeals15 is an

illustrative case where Article 1387 has been put in issue. The facts and the
ruling of the Supreme Court are as follows:
An action for recovery of a sum of money was filed on June 4, 1960, by
Cirilo D. Cabral and Zacarias Perez against Elpidio Agustin and Manuel
Flores in the Court of First Instance of Bulacan.
art. 1387

At said time, Elpidio Agustin was then a furniture dealer under the
business name and style “Modern Furniture Store” in Masantol, Pampanga.
A big fire, however, broke out on January 9, 1961, and totally burned said
furniture store of Elpidio Agustin and its contents of several pieces of
art COntraCts 505
Rescissible Contracts
furniture. As a result, Elpidio Agustin, on January 12, 1961, surrendered to
the Municipal Treasurer his license to operate the store.
Not long thereafter, said defendant’s brother, Marciano Agustin, put on the
same site a new furniture store, adopting the name and style “Modern
Furniture Store.” On February 20, 1961, for business purposes, Marciano
Agustin secured a new license and privilege tax to operate the store. And
on the same date, Elpidio Agustin verbally transferred “Modern Furniture
Store” to his brother Marciano Agustin.
Subsequently, on July 13, 1961, the Court of First Instance of Bulacan, in
the aforementioned case, rendered judgment against Elpidio Agustin (who
had confessed judgment) and Manuel Flores, jointly and severally, for
P10,685.15 plus interest and P500.00 attorney’s fees.
Subsequently, the Court of Appeals affirmed the decision and it became
final and executory. A writ of execution was issued on April 20, 1963.
Acting thereon, the Provincial Sheriff of Pampanga, on May 3, 1963, levied
on the pieces of furniture found in “Modern Furniture Store.” Stating that
said properties do not belong to judgment debtor Elpidio Agustin but to
him, Marciano Agustin filed a third-party claim with the sheriff. An
indemnity bond, however, was posted by the judgment creditors in the
sheriff’s favor, so he issued notice that the properties levied upon will be
sold at public auction on May 18, 1963.
A day before that, on May 17, 1963, Marciano Agustin filed in the Court
of First Instance of Pampanga the present action, against judgment
creditors Cabral and Perez and the sheriff, to be declared owner of the
pieces of furniture levied upon, with preliminary injunction and damages.
A writ of preliminary injunction was issued enjoining the sheriff from
proceeding with the sale.
After the defendants answered and trial, the Court of First Instance
rendered a decision that dismissed the complaint. Plaintiff appealed to the
Court of Appeals. On July 29, 1965, the Appellate Court rendered a
decision reversing the lower court, and declaring Marciano Agustin owner
of the pieces of furniture listed in the complaint, ordering defendants to pay
him jointly and severally P2,000.00 moral and actual damages, and
P500.00

SCAD 887.
. 1388

attorney’s fees, and rendering permanent the injunction issued.

Appeal therefrom was taken to Us by defendants. At issue here is: Does
Article 1387 of the Civil Code on presumption of fraud apply?
xxx xxx xxx
506 ObligatiOns and COntraCts
Text and Cases
The provision in question applies only when there has in fact been an
alienation or transfer, whether gratuitously or by onerous title. In the
present case, the finding of the Court of Appeals, which is factual and
therefore not proper for Us to alter in this appeal, is that the store of
Marciano Agustin is a new and different one from that of Elpidio Agustin.
True, Marciano Agustin testified that “Modern Furniture Store” was
transferred, verbally, to him by Elpidio Agustin on February 20, 1961. As
the Court of Appeals found, however, this referred to the business name
and style, not to the store or its contents, as the store and contents were
completely new, coming from the capital of Marciano Agustin, whereas
Elpidio’s store and its contents of furniture were destroyed totally by the
fire of January 9, 1961.
Since there was in fact no transfer of the store or its furniture, Article 1387
aforementioned finds no application. And appellants do not contend that
the transfer merely of the name and style “Modern Furniture Store” would
be fraudulent. Such transfer has in the circumstances no effect on Marciano
Agustin’s ownership of the pieces of furniture in question.

Article 1388. Whoever acquires in bad faith the things alienated in fraud of
creditors, shall indemnify the latter for damages suffered by them on account
of the alienation, whenever, due to any cause, it should be impossible for him
to return them.
If there are two or more alienations, the first acquirer shall be liable first,
and so on successively. (1298a)

A transferee or buyer of a debtor’s property, who knows that the conveyance

has been principally made to remove the property from the reach of the creditor
in satisfaction of the debtor’s liability, shall be liable to the creditor for
damages if it should be impossible for the transferee to return the subject
property. The knowledge of the transferee of the evasive and fraudulent
designs of the debtor makes the said transferee’s acquisition tainted with bad
faith. He should have desisted from perfecting the fraudulent contract with the
debtor when he learned of the purpose of the transaction. In the event that the
transferee in bad faith transfers the property to a
art. 1389

subsequent buyer who is likewise in bad faith, the latter shall have the
obligation to return said property if it is still possible to do so. If not, he shall
be liable for damages. However, if such buyer is in good faith, his purchase of
the property is perfectly valid, thereby making it impossible for the first
transferee to return the property, in which case such first transferee shall be
liable for damages.
art COntraCts 507
Rescissible Contracts
Article 1389. The action to claim rescission must be commenced within four
years.
For persons under guardianship and for absentees, the period of four years
shall not begin until the termination of the former’s incapacity, or until the
domicile of the latter is known. (1299)

The prescriptive period within which to file a case for rescis-sion is four years.
The situations depend on the ground invoked but, in all these cases, the
prescriptive period begins to run after the aggrieved party has
unsuccessfully exhausted all possible remedies to enforce the obligation or to
recover what has been lost,16 thus:
1) For persons under guardianship, the period begins from the time the
incapacity terminates and the aggrieved party has unsuccessfully
exhausted all other legal remedies to be able to enforce his or her
rights or recover what has been lost. Hence, if the person is a minor,
the period begins from the time he reaches the age of majority which
is 18 years of age 280 and has unsuccessfully exhausted all legal
remedies;
2) For absentees, the period begins from the time learns of the contract
and has unsuccessfully exhausted all other legal remedies to be able
to enforce his rights or recover what has been lost. For the exercise
of civil rights and the fulfillment of civil obligations, the domicile of
natural persons is the place of their habitual residence.281 When the
law creating or recognizing them, or any provision does not fix the
domicile of juridical persons, the same shall be understood to be the
place where their legal representative is established or where they
exercise their principal function;19
3) For contracts entered into in fraud of creditors, the period begins
from the time of the discovery of the fraud and after he or she has
unsuccessfully exhausted all other legal
. 1389

remedies to be able to enforce his or her rights or recover what has been
lost; and
4) For contracts entered into with respect to things under litigation
without the knowledge and approval of the litigants or of competent
judicial authority, the period begins from the time of knowledge of
the transaction and unsuccessful exhaustion of all other legal

280
Article 234 of the Family Code of the Philippines, Executive Order No. 209 as amended by
Republic Act 6809.
281
Article 50 of the 1950 Civil Code.
508 ObligatiOns and COntraCts
Text and Cases
remedies to be able to enforce his rights or recover what has been
lost.

Article 51 of the 1950 Civil Code.

432 ObligatiOns and COntraCts Text
and Cases

Chapter 7

VOIDABLE CONTRACTS

Article 1390. The following contracts are voidable or annullable, even

though there may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a
contract;
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a proper action in
court. They are susceptible of ratification. ( n )

Voidable contracts are the same as annullable contracts. They are valid until
annulled. They are not invalid from the beginning unlike a void contract. Hence
any defect or infirmity causing its annullable nature can be cured by the party
aggrieved or injured. This process of curing the defect is called ratification.

In Lim Tay vs. Court of Appeals,1 the Supreme Court ruled that the effects of
an annulment operate prospectively and do not, as a rule, retroact to the time
the contract, such as a sale, was made.

The grounds enumerated in Article 1390 have already been explained in this
book under Articles 1327 to 1344.

Significantly, damage need not exist in case of annulment.

Article 1391. The action for annulment shall be brought within four years.
This period shall begin:
In cases of intimidation, violence or undue influence, from the time the
defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery 1G.R. No. 126891,
August 5, 1998, 97 SCAD 103, 298 SCRA 634.

432
. 1391
510 ObligatiOns and COntraCts
Text and Cases
of the same.
And when the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases. (1301a)

A prescriptive period is the time within which an aggrieved party can file a
case in court to make a claim or to assert a right or to correct a wrong. In
annulling a contract, the prescriptive period is four years. The starting point of
this period depends on the ground invoked as follows:
1) In case of intimidation, violence or undue influence, from the time the
defect of the consent ceases. Hence if, to be able to lease his property to A,
B coerces A to enter into the said lease contract by continually threatening
A with serious bodily injury if he does not do so, A is excused from not
filing a case for the annulment of the contract while the threat and
intimidation are still existing. However, if B finally reforms and tells A that
he apologizes for such threats and stops the same, the fouryear period for
A to annul the contract will commence from the cessation of the threat and
not from the time the contract was entered into. In Rodriguez vs.
Rodriguez,282 where an annulment of contract was filed on the ground of
duress, the Supreme Court, after resolving that there was no duress, ruled
that even if there were duress, the circumstances of the case showed that
the filing of the case had already prescribed, thus:
What is more decisive is that duress being merely a vice or
defect of consent, an action based upon it must be brought
within four years after it has ceased; and the present action
was instituted only in 1962, twenty-eight (28) years after the
intimidation is claimed to have occurred, and no less than
nine (9) years after the supposed culprit died (1953). On top
of it, appellant entered into a series of subsequent
transactions with appellees that confirmed the contracts that
she now tries to set aside. Therefore, this cause of action is
already barred.
2) In case of mistake or fraud, from the time of discovery of the same. For
example, if A, an expert jeweler, induces B in 1990 to buy a figurine from
him knowingly misrepresenting to B that the figurine is made of diamond
when in fact it is only made of glass and, as a result, B buys such figurine,
B is obviously excused from filing an action to annul the contract during
the
art. 1391

time when he is not aware of the fraud. If, in 1997, B discovers the fraud,
the four year-period within which to file the action to annul the contract of
sale shall start only in 1997.

282
G.R. No. L-23002, July 31, 1967, 20 SCRA 908.
art COntraCts 511
Voidable Contracts
3) When the action refers to contracts entered into by minors or other
incapacitated persons, from the time the guardianship ceases. Hence, if
during A’s minority, his guardian, though obtaining a court order to sell the
property of his minor ward, fraudulently transferred said minor’s property
to a third party, A obviously cannot file a case for annulment while under
guardianship because the guardian at that time is supposedly the one taking
charge of his affairs. Once the guardianship ceases or if A reaches the age
of majority, it is from that time when the prescriptive period will start for
A to annul the contract. In Causapin vs. Court of Appeals283 where a sale
of property was entered into by the petitioner when she was a minor and
where said petitioner filed the case for recovery of property only in 1986
which was about 20 years after she reached the age of majority, the
Supreme Court ruled that the action had already long prescribed.
It is a rule that an extra-judicial demand by a creditor shall interrupt the
running of a prescriptive period. 284 However, this rule only applies to a
determinate conduct that can be demanded. If a contract of sale of property is
alleged as voidable or annullable, and the aggrieved party who sold the
property extra-judicially demands for the reconveyance of the property prior to
the filing of the suit, the prescriptive period of four (4) years is not interrupted
by such extra-judicial demand. A voidable contract is valid unless annulled by
the proper court. A debtor-buyer, therefore, has no obligation to accede to a
demand for the reconveyance by a creditor-seller precisely because the contract
is valid unless annulled. In Miailhe vs. Court of Appeals,285286 the petitioner
claimed that, during the height of Martial Law under President Marcos, he was
intimidated and forced to enter into a contract with the Development Bank of
the Philippines (DBP), a government bank, that led to the forced conveyance
of his property to DBP. It was shown that the cause for the vitiation of consent
ceased on February 24, 1986, when President Marcos left the Philippines but
the case for annulment of contract was filed only on March 23, 1990. The
Supreme Court said that the action has prescribed. The action should have been
filed on or before February 24, 1990. Petitioner contended that the demands
made to the respondent to reconvey the

283
G.R. No. 107432, July 4, 1994, 53 SCAD 13, 233 SCRA 615.
284
Article 1155 of the Civil Code.
285
G.R. No. 108991, March 20, 2001, 146 SCAD 151.
286
G.R. No. 53820, June 15, 1992, 209 SCRA 763.
512 ObligatiOns and COntraCts
Text and Cases
arts. 1392-1393

property interrupted the prescriptive period. This was also brushed aside by the
Supreme Court by saying that there was no obligation to reconvey on the part
of the respondent, because the contract that allowed the respondent to own and
possess the property was voidable, which means that it was valid unless the
court annulled the same. Since there had been no annulment yet of the contract,
there was therefore no determinate duty for the respondent to heed the demand
to reconvey. The reconveyance of the property by the respondent could not be
a determinate conduct that can be extrajudicially demanded while the contract
is considered valid.

Article 1392. Ratification extinguishes the action to annul a voidable

contract. (1309a)

Article 1393. Ratification may be effected expressly or tacitly. It is

understood that there is a tacit ratification if, with knowledge of the reason
which renders the contract voidable and such reason having ceased, the
person who has a right to invoke it should execute an act which necessarily
implies an intention to waive his right. (1311a)

Ratification is the act of curing the defect which made the contract annullable.
It may be expressly or tacitly given. It extinguishes the action to annul a
voidable contract. Hence, if A is coerced by B to lease the latter’s property and
if, after the reason for the coercion ceased, A writes B a letter that he (A) will
continue the lease, the defective contract will be considered as expressly
ratified. If instead of writing B a letter, A willingly and continuously pays the
rentals for the subject leased premises to be able to live in the same, the defect
of the contract is tacitly cured. In both cases, there is ratification which
completely erases the infirmity in the contract. An action therefore by A to
annul the agreement, based on force and intimidation will not prosper even if
it is filed within the four-year prescriptive period.

In Yao Ka Sin Trading vs. Court of Appeals,6 the Supreme Court ruled that
there can be no ratification by a corporation of acts performed by an officer if
he has not been given apparent authority by the corporation, or if his acts are
not later validated by the corporation. The Supreme Court likewise
differentiated the case from another case which clearly shows ratification, thus:

G.R. Nos. 74938-39, January 17, 1990, 181 SCRA 84.

arts. 1392-1393
 COntraCts 513Voidable Contracts
The cases then of Francisco vs. GSIS and Board of
Liquidators vs. Kalaw are hopelessly unavailing to the petitioner. In said
cases, this Court found sufficient evidence, based on the conduct and
actuations of the corporations concerned, of apparent authority conferred
upon the officer involved which bound the corporations on the basis of
ratification. In the first case, it was established that the offer of compromise
made by plaintiff in the letter, Exhibit “A,” was validly accepted by the
GSIS. The terms of the offer were clear, and over the signature of
defendant’s general manager, Rodolfo Andal, plaintiff was informed
telegraphically that her proposal had been accepted. It was sent by the GSIS
Board Secretary and defendant did not disown the same. Moreover, in a
letter remitting the payment of P30,000 advanced by her father, plaintiff
quoted verbatim the telegram of acceptance. This was in itself notice to the
corporation of the terms of the allegedly unauthorized telegram.
Notwithstanding this notice, GSIS pocketed the amount and kept silent
about the telegram. This Court then ruled that:
“This silence, taken together with the unconditional
acceptance of three other subsequent remittances from
plaintiff, constitutes in itself a binding ratification of the
original agreement (Civil Code, Art. 1393).
‘ART. 1393. Ratification may be effected ex-
pressly or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason which renders
the contract voidable and such reason having ceased, the
person who has a right to invoke it should execute an act
which necessarily implies an intention to waive his right.’ ”
In the second case, this Court found:
“In the case at bar, the practice of the corporation has been to allow its
general manager to negotiate and execute contracts in its copra trading
activities for and in NACOCO’s behalf without prior board approval. If the
by-laws were to be literally followed, the board should give its stamp of
prior approval on all corporate contracts. But that board itself, by its acts
and through acquiescence, practically laid aside the by-law require-ment of
prior approval.”
Under the given circumstances, the Kalaw contracts are valid corporate acts.
Article 1394. Ratification may be effected by the guardian of the
incapacitated person. (n)
arts. 1394-1397

A guardian is tasked with the administration of the person and properties of

the ward. He must see to it that they are protected, and that everything
undertaken affecting the ward is for the latter’s best interest. Ratification of a
defective contract can therefore be made by the guardian of an incapacitated
person. For example, if an insane person entered into a contract with a
carpenter to repair the roof of his house, this contract can be annulled as it has
514 ObligatiOns and COntraCts
Text and Cases
been entered into by a person who is incapacitated. However, the guardian can
make an express or tacit ratification of the repair, especially if it will redound
to the benefit of his incapacitated ward.

Article 1395. Ratification does not require the conformity of the contracting
party who has no right to bring the action for annulment. (1312)

Ratification is a unilateral act. It is generally done by the injured party and not
by the party causing the injury. The consent of the injuring party is not required
because such party normally desires the effectivity of the contract anyway from
its inception. Indeed, if the injuring party is not interested in the contract in the
first place, he would not have exerted fraud or intimidation for the innocent
party to enter the contract.

Article 1396. Ratification cleanses the contract from all its defects from the
moment it was constituted. (1313)

Ratification transforms the contract completely as one without infirmity. It

cures the defect which initially made the contract voidable. This curing effect
retroacts to the day when the contract was entered into. Hence, upon
ratification, it is as if the contract has never been visited by any infirmity or
defect at all.

Article 1397. The action for the annulment of contracts may be instituted by
all who are thereby obliged principally or subsidiarily. However, persons who
are capable cannot allege the incapacity of those with whom they contracted;
nor can those who exerted intimidation, violence, or undue influence, or
employed fraud, or caused mistake base their action upon these flaws of the
contract. (1302a)

In the case of Malabanan vs. Gaw Ching,7 the Supreme Court had the occasion
to discuss the parties who can file an annulment case, thus:
 art. 1397 COntraCts 515Voidable Contracts

The firmly settled rule is that strangers to a contract cannot sue either or
both of the contracting parties to annul and set aside that contract. Article
1397 of the Civil Code embodies that rule in the following formulation:
“Article 1397. The action for the annulment of contracts may
be instituted by all who are thereby obliged principally or
subsidiarily. However, persons who are capable cannot
allege the incapacity of those with whom they contracted; nor
can those who exerted intimidation, violence, or undue
influence, or employed fraud, or caused mistake base their
action upon these flaws of the contract.”
Article 1397 itself follows from Article 1311 of the Civil Code which establishes
the fundamental rule that:
“Article 1311. Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir
is not liable beyond the value of the property he received
from the decedent.
xxx xxx xxx.”
As long ago as 1912, this Court in Ibañez vs. Hongkong and Shanghai
Bank, pointed out that it is the existence of an interest in a particular
contract that is the basis of one’s right to sue for nullification of that
contract and that essential interest in a given contract is, in general,
possessed only by one who is a party to the contract. In Ibañez, Mr. Justice
Torres wrote:
“From these legal provisions it is deduced that it is the interest had in a
given contract, that is the determining reason of the right which lies in favor
of the party obligated principally or subsidiarily to enable him to bring an
action for nullity of the contract in which he intervened, and, therefore, he
who has no right in a contract is not entitled to prosecute an action for
nullity, for according to the precedents established by the courts, the person
who is not a party to a contract, nor has any cause of action or
representation from those who intervened therein, is manifestly without
right of action and personality such as to enable him to assail the validity
of the contract.” (Decisions of the Supreme Court of Spain, of April 18,
1901, and November 23, 1903, pronounced in cases requiring an
application of the preinserted Article 1302 of the Civil Code.)

G.R. No. L-18210, December 29, 1966, 18 SCRA 1253.

Mr. Justice Torres went on to indicate a possible qualification to the above
general principle, that is, a situation where a non-party to a contract could
be allowed to bring an action for declaring that contract null:
516 ObligatiOns and COntraCts art. 1397
Text and Cases

“He who is not the party obligated principally or subsidiarily in a contract

may perhaps be entitled to exercise an action for nullity, if he is prejudiced
in his rights with respect to one of the contracting parties; but, in order that
such be the case, it is indispensable to show the detriment which positively
would result to him from the contract in which he had no intervention.”
xxx xxx xxx.”
There is an important and clear, albeit implicit, limitation upon the right of
a person who is in fact injured by the very operation of a contract between
two (2) third parties to sue to nullify that contract: that contract may be
nullified only to the extent that such nullification is absolutely necessary to
protect the plaintiff’s lawful rights. It may be expected that in most
instances, an injunction restraining the carrying out of acts in fact injurious
to the plaintiff’s rights would be sufficient and that there should be no need
to set aside the contract itself which is a res inter alios acta and which may
have any number of other provisions, implementation of which might have
no impact at all upon the plaintiff’s rights and interests.
What is important for present purposes is that respondent Gaw Ching,
admittedly a stranger to the contract of sale of a piece of land between
petitioners Malabanan and Senolos inter se, does not fall within the
possible exception recognized in Ibañez vs. Hongkong & Shanghai Bank.
In the first place, Gaw Ching had no legal right of preemption in respect of
the house and lot here involved. The majority opinion of the appellate court
itself explicitly found that the subject piece of land is located outside the
Urban Land Reform Zones declared pursuant to P.D. No. 1517. Even
assuming, for purposes of argument merely that the land here involved was
in fact embraced in a declared Urban Land Reform Zone (which it was not),
Gaw Ching would still not have been entitled to a right of preemption in
respect of the land sold. In Santos vs. Court of Appeals, this Court held that
the preemptive or redemptive rights of a lessee under P.D. No. 1517 exists
only in respect of the urban land under lease on which he had resided for
ten (10) years or more and that, in consequence, where both land and
building belong to the lessor, that preemptive or redemptive right was
simply not available under the law.
Finally, we are unable to understand the respondent appellate court’s view
that respondent Gaw Ching having been a long time tenant of the property
in question, had acquired a preferred right to purchase that property. This
holding is simply bereft of any legal basis. We know of no law, outside the
Urban Land Reform Zone or P.D. No. 1517, that grants such a right to a
lessee no matter how long the period of the lease has been. If such right
existed at all, it could only have been created by contract, respondent Gaw
Ching does not, however, pretend that there had been such a contractual
stipulation between him and petitioners.
In the second place, assuming once again, for present purposes only, that
respondent Gaw Ching did have a preemptive right to purchase the land
from petitioner Malabanan (which he did not), it must be stressed that
 art. 1397 COntraCts 517Voidable Contracts

petitioner Malabanan did thrice offer the land to Gaw Ching but the latter
had consistently refused to buy. Since Gaw Ching did not in fact accept the
offer to sell and did not buy the land, he suffered no prejudice, and could
not have suffered any prejudice, by the sale of the same piece of land to
petitioner Senolos. No fraud was thus worked upon him notwithstanding
his insinuation that the sale of the land to petitioner Senolos had preceded
the offer of the same piece of land to himself.
In the third place, and contrary to the holding of the majority appellate
court opinion, the fact that Gaw Ching had been lessee of the house and lot
was simply not enough basis for a right to bring an action to set aside the
contract of sale between the petitioners inter se. A lessee, it is elementary,
cannot attack the title of his lessor over the subject matter of the lease.
Moreover, the lease contract between petitioner Malabanan and respondent
Gaw Ching must in any case be held to have lapsed when the leased house
was condemned and the order of demolition issued.
In Armentia vs. Patriarca,8 the Supreme Court likewise discussed Article 1397
in connection with Article 1311, thus:
Plaintiff was but a brother of the deceased Marta Armentia. True, he is an
intestate heir of Marta; but he is not a forced heir. Upon the other hand,
Marta was free to dispose of her properties the way she liked it. She had
neither ascendants nor descendants.
By Article 1397 of the Civil Code, “[t]he action for annulment of contracts
may be instituted by all who are thereby obliged principally or
subsidiarily.” This must be construed in conjunction with Article 1311 of
the same code providing that “[c]ontracts take effect only between the
parties, their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by their nature,
or by stipulation or by

G.R. No. L-30351, September 11, 1974, 59 SCRA 15.

provision of law,” and that “the heir is not liable beyond the value of the
property he received from the decedent.” Plaintiff is not a forced heir. He
is not obliged principally or subsidiarily under the contract. Marta
Armentia did not transmit to him by devise or otherwise any right to the
property, the subject thereof. On the contrary, Marta voluntarily disposed
of it. No creditors are defrauded; there are none. No legitimes are impaired.
Therefore, plaintiff has no cause of action to annul or to rescind the sale.
In point is Concepcion vs. Sta. Ana, 87 Phil. 787. The facts there may well
be analogized with those of the present. In the Concepcion case, plaintiff
Monico Concepcion was the only surviving legitimate brother of Perpetua
Concepcion, who died without issue and without leaving any will. In her
lifetime, or more precisely, on June 29, 1945, said Perpetua Concepcion,
“in connivance with the defendant and with intent to defraud the plaintiff,
518 ObligatiOns and COntraCts art. 1397
Text and Cases

sold and conveyed three parcels of land for a false and fictitious
consideration to the defendant, who secured transfer certificate of title of
said lands issued under her name; and that the defendant has been in
possession of the properties sold since the death of Perpetua Concepcion,
thereby causing damages to the plaintiff in the amount of not less than two
hundred (P200) pesos.” On motion to dismiss, the lower court threw the
com-plaint out of court upon the ground that the “plaintiff is not a party to
the deed of sale executed by Perpetua Concepcion in favor of the
defendant;” that even on the assumption “that the consideration of the
contract is fictitious, the plaintiff has no right of action against the
defendant;” that under Article 1302 of the old Civil Code, “the action to
annul a contract may be brought by any person principally or subsidiarily
bound thereby;” that “plaintiff is not bound by the deed of sale executed by
the deceased in favor of the defendant;” and that he has “no obligations
under the deed.”
The following reproduced in haec verba from the Concepcion opinion is
illuminating:
“(2) As to the appellant’s second and last contention, under the law action
to annul a contract entered into with all the requisites mentioned in Article
1261 whenever they are tainted with the vice which invalidate them in
accordance with law, may be brought not only by any person principally
bound or who made them, but also by his heir to whom the right and
obligation arising from the contract are transmitted. Hence, if no such
rights, actions or obligations have been transmitted to the heir, the latter
can not bring an action to annul the contract in representation of the
contracting party who made it. In Wolfson vs. Estate of Martinez, 20 Phil.
340, this Supreme Court quoted with approval the judgment of the Supreme
Court of Spain of April 18, 1901, in which it was held that ‘he who is not
a party to a contract, or an assignee thereunder, or does not represent those
who took part therein, has under Articles 1257 and 1302 of the Civil Code
no legal capacity to challenge the validity of such contract.’ And in Irlanda
vs. Pitargue (22 Phil. 283) we held that ‘the testamentary or legal heir
continues in law as the juridical personality of his predecessor-in-interest,
who transmits to him from the moment of his death such of his rights,
actions and obligations as are not extinguished thereby.’
The question to be resolved is, therefore, whether the deceased Perpetua
Concepcion has transmitted to the plaintiff any right arising from the
contract under consideration in order that he can bring an action to annul
the sale voluntarily made by her to the defendant with a false consideration.
We are of the opinion and so hold, that the late Perpetua Concepcion has
not transmitted to the plaintiff any right arising from the contract of
conveyance or sale of her lands to the defendant, and therefore the plaintiff
cannot file an action to annul such contract as representative of the
deceased.
 art. 1397 COntraCts 519Voidable Contracts

According to the complaint the deceased, in connivance with the defendant

and with intent to defraud the plaintiff, (that is, in order not to leave the
properties above mentioned upon her death to the plaintiff) sold and
conveyed them to the latter, for a false and fictitious consideration. It is,
there-fore obvious, that the conveyance or sale of said properties to the
defendant was voluntarily made by the deceased to said defendant. As the
deceased had no forced heir, she was free to dispose of a thing which
involves the right to give or convey it to another without any consideration.
The only limitation established by law on her right to convey said
properties to the defendant without any consideration is, that she could not
dispose of or transfer her property to another in fraud of her creditors. And
this court, in Solis vs. Chua Pua Hermanos (50 Phil. 636), through Mr.
Justice Street, held that a ‘voluntary conveyance, without any consideration
whatever, is prima facie good as between the parties, and such an
instrument can not be declared fraudulent as against creditors in the
absence of proof, that there was at the time of the execution of the
conveyance a creditor who could be defrauded by the conveyance, 27 C.J.
4770.’

In Bañez vs. Court of Appeals,9 the Supreme Court further explained the
exception to Article 1397 thus:
Article 1397 of the Civil Code provides that the action for annulment of
contracts may be instituted by all who are thereby obliged principally or
subsidiarily. Hence, strangers to the contract who are not bound thereby
have neither the right nor the personality to bring an action to annul such
contract. It cannot be gainsaid that respondent Pio Arcilla was a stranger
to, and not bound principally or subsidiarily by, the conditional contract to
sell executed on May 20, 1960 by the PHHC in favor of Cristeta L.
Laquihon, and the transfer of rights over the same lot from Basilio
Laquihon to Aurea V. Banez. Hence, respondent Pio Arcilla could not
bring an action to annul the same.
There is, however, an exception to the rule laid down in Article 1397. This
Court, in Teves vs. People’s Homesite and Housing Corporation, L-21498,
June 27, 1968, citing Ibañez vs. Hongkong and Shanghai Bank, held that
“A person who is not a party obliged principally or subsidiarily in a
contract may exercise an action for nullity of the contract if he is prejudiced
in his rights with respect to one of the contracting parties, and can show the
detriment which would positively result to him from the contract in which
he had no intervention.” Pursuant to said doctrine, in order that respondent
Pio Arcilla might bring an action for the nullity of the contracts aforesaid,
he should have been not only prejudiced in his rights with respect to one of
the contracting parties, but must have also shown the detriment which he
would positively suffer from the contracts. It becomes, therefore, necessary
to inquire, whether respondent Pio Arcilla’s rights were prejudiced by the
aforesaid contracts, and as to what detriment, if any, he suffered because
of those contracts.
520 ObligatiOns and COntraCts art. 1397
Text and Cases

What rights of respondent Pio Arcilla were prejudiced? The Court of

Appeals found that Pio Arcilla “makes no pretense that he entered into and
built his land upon appellee PHHC’s land with the consent of the latter.”
Pio Arcilla was, therefore, a trespasser or a squatter, he being a person who
settled or located on land, inclosed or uninclosed with “no bona fide claim
or color of title and without consent of the owner.” He began his material
possession of the lot in bad faith, knowing that he did not have a right
thereto, and it is presumed that his possession continued to be enjoyed in
the same character in which it was acquired, i.e., in bad faith until the
contrary is proved. And what right can a squatter have to the land into
which he has intruded against the owner of the land? The answer is not
hard to find. A squatter can have no possessory rights whatsoever, and his
occupancy of the land is only at the owner’s sufferance, his acts are merely
tolerated and cannot affect the owner’s possession. The squatter is
necessarily bound to an implied promise, that he will vacate upon demand.
This Court, in Bernardo, et al. vs. Bernardo and Court of Appeals, laid down the
doctrine that:

Mercado vs. Espiritu, G.R. No. 11872, December 1, 1917, 37 Phil. 215.
“In carrying out its social readjustment policies, the government could not
simply lay aside moral standards, and aim to favor usurpers, squatters, and
intruders, unmindful of the lawful or unlawful origin and character of their
occupancy. Such a policy would perpetuate conflicts instead of attaining
their just solution.
Respondent Pio Arcilla, having no possessory rights whatsoever, what
detriment could he have suffered from the aforesaid contracts?”
The action for annulment cannot be filed by the person who caused the defect
in the contract. Hence, the one who committed fraud or intimidation cannot
annul the contract on the ground that there was fraud or violence when the
contract was entered into. He is estopped from asserting the grounds for
annulment which were principally initiated by him. Moreover, it is a general
rule that a litigant cannot come to court with “unclean hands.”

A case for annulment cannot likewise be filed by the person who is capacitated
to enter into the contract if the ground to be invoked is the incapacity of the
other party. Hence, if a minor and a person of age entered into a contract of
sale of a particular car, the person of age cannot file a case to annul the contract
based on the fact that the other contracting party was a minor. The minor,
however can file a case upon reaching the age of majority because it is at this
time when the guardianship of the parents ceases.

However, if the case filed is not for annulment of contract but for the
enforcement of the contract, the party who is capacitated may file such action
against the minor. Whether or not the minor will be liable depends upon the
 art. 1397 COntraCts 521Voidable Contracts

kind of misrepresentation which the minor made in entering the contract and
upon the extent of the benefit to the minor. If the misrepresentation is an active
one, which means that the minor deliberately and intentionally undertakes to
inform the other party and expressly declares in the contract that he is of
majority age, when in fact he is not of age, the minor will be liable to pay
whatever his obligation is under the contract as if his liability is that of a person
who is of age.10 However, if the misrepre-sentation is a passive one, which
means that the minor was able to enter into the contract without doing anything
to declare his true age, such minor shall be liable only up to the extent that he
has been benefited by the contract.11

Article 1398. An obligation having been annulled, the contracting parties

shall restore to each other the things which
 COntraCts 522Voidable Contracts
arts. 1398-1399

have been the subject matter of the contract, with their fruits, and the price
with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be the basis for
damages. (1303a)

Article 1399. When the defect of the contract consists in the incapacity of
one of the parties, the incapacitated person is not obliged to make any
restitution except insofar as he has been benefited by the thing or price
received by him. (1304)

When the annulment of the contract has been decreed, the contracting parties
must be returned to their original position. Hence whatever has been given
must be returned to the giver. In a contract of sale of a car, for example, the car
must be returned to the ownerseller and the purchase money with the
corresponding interest must be returned to the buyer. If the contract involves
some service like the tutoring of a particular child, the value of the tutoring
must be paid to the tutor by way of damages.

However, the law states that when the defect of the contract consists in the
incapacity of one of the parties, the incapacitated person is not obliged to make
any restitution except insofar as he has been benefited by the thing or price
received by him. Hence, if part of the proceeds of a contract of loan entered
into by a minor with a bank has been uselessly spent by said minor, the bank
cannot recover such uselessly spent money even if a court decrees that the
obligation should be annulled. The minor has no obligation to restore such
money. The bank, however, can recover from the minor such part of the
proceeds which turns out to be beneficial to him like money spent to be able to
enroll in a school. It must be noted that the bank cannot even file a case against
the minor. Hence, it can only recover by way of a counterclaim in a complaint
for annulment filed by the minor when he reaches the age of majority.

Article 1400. Whenever the person obliged by the decree of annulment to

return the thing can not do so because it has been lost through his fault, he
shall return the fruits received and the value of the thing at the time of the
loss, with interest from the same date. (1307a)

Braganza vs. De Villa Abrille, G.R. No. L-12471, April 13, 1959, 105 Phil. 456. arts. 1400-1401
 COntraCts 523
When the object to be returned cannot be returned, because it was lost by the
person obliged to return it due to the fault of the said person, the value of the
object, its fruits, and interest shall be given instead to satisfy the order of
restitution. Hence, if A is compelled by B to have an exchange of their
respective cars, and the said contract of exchange is subsequently annulled, A
and B must return what each of them has received from each other. If A cannot
return the car obtained by way of the exchange because it has been lost through
his fault, he shall undertake restitution by paying B an amount equivalent to
the value of the car plus interest, if any.

Article 1401. The action for annulment of contracts shall be extinguished

when the thing which is the object thereof is lost through the fraud or fault
of the person who has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the
contracting parties, the loss of the thing shall not be an obstacle to the
success of the action, unless said loss took place through the fraud or fault
of the plaintiff. (1314a)

It is a rule that no one can come to court with unclean hands. Hence if A
coerced B to sell to him a car, B can seek the annulment of the sale. However,
if B lost the car by intentionally destroying it, he cannot file the annulment case
as such right will be considered extinguished.

If an incapacitated person, such as a deaf-mute who cannot read and write,

purchases a car and later he files a case to annul the contract of sale, the mere
fact that the car has been lost will not abate the proceedings for annulment.
This is so because the incapacitated person is not obliged to make any
restitution except when it has benefited him. Hence, since the object of the
contract has been lost, no benefit can accrue in his favor. However, if the
incapacitated person loses the car through his own fault, then the case will be
dismissed.

Article 1402. As long as one of the contracting parties does not restore what
in virtue of the decree of annulment he is bound to return, the other cannot
be compelled to comply with what is incumbent upon him. (1308)

Restitution requires the return by the parties of what each has received from
the other. If one of them cannot restore to the other what he has received from
the said other, such other person cannot
art. 1402
Voidable Contracts

be compelled to return what he, in turn, has received. However, if one of the
parties is incapacitated, he is not obliged to return what he has received except
insofar as he has been benefited by the thing or price received by him.
448 ObligatiOns and COntraCts Text
and Cases

Chapter 8

UNENFORCEABLE CONTRACTS (n)

Article 1403. The following contracts are unenforceable, unless they are
ratified:
(1) Those entered into in the name of another person by one who has
been given no authority or legal representation, or who has acted
beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set forth
in this number. In the following cases an agreement hereafter
made shall be unenforceable by action, unless the same, or some
note or memorandum thereof, be in writing, and subscribed by
the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary
evidence of its contents:
(a) An agreement that by its terms is not to be performed within a
year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage
of another;
(c) An agreement made in consideration of marriage, other than a
mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action,
at a price not less than five hundred pesos, unless the buyer
accept and receive part of such goods and chattels, or the
evidences, or some of them, of such things in action, or pay at the
time some part of the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind of property sold,
terms of sale, price, names of the purchasers and person on
whose account the sale is made, it is a sufficient memorandum;
448
(e) An agreement for the leasing for a longer period than one year,
or for the sale of real property or of an interest therein;
arts. 1403-1404 COntraCts 525
Unenforceable Contracts (n)
(f) A representation as to the credit of a third person.
(3) Those where both parties are incapable of giving consent to a
contract.

Article 1404. Unauthorized contracts are governed by Article 1317 and the
principles of agency in Title X of this Book.

A contract may have all the requisites for perfection but it may still be
unenforceable. These unenforceable contracts are the ones treated in this
chapter. Thus, if a contract has been entered into without authority, it cannot
be enforced. This has been discussed under Article 1317. Non-authority is also
governed by the principles of agency which are provided for in Article 1868
up to Article 1932 of the Civil Code of 1950. 287 Another case of an
unenforceable contract is when a contract is entered into by parties who are
both incapacitated to enter into a contract. Hence, if a contract is entered into
by a minor and by a deaf-mute who cannot read and write, such contract is
unenforceable. If only one is incapacitated, the contract will only be voidable.

Another instance of an unenforceable contract is when the contract does not

comply with the Statute of Frauds. Basically, this statute mandates that for
certain executory contracts to be enforceable in a court of law, the only
evidence that can prove such contract is a written proof of the agreement like
some notes or memoranda. The reason for this requirement is precisely to
prevent fraud or perjury 288 as it has always been regarded that “a written
document speaks a uniform language but the spoken word could be notoriously
unreliable.”289 The written evidence of the contract may not necessarily be in
one document but in two or more notes or memoranda, which taken together
or by reference with other writings, clearly reveal the essential requisites for
the existence of a contract and also the signature of the party or parties charged
or their agent. 290 In Berg vs. Magdalena,5 the Supreme Court, citing
jurisprudence in the United States, discussed the nature of a memorandum or
note, thus:
Before we proceed, it is important to state at this juncture some principles
governing the meaning, extent and scope of the rule underlying the statute
of frauds relative to the note or memorandum that may serve as proof to
determine the existence of an oral contract or agreement contemplated by
it, and for our purpose, it suffices for us to quote the following authorities:
“No particular form of language or instrument is necessary to constitute a
memorandum or note in writing under the statute of frauds; any document
or writing, formal or informal, written either for the purpose of furnishing

287
Book IV, Title 10 of the 1950 Civil Code.
288
Shoemaker vs. La Tondeña, 68 Phil. 24.
289
Air France vs. Carrascoso, G.R. No. L-21438, September 28, 1966, 18 SCRA 155.
290
Berg vs. Magdalena Estate, G.R. No. L-3784, October 17, 1952, 92 Phil. 110.
526 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
evidence of the contract or for another purpose, which satisfies all the
requirements of the statute as to contents and signature, as discussed
respectively infra Secs. 178-200, and infra Secs. 201-215, is a sufficient
memorandum or note. A memorandum may be written as well with lead
pencil as with pen and ink. It may also be filled in on a printed form.” (37
C.J. S., 653-654)
“The note or memorandum required by the statute of frauds need not be
contained in a single document, nor, when contained in two or more papers,
need each paper be sufficient as to contents and signature to satisfy the
statute. Two or more writings properly connected may be supplied or
rendered certain by another, and their sufficiency will depend on whether,
taken together, they meet the requirements of the statute as to contents and
the requirements of the statute as to signature, as considered respectively
(infra Secs. 179-200 and Secs. 201-215)
“Paper connected. — The rule is frequently applied to two or more, or a
series of, letters or telegrams, or letters and telegrams sufficiently
connected to allow their consideration together; but the rule is not confined
in its application to letters and telegrams; any other documents can be read
together when one refers to the other. Thus, the rule has been applied so as
to allow the consideration together, when properly connected, of a letter
and an order of court, a letter and order for goods, a letter and a deposition,
letters or telegrams and undelivered deeds, wills, correspondence and
related papers, a check and a letter, a receipt and a check, deeds and a map,
a memorandum of agreement and a deed, a memorandum of sale and an
abstract of title, a memorandum of sale and a will, a memorandum of sale
and a receipt, and a contract, deed, and instructions to a depositary in
escrow. The number of papers connected to make out a memorandum is
immaterial.”

Id.
G.R. No. L-23351, March 13, 1968, 22 SCRA 1000.
G.R. No. 118509, December 1, 1995, 66 SCAD 136, 250 SCRA 523.
Thus, in Paredes vs. Espino,6 where the record shows that the defendant wrote
the plaintiff a letter stating that he (the defendant) accepted the offer of the
plaintiff as to the price and the object of the contract and that this was followed
up by telegrams, the Supreme Court said that the documents presented
constituted adequate memoranda of the transaction and therefore was removed
from the operation of the Statute of Frauds. Also in Limketkai Sons Milling,
Inc. vs. Court of Appeals,7 it was held:
Moreover, under Article 1403 of the Civil Code, an exception for the
unenforceability of contracts pursuant to the Statute of Frauds is the
existence of a written note or memorandum evidencing the contract. The
memorandum may be found in several writings, not necessarily in one
document. The memorandum or memoranda is/are evidence that such a
contract was entered into.
xxx xxx xxx
arts. 1403-1404 COntraCts 527
Unenforceable Contracts (n)
While there is no written contract of sale of the Pasig property executed
by BPI in favor of plaintiff, there are abundant notes and memoranda extant
in the records of this case evidencing the elements of a perfected contract.
There is Exhibit P, the letter of Kenneth Richard Awad addressed to Roland
Aromin, authorizing the sale of the subject property at the price of
P1,000.00 per square meter giving 2% commission to the broker and
instructing that the sale be on cash basis. Concomitantly, on the basis of
the instruction of Mr. Awad, (Exh. P), an authority to sell (Exh. B), was
issued by BPI to Pedro Revilla, Jr., representing Assetrade Co., authorizing
the latter to sell the property at the initial quoted price of P1,000.00 per
square meter which was altered on an unaccepted offer by Technoland.
After the letter authority was issued to Mr. Revilla, a letter authority was
signed by Mr. Aromin allowing the buyer to enter the premises of the
property to inspect the same (Exh. C). On July 9, 1988, Pedro Revilla, Jr.,
acting as agent of BPI, wrote a letter to BPI informing it that he had
procured a buyer in the name of Limketkai Sons Milling, Inc. with offices
at Limketkai Bldg., Greenhills, San Juan, Metro Manila, repre-sented by
its Exec. Vice President, Alfonso Lim (Exh. D). On July 11, 1988, the
plaintiff, through Alfonso Lim, wrote a letter to the bank, through Merlin
Albano, confirming their transaction regarding the purchase of the subject
property (Exh. E). On July 18, 1988, the plaintiff tendered upon the
officials of the bank a check for P33,056,000.00 covered by Check No.
CA510883, dated July 18, 1988. On July 1, 1988, Alfoso

Vda. De Espiritu vs. Court of First Instance, G.R. No. L-30486, October 31, 1972 , 47 SCRA 354.
Iñigo vs. Estate of Maloto, G.R. No. L-24383, September 28, 1967, 21 SCRA
Zamora instructed Mr. Aromin in a letter to resubmit new offers only if
there is no transaction closed with Assetrade Co. (Exh. S). Combining all
these notes and memoranda, the Court is convinced of the existence of
perfected contract of sale.
Clearly the Statute of Frauds only applies to executory contracts and not to
contracts which have been consummated8 already or those which have been
totally or partially performed. 9 Hence, a contract of sale of real property in
installment is not within the Statute of Frauds, even though it is not in writing,
if the first installment has already been paid. In such a case, there has already
been a partial performance of the contract by the buyer. In Babao vs. Perez,10
it has also been held that an oral contract partially performed must be proven
clearly in court, thus:
Assuming arguendo that the agreement in question falls also under
paragraph (a) of Article 1403 of the new Civil Code, i.e., it is a contract or
agreement for the sale of real property or of an interest therein, it cannot
also be contended that that provision does not apply to the present case for
the reason that there was part performance on the part of one of the parties.
In this connection, it must be noted that this statute is one based on equity.
It is based on equitable estoppel or estoppel by conduct. It operates only
under certain specified conditions and when adequate relief at law is
unavailable (49 Am. Jur., Statute of Frauds, Section 422, p. 727). And one
of the requisites that need be present is that the agreement relied on must
528 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
be certain, definite, clear, unambiguous and unequivocal in its terms before
the statute may operate. Thus, the rule on this matter is as follows:
“The contract must be fully made and com-
pleted in every respect except for the writing required by the
statute, in order to be enforceable on the ground of part
performance. The parol agreement relied on must be certain,
definite, clear, unam-biguous, and unequivocal in its terms,
particularly where the agreement is between parent and child,
and be clearly established by the evidence. The requisite of
clearness and definiteness extends to both the terms and the
subject matter of the contract. Also, the oral
246, citing Almirol vs. Monserrat, 48 Phil. 67; Robles vs. Lizarraga Hermanos, 50 Phil. 387; Diama
vs. Macalibo, 74 Phil.70; Arroyo vs. Azur, 76 Phil. 493; Facturan vs. Sabanal, 81 Phil. 512;
Carbonnel vs. Poncio, 55 O.G. No. 14, Page 2415; Soriano vs.
Heirs of Magali, L-15133, July 31, 1963.
G.R. No. L-8334, December 28, 1957, 102 Phil. 756.
Paterno vs. Jao Yan, G.R. No. L-12218, February 28, 1961, 1 SCRA 631; Khan vs. Asuncion,
April 27, 1967, 19 SCRA 996; Ortega vs. Leonardo, 55 O.G. 8456.
G.R. No. L-12218, February 28, 1961, 1 SCRA 631.
Western Mindanao Lumber Co. vs. Medalla, 79 SCRA 708; Cruz vs. J.M.
contract must be fair, reasonable, and just in its provisions for
equity to enforce it on the ground of part performance. It
would be inequitable to enforce the oral agreement, or if its
specific enforcement would be harsh or oppressive upon the
defendant, equity will withhold its aid. Clearly, the doctrine
of part performance taking an oral contract out of the statute
of frauds does not apply so as to support a suit for specific
performance where both the equities and the statute support
the defendant’s case.” (49 Am. Jur., p. 729)
The alleged agreement is far from complying with the above requirement
for, according to the complaint, Santiago Babao bound himself to convert
a big parcel of forest land of 156 hectares into a veritable farm planted to
coconuts, rice, corn and other crops such as bananas and bamboo trees and
to act as administrator of said farm during the lifetime of Celestina Perez,
while the latter in turn bound herself to give either to Santiago or his wife
1/2 of the land as improved with all the improvements thereon upon her
death. This agreement is indeed vague and ambiguous for it does not
specify how many hectares was to be planted to rice and corn, and what
portion to bananas and bamboo trees. And as counsel for appellants puts it,
“as the alleged contract stands, if Santiago Babao should plant one-half
hectare to coconuts, one-half to rice, and another half hectare to corn, and
the rest to bananas and bamboo trees, he would be entitled to receive one-
half of 156 hectares, or 78 hectares, of land for his services. That certainly
would be unfair and unheard of; no sane property owner would enter into
such contract. It costs much more time, money and labor to plant coconut
trees than to plant bananas and bamboo trees; and it also costs less to
convert forest land to rice and corn land than to convert it into a coconut
plantation. On the part of Celestina Perez, her promise is also incapable of
execution. How could she give and deliver one-half of the land upon her
death?”
arts. 1403-1404 COntraCts 529
Unenforceable Contracts (n)
The terms of the alleged contract would appear more vague if we consider
the testimony of Carlos Orense who claimed to have been present at the
time the alleged agreement was made between Celestina Perez and
Santiago Babao for apparently the same does not run along the same line
as the one claimed by appellee. This is what Orense said: “You, Santiago,
leave the Llana estate and attend to this lupang parang. Have it cleared and
planted to coconuts, for that land will eventually fall in your hands” (as
translated from Tagalog), which runs counter with the claim of appellee.
The agreement being vague and ambiguous, the doctrine of part
performance cannot therefore be invoked to take this case out of the
operation of the statute.
“Obviously, there can be no part performance until there is a
definite and complete agreement between the parties. In
order to warrant the specific enforcement of a parol contract
for the sale of land, on the ground of part performance, all the
essential terms of the contract must be established by
competent proof, and shown to be definite, certain, clear, and
unambiguous.
“And this clearness and definiteness must extend to both the
terms and the subject-matter of the contract.
“The rule that a court will not specifically enforce a contract
for the sale of land unless its terms have been definitely
understood and agreed upon by the parties, and established
by the evidence, is especially applicable to oral contracts
sought to be enforced on the ground of part performance. An
oral contract, to be enforced on this ground must at least have
that degree of certainty which is required of written contracts
sought to be specifically enforced.
“The parol conract must be sufficiently clear and definite to
render the precise acts which are to be performed thereunder
clearly ascertainable. Its terms must be so clear and complete
as to allow no reasonable doubt respecting its enforcement
according to the understanding of the parties.” (101 A.L.R.,
pp. 950-951)
“In this jurisdiction, as in the United States, the existence of
an oral agreement or understanding such as that alleged in the
complaint in the case at bar cannot be maintained on vague,
uncertain, and indefinite testimony, against the reasonable
presumption that prudent men enter into such contracts will
execute them in writing, and comply with the formalities
prescribed by law for the creation of a valid mortgage. But
where the evidence as to the existence of such an
understanding or agreement is clear, convincing, and
satisfactory, the same broad principles of equity operate in
this jurisdiction as in the United States to compel the parties
to live up to the terms of their contract.” (Cuyugan vs. Santos,
34 Phil. 100, 101)
530 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
Partial performance can also be manifested when improvements are made on
the subject property pursuant to the contract, rentals are paid, taking possession
on the basis of a verbal contract to purchase the property, payment of taxes and
relinquishment of rights, tender of payment coupled with other acts indicating
partial performance.11 In Paterno vs. Jao Yan,12 the Supreme Court applied the
rule on partially executed contract as being beyond the ambit of the Statute of
Frauds, thus:
At the trial, defendant offered testimonial evidence to support his claim
that the original written contract had been subsequently modified by oral
agreement between the parties in the manner alleged in the answer; he also
submitted documents filed with the City Engineer’s office, regarding the
semi-concrete building, conformably to the modificatory oral agreement.
The Court below sustained the plaintiff’s objections to such evidence and
exclude it on the ground that its acceptance was barred by the Statute of
Frauds [Rule 123, Sec. 21(a) and (c), Rules of Court], and rendered
judgment for the lessors as prayed for in the amended complaint. Defendant
duly appealed.
We are of the opinion that the lower Court committed reversible error in
excluding appellant’s oral evidence.
It is an established doctrine in this jurisdiction that partial performance
takes an oral contract out of the scope of the Statute of Frauds (27 C.J. 206;
Hernandez vs. Andal, 78 Phil. 196). With particular reference to contracts
over real property, this Court has decided that where an oral contract of
sale has been partially executed by payment of the price, oral testimony is
admissible to evidence the existence of the contract (Almiraol and Carino
vs. Monserrat, 48 Phil. 67). The rule is entirely applicable to contract of
lease, and the weight of authority supports the doctrine that —
“The taking of possession by the lessee and the making of
valuable improvements, and the like, on the faith of the oral
agreement, may operate to take the case out of the prohibition
of the statute, for it would be a gross fraud to permit the lessor
in such a case to avoid the lease.” (49 Am. Jur., p. 809, Sec.
106 , and cases cited )
It is likewise the rule that —
“The expenditure of money by a tenant in making
improvements on the premises on the faith of an oral agreement for a lease
for a further term, may be viewed not only as constituting in itself an act
of part performance but as furnishing strong if not conclusive evidence that
possession is continued Tuazon, 76 SCRA 543.
Rosencor Development Corporation vs. Inquing, G.R. No. 140479, March 8, 2001 , 145 SCAD
484.
under the oral contract and not as a tenant holding under the
original lease.” (49 Am. Jur. 810; 33 A.L.R. 1489, 1501).
Accordingly, in Read Drug & Chemical Co. vs. Nattans, 129 Md. 67, 98
Atl. 158, it was held that a parol agreement of a landlord to extend a lease
for a specified term of years and a specified rental, provided the tenant
arts. 1403-1404 COntraCts 531
Unenforceable Contracts (n)
made certain extensive repairs to the property, was enforceable
notwithstanding the Statute of Frauds, where the tenant fully performed his
part of the agreement. This is precisely the case before us. The written
contract of lease called for the erection, by the tenant, of a building of
strong wooden materials, yet it is not contested that what he actually did
construct on the leased lot was a semi-concrete edifice, at a much higher
cost. Since modification is plainly referable to the oral agreement as
claimed, and the same can not be explained on the record except as
executed in reliance of the verbal modification of the original lease, and in
performance thereof, as contended by the appellant, we are of the opinion
that the Court below should have accepted and taken into account the
offered testimony on the extension and modification of the original terms
of the lease, instead of declaring the same unenforceable under the Statute
of Frauds. x x x
The enumeration of the contracts under Article 1403(2) that must comply with
the Statute of Fraud is exclusive.13 This means that any other contract not
included in the enumeration is not within the operation of the Statue of Frauds.
Thus, “ the right of first refusal” granted in a contract is not included. 14 The
right of first refusal is the right given to a person to be preferred in the sale of
a property in case the owner decides to sell the same. Such right of first of first
refusal is not even a contract but merely a grant contained in a contract. 15
Likewise, the setting up of boundaries,291 the oral partition of real property,292
and an agreement creating a right of way293294 do not fall under the Statute of
Frauds.

The first contract within the operation of the Statute of Frauds is an agreement
that by its terms is not to be performed within a year from the making thereof.
Hence, an agreement orally entered into in 1987, for a person to commence the
painting of a portrait in 1989, cannot be enforced unless such contract is in
writing. Also, if a contract stipulates that a certain type of activity shall be
commenced within the year from the making of the contract, but can only be
Ibid.
15

fully accomplished after one year from the same, it will fall within the Statute
of Frauds. Thus, if the parties in January 1997 sign a contract for one of them
to build a seven-story building to commence on November 1997, it cannot
obviously be fully finished by January 1998. It can only be finished beyond the
said period, and therefore this contract falls within the Statute of Frauds.
However, if a contract is entered into where one party fully completed his
undertaking within one year and the other party could only finish his
undertaking beyond one year, the said contract shall be considered as removed
from the ambit of the Statute of Frauds.19 Hence, in the example given, if one
of the parties already fully paid the builder of the building the complete
consideration for the construction of the same six months after the making of

291
Hernandez vs. Court of Appeals, 160 SCRA 321.
292
Simprosa Vda. De Espina vs. Abaya, 196 SCRA 312.
293
Western Mindanao Lumber Co. vs. Medalla, 79 SCRA 708.
294
Babao vs. Perez, G.R. No. L-8334, December 28, 1957, 102 Phil. 756.
532 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
the contract, such contract does not anymore fall within the statute. In the case
of Babao vs. Perez,20 the Supreme Court stated the rule thus:
x x x Thus, the rule on this point is well settled in Corpus Juris in the
following wise: “Contracts which by their terms are not to be performed
within one year, may be taken out of the statute through performance by
one party thereto. All that is required in such case is complete performance
within one year by one party, however many years may have to elapse
before the agreement is performed by the other party. But nothing less than
full performance by one party will suffice, and it has been held that, if
anything remains to be done after the expiration of the year besides the
mere payment of money, the statute will apply. ( Italics supplied). x x x
“When, in an oral contract which, by its terms, is not to be
performed within one year from the execution thereof, one of
the contracting parties has complied within the year the
obligations imposed on him by said contract, the other party
cannot avoid the fulfillment of those incumbent on him under
the same contract by invoking the statute of frauds because
the latter aims to prevent and not to protect fraud.”
(Shoemaker vs. La Tondeña, Inc., 68 Phil. 24)
“The broad view is that the statute of fraud applies only to
agreements not to be performed on either side within a year
from the making thereof.

Id.
Arthur Corbin, Corbin on Contracts, One Volume Edition, 1952, St. Paul Publishing Co., Page
399.
Id., 400.
Id.
Id., 399.
Agreements to be fully performed on one side within the year
are taken out of the operation of the statute.” (National Bank
vs. Philippine Vegetable Oil, 49 Phil. 857 , 858)
If the contract stipulates that the contract shall be executed immediately upon
the signing of the agreement, although it has been reset to another date by
agreement of the parties so that it can be finished only beyond one year, the
contract is not within the statute. In any event, if initially, a contract should
have been finished in one year, but due to the postponement agreed upon by
the parties, the project could only be finished beyond one year from the date of
the making of the contract, such contract does not fall under the Statute of
Frauds.

The second case, which must comply with the Statute of Frauds, is a special
promise to answer for the debt, default or miscarriage of another. The word
“special promise” is meant to limit the “statutory provision to express and tacit
promises in fact made and does not apply in cases where the duties are created
by law without any promissory assent.”21 A promise is not within this clause
arts. 1403-1404 COntraCts 533
Unenforceable Contracts (n)
of the statute unless there is an obligation of some third person to the promisee,
either already existing or subsequently existing.22 The promise must be made
to the promisee and not to the debtor.23 The phrase “debt, default and
miscarriages” includes all legal obligations under which a person can come,
contractual or non-contractual, re-quiring a money payment or any other kind
of performance.24 The commitment of the promisor to pay the debt of another
should not immediately discharge the debtor from his debt at the time of the
making of the promise; otherwise, there will be a novation which will not fall
under the Statute of Frauds.25 The promise must be in the nature of a collateral
or subsidiary obligation and not an original one. Hence, if one merely promises
to pay the obligation of another once the debt becomes due, such promise does
not fall under the Statute of Frauds. This is in effect an indemnity agreement,
where the promissor is a principal and original debtor. However, if the
promissor will pay only if the principal debtor cannot pay and this promise is
not in writing, such a promise falls within the Statute of Frauds, and therefore
must be in writing to be enforceable.

Id., 404.
26
Lawrence P. Simpson, Handbook of the Law of Contracts, St. Paul Publishing Co., 1954, Page
160.
Id., Page 169.
It is very clear that a promisor cannot be made to answer for the debt or
default of another unless someone else is primarily liable to the creditor. It
is in this sense that the phrases “collateral obligation” and “original
obligation” are properly used. If S promises C to answer for P’s debt,
whether S’s promise is made simultaneously with the inception of P’s
obligation and for the same consideration, or whether it is made after P had
become indebted and for a separate consideration, S’s obligation is
collateral to P’s and so within the statute unless some other factors are
present. On the other hand, if no obligation exists between P and C, S’s
promise is said to be original, “i.e., not within the statute, because he cannot
be answering for another’s default. Here the distinction between original
and collateral promises is properly made; but even here it expresses merely
a result, and not a test of when a promise is or is not within the statute. 26
In case the obligation is joint, there is no “special promise” as contemplated in
the Statute of Frauds. However, in solidary obligations, it will depend on
whether or not the promisor knew that only one of the solidary debtors will
truly be benefited by the payment, thus:
One is not considered as promising to pay the debt of another within the
meaning of the statute, even though performance by him will operate to
extinguish another’s debt, where his performance will also extinguish the
promisor’s own “debt.” An obligation incurred jointly by two persons is
not considered an undertaking by one to answer for the debt of the other,
for the reason that only one obligation is created, although two persons are
liable thereon. In joint promises there are not two obligations, one
534 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
promissory and one debt, but only one obli-gation, the debt, for which two
people are jointly liable. Therefore, the promise of the person who is not to
receive the goods or the loan is not a “promise to answer for the debt” of
the other person who is to receive them, but a promise to answer for his
own debt, and this has been the conclusion that has always been reached
by the courts. For example, P wishes to purchase a horse from C, but
knowing that C will not sell on his credit alone, P induces S to become a
surety. If P and S orally say to C, “we pro-mise to pay you $200 in six
months,” and C delivers the horse to P, even though C knows that P is to
own the horse and that S is only acting as surety, since the form of the
promise is joint, the law is that only one obligation results, P and S being
jointly lia-ble for a single

G.R. No. 5447, March 1, 1910, 15 Phil. 167.

Executive Order No. 209 as amended effective as of August 3, 1988.
Article 77 of the Family Code.
Hermosisima vs. Court of Appeals, G.R. No. L-14628, September 30, 1960.
debt. The defense of the statute of frauds by S in a suit by C on the promise
would be bad in law, for S is as much a debtor to C as is P even though as
between P and S it was un-derstood that P was to have the horse and even
though C knew this. Although the promise of S is a promise to pay P’s debt,
in a certain sense, since payment by S in accordance with his promise
extinguishes C’s claim against P as well as against S, yet it is also a promise
to pay his own debt. According to the settled interpretation, the statute is
inapplicable to a promise where its form and consideration for it make the
promisor a debtor.
Where the promises are not in form joint but are several or joint and
several, more than one obligation results. Here the question in whose favor
the consideration is to inure becomes determinative of whether the statute
applies. If both promisors are the buyers or the borrowers, they both
become debtors and their oral promises are as binding as their written ones
would be. But if one of several promisors is to have the purchased goods
or the borrowed money, the others lending their credit as security, and this
is known to all parties, the latter are “answering for the debt of another
within the statute.” This is just as true where the promise of the one who is
merely lending his credit is in terms conditioned upon default by the one
for whose benefit the consideration inures. A several promise of suretyship
is as much within the statute of frauds as a promise of guaranty. So in the
above illustration, if P and S say: “We and each of us promise to pay $200
in six months,” and P is to own the horse to the knowledge of C, the
promises are joint and several, S is a surety for S’ debt and his defense of
the statute of frauds is good.27
In Paul Reiss, et al. vs. Jose M. Memije,28 the Supreme Court also had occasion
to explain the type of collateral contract which falls under the Statute of Frauds.
The pertinent portion of the decision is as follows:
Defendant appellant entered into a contract with one Buenaventura
Kabalsa for the repair of a house in the City of Manila. The contractor
undertook to furnish the necessary materials, including a considerable
arts. 1403-1404 COntraCts 535
Unenforceable Contracts (n)
amount of lumber, to be used in the repairs. The contractor being a man of
no commercial standing in the community was unable to secure credit
therefor, and was compelled to pay cash for all purchases. Having no
money and no credit he was unable to continue the purchase of the
necessary lumber, plaintiffs, with whom he was dealing, absolutely
refusing to allow any lumber to leave their yard without payment in
advance. The work on the house being delayed for the lack of the necessary
materials, defendant accompanied
Martinez vs. Court of Appeals, G.R. No. 123547, May 21, 2001, 148 SCAD 666.
the contractor to plaintiff’s lumber yard, and after satisfying plaintiffs as to
his own financial responsibility, and that as a property owner and an
attorney in active practice in the City of Manila, he was good for the
amount of lumber needed in the repair of his house, he entered into an
agreement with them whereby they were to deliver the necessary lumber to
the contractor for use in the repair of his house.
In pursuance of and in accordance with the directions of the defendant,
plaintiffs delivered to Kabalsa a considerable amount of lumber which was
used in the repairs upon defendant’s house, and judgment in this action was
rendered in favor of the plaintiffs for the proven amount of the unpaid
balance of the purchase price of this lumber.
xxx xxx xxx
Section 335 of Act No. 190 is as follows:
“In the following cases an agreement hereafter made shall be
unenforceable by action unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement can not be received without the
writing, or secondary evidence of its contents:
*****
“2. A special promise to answer for the debt, default, or miscarriage of another;”
*****
An immense amount of litigation has arisen in England and the United
States over the construction of similar provisions which are found in most,
if not all, of the so-called statutes of fraud which have been enacted in those
jurisdictions, and many courts and text writers have acknowledged their
inability to find anything like uniform rules of construction in the
conflicting decisions which have been rendered, applying the statute to the
infinite variety of facts which have presented themselves; so that it has been
said by some that the law upon the subject is in a state of hopeless
confusion.
The true test as to whether a promise is within the statute has been said to
lie in the answer to the question whether the promise is an original or a
collateral one. If the promise is an original or an independent one; that is,
if the promisor becomes thereby primarily liable for the payment of the
debt, the promise is not within the statute. But on the other hand, if the
promise is
536 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases

Cenido vs. Apacianado, G.R. No. 132474, November 19, 1999, 115 SCAD 798,
collateral to the agreement of another and the promisor becomes thereby
merely a surety, the promise must be in writing. (Gull vs. Lindsay, 4 Exch.
45; and other cases cited under note 2, p. 906 , Encyclopedia of Law, Vol.
29)
Just what is the character of a promise as original or collateral is a question
of law and fact which must in each case be determined from the evidence
as to the language used in making the promise, and the circumstances under
which the promise was made; and, since as a general rule the parties
making a promise of this nature rarely understand the legal and technical
difference between an original and a collateral promise, the precise form of
words used, even when established by undisputed testimony is not always
conclusive. So that it is said that “While, as a matter of law, a promise,
absolute in form, to pay or to be ‘responsible’ or to be the ‘paymaster,’ is
an original promise, and while, on the other hand, if the promisor says, ‘I
will see you, paid,’ or ‘I will pay if he does not,’ or uses equivalent words,
the promise standing alone is collateral, yet under all the circumstances of
the case, an absolute promise to pay, or a promise to be ‘responsible,’ may
be found to be collateral, or promises deemed to be collateral, or promises
deemed prima facie collateral may be adjudged original.” (Encyclopedia
of Law, 2nd ed., Vol. 29, p. 207 and many cases there cited.)
If goods are sold upon the sole credit and responsibility of the party who
makes the promise, then, even though they be delivered to a third person,
there is no liability of the third person to which that of the party promising
can be collateral, and consequently such a promise to pay does not require
a memorandum in writing; and on the same principle it has been held that
when one advances money at the request of another (on his promise to
repay it) to pay the debt of a third party, as the payment creates no debt
against such third party, not being made at all upon his credit, the liability
of the party on whose request and promise it was made is original and not
collateral, and not within the Statute of Frauds. (Pearce vs. Blagrave, 3
Com. Law, 338; Prop’rs of Upper Locks vs. Abbot, 14 N. H., 157.) But it
has been said that if the person for whose benefit the promise is made was
himself liable at all, the promise of the defendant must be in writing.
(Matson vs. Wharam, 2 T.R., 80) And the text writers point out that if this
rule be understood as confined to cases where a third party and the
defendant are liable in the same way, and to do the same thing, one as
principal and the other as surety, it may be accepted as the uniform doctrine
of all the cases both in England and in the United States. (Browne on the
Statute of Frauds, par. 197, and cases there cited.) In such cases, the
defendant is said to come in aid to procure the credit to be given to the
principal debtor, and the question, therefore, ultimately is “upon whose
credit the goods were sold or the money advanced,” or whatever other thing
done which the defendant stands in the relation to the third party of surety
to principal “if any credit at all be given to the third party, the defendant’s
promise is required to be in writing as collateral.” (Browne on the Statute
of Frauds, p. 227, and notes 2 and 4) But it must be clearly recognized that
these principles are applicable only where the parties are liable in the same
arts. 1403-1404 COntraCts 537
Unenforceable Contracts (n)
way to do the same thing, one as principal and the other as surety, for if the
credit is given to both jointly, since neither can be said to be surety for the
other to the creditor, their engagement need not be in writing.
As has been said before, it is frequently a matter of difficulty to determine
to whom the credit has actually been given, whether to the defendant alone,
in which case the debt is his own and his promise is good without writing;
or in part to the third party, in which case the defendant’s promise being
collateral to and in aid of the third party’s liability, requires a writing to
support it, or to both jointly, in which case as has been said their
engagement need not be in writing. This must be determined from the
language and expressions used by the parties promising, and from an
examination of the circumstances showing the understanding of the parties.
The unexplained fact that charges were made against a third party on the
plaintiff’s books, or that the bill was presented to the original debtor in the
first instance, unqualified by special circumstances tends to prove that the
credit was given in whole or in part to him, and that the defendant’s promise
is a collateral one. (Larson vs. Wyman, 14, Wend, [N.Y.], 246; Pennell vs.
Pentz, 4 E.D. Smith [N.Y.], 639) But it is evidently quite impossible to
specify any one fact or set of facts on which the question as to whom the
plaintiff gave credit is to be determined. In the language of Buchanan, C.J.,
in Elder vs. Warfield (7 Harris & J. [Md.] 937), “the extent of the
undertaking, the expression used, the situation of the parties, and all the
circumstances of the case should be taken into consideration.”
Application of these principles has been made in many cases where owners
of buildings going up under contract enter into agreements upon which
subcontractors or others have continued to supply labor or material after
the principal contractor has become either actually or probably unable to
pay. In these cases, the question is whether the services for which the action
is brought against the owner of the building were performed solely upon
the credit of his promise, to be himself responsible and to pay for the
materials and labor furnished, or whether the subcontractors and laborers
continued to furnish labor and materials to the principal contractor relying
upon his obligation guaranteed by the promise of the owner. (Gill vs.
Herrick, 111 Mass., 501; Walker vs. Hill, 119 Mass., 249; Clifford vs.
Luhring, 69 III., 401; Rawson vs. Springteen, 2 Thomp. & C. [N.Y.], 416;
Belknap vs. Bender, 6 Thomp & C. [N.Y.], 611; Jefferson County vs.
Slagle, 66 Pa. St., 97; Haverly vs. Mercur, 78 Pa. St., 257; Weyand vs.
Critchfield, 3 Grant [Pa.] 113; Lakeman vs. Mountstephen, L. R. 7 H. L.,
17)
Taking into consideration all the circumstances of the case at bar, we are
satisfied that the credit for the lumber delivered by the plaintiffs to
defendant’s contractor was extended solely and exclusively to the
defendant under the verbal agreement had with him, and therefore, that the
provisions of the statute did not require that it should be made in writing.
Defendant admitted on the stand that his contractor had no commercial
credit or standing in the community, and it appears that plaintiffs, after
investigation, absolutely refused to extend him any credit whatever upon
any conditions and that the defendant was well aware of that fact. From the
testimony of the contractor himself, it seems clear that when the agreement
538 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
for the delivery of lumber was made, the credit was extended not to the
contractor but to the defendant. It appears that both plaintiffs and defendant
exercised special precautions to see that all the lumber was delivered on
defendant’s lot, and that before each bill of lumber was delivered,
defendant carefully examined the invoice, which by agreement was
submitted to him, and that no lumber was delivered without his approval.
The precise language in which the verbal agreement was made does not
appear from the evidence, and while it is true that one of the plaintiffs in
his deposition, made in the United States, refers to the agreement as one
whereby defendant “guaranteed” payment for the lumber, we are satisfied
from all the evidence that the word was not used by this witness in its
technical sense, and that he did not mean thereby to say that defendant
guaranteed payment by the contractor, but rather that after satisfying
plaintiffs as to his own financial responsibility, he obligated himself to pay
for the lumber delivered to his contractor for use in his house. The only
evidence in the whole record which tends to put our conclusion in this
regard in doubt, is the testimony of plaintiffs’ acting manager during
plaintiffs’ absence in the United States who stated that he sent a statement
of account and a bill for the lumber to the contractor; but this fact, which
under ordinary circumstances would be strong evidence that the credit was
originally extended to the contractor and merely guaranteed by the
defendant, was satisfactorily and sufficiently explained by proof that the
plaintiff were compelled to leave for the United States quite unexpectedly,
with no opportunity to go over the accounts with their acting manager, who
was left in charge, so that the latter having no knowledge whatever as to
plaintiffs’ agreement with defendant, and learning that lumber had been
delivered to the contractor, supposed that it had been sold to him, and only
discovered his mistake on later investigation and correspondence with his
principals, after the contractor had notified him as to the true nature of the
transaction.
The judgment appealed from should be affirmed with the costs of this instance
against the appellant. So ordered.
The third contract that must comply with the Statute of Frauds is an agreement
made in consideration of marriage other than a mutual promise to marry.
Hence, ante-nuptial agreements or marriage settlements must be in writing to
be enforceable. However, this rule has been modified by Article 77 of the
Family Code,29 which provides that ante-nuptial agreements or marriage
settlements or any modifications thereof shall be in writing, signed by the
parties and executed before the marriage.30 This legal requirement is mandatory
in nature. Hence, violation of this mandatory provision of the Family Code will
make the marriage settlement not only unenforceable but null and void
pursuant to Article 5 of the Civil Code, which pertinently provides that acts
executed against the provision of mandatory laws shall be void. On the other
hand, a mutual promise to marry will not fall under the Statute of Frauds
because a breach of such promise per se is not actionable.31

The fourth contract within the Statute of Frauds is an agreement for the sale
of goods, chattels or things in action, at a price not less than five hundred pesos.
arts. 1403-1404 COntraCts 539
Unenforceable Contracts (n)
Hence, a contract of sale of a fountain pen worth P5,000.00 must be in writing
to be enforceable. However, if one has paid the said pen, the contract has
already been partially performed and therefore it is removed from the ambit of
the Statute of Frauds. In an auction sale, the recording of the sale in the sales
book is enough memorandum so as to remove the contract from the Statute of
Fraud.

The fifth contract within the Statute of Frauds is an agreement for the leasing
for a longer period than one year or the sale of real property or an interest
therein. Thus, a contract of lease for two years must be in writing to be
enforceable. A sale of real estate must likewise be in writing to be enforceable,
but it need not be notarized32 to be effective between the parties. Notarization
is needed only to bind third persons, and so that the proper registry of property
can accept the deed or contract for registration.33

318 SCRA 688.

G.R. 118509, December 1, 1995, 66 SCAD 136, 250 SCRA 523.
G.R. No. L-29264, August 29, 1969, 29 SCRA 419.
540 ObligatiOns and COntraCts
Text and Cases
art. 1405

The sixth contract within the Statute of Frauds is a representation as to the

credit of a third person. Under Article 21 of the Civil Code, it is provided that
“every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due and observe honesty and good
faith.” A representation therefore of the creditworthiness of another, which
turns out to be untrue may be a cause of action for damages if the same were
given in bad faith. But if the untrue representation has been done in good faith
and the other party has all the opportunity to investigate the truth of the same,
no damages can be awarded. Because the nature of the liability really depends
on the intent of the representation, which is not an easy task to prove and which
is susceptible to error, the law requires that the proof of such repre-sentation
must also be in writing. Thus, if A represents to G that X is a millionaire who
happens to be without cash at the moment and G lends X money, such
representation by A must be in writing.

Article 1405. Contracts infringing the Statute of Frauds, referred to in No.

2 of Article 1403, are ratified by the failure to object to the presentation of
oral evidence to prove the same, or by the acceptance of benefits under them.

In Limketkai Sons Milling, Inc. vs. Court of Appeals,34 the Supreme Court
applied and explained the rule that contracts infringing the Statute of Frauds
are ratified by the failure to object to the presentation of oral evidence thus:
In the case at bench, the allegation of NBS that there was no concurrence
of the offer and acceptance upon the cause of the contract is belied by the
testimony of the very BPI official with whom the contract was perfected.
Aromin and Albano concluded the sale for BPI. The fact that the deed of
sale still had to be signed and notarized does not mean that no contract had
already been perfected. A sale of land is valid regardless of the form it may
have been entered into (Claudel vs. Court of Appeals, 199 SCRA 113, 119
[1991]). The requisite form under Article 1458 of the Civil Code is merely
for greater efficacy or convenience and the failure to comply therewith
does not affect the validity and binding effect of the act between the parties
(Vitug, Compendium of Civil Law and Jurisprudence, 1993 Re-vised
Edition, p. 552).
If the law requires a document or other special form, as in the
sale of real property, the contracting parties may compel each 36Eusebio vs. Sociedad
Agricola de Balarin, L-21519, March 31, 1966, 16 SCRA
569 ; Facturan vs. Sabayan, 81 Phil. 512; Almirol vs. Monserrat, 48 Phil. 67.
G.R. No. 23717, September 28, 1925, 48 Phil. 67.
G.R. No. L-4002, May 12, 1952, 91 Phil. 257.
art. 1405
 COntraCts 541Unenforceable Contracts (n)
other to observe that form, once the contract has been perfected. Their right
may be exercised simultaneously with action upon the contract (Article
1359, Civil Code).
Regarding the admissibility and competence of the evidence adduced by
petitioner, respondent Court of Appeals ruled that because the sale
involved real property, the statute of frauds is applicable.
In any event, petitioner cites Abrenica vs. Gonda (34 Phil. 739 [1916])
wherein it was held that contracts infringing the Statute of Frauds are
ratified when the defense fails to object, or asks questions on cross-
examination. The succinct words of Justice Araullo still ring in judicial
cadence.
As no timely objection or protest was made to the admission
of the testimony of the plaintiff with respect to the contract;
and as the motion to strike out said evidence came to late, and
furthermore, as the defendants themselves, by the cross-
questions put by their counsel to the witnesses in respect to
said contract, tacitly waived their right to have it stricken out,
that evidence, therefore, cannot be considered either
inadmissible or illegal, and court, far from having erred in
taking it into consideration and basing his judgment thereon,
notwithstanding the fact that it was ordered to be stricken out
during the trial, merely corrected the error he committed in
ordering it to be so stricken out and complied with the rules
of procedure hereinbefore cited. (at p. 748)
In the instant case, counsel for respondents cross-examined petitioner’s
witnesses at length on the contract itself, the purchase price, the tender of
cash payment, the authority of Aromin and Revilla, and other details of the
litigated contract. Under the Abrenica rule (reiterated in a number of cases,
among them Talosig vs. Vda. De Nieba, 43 SCRA 472 [1972]), even
assuming that parol evidence was initially inadmissible, the same became
competent and admissible because of the crossexamination, which elicited
evidence proving the evidence of a perfected contract. The cross-
examination on the contract is deemed a waiver of the defense of the Statute
of Frauds (Vitug, Compendium of Civil Law and Jurisprudence, 1993
Revised Edition, supra, p. 563).
The reason for the rule is that as pointed out in Abrenica
“if the answers of those witnesses were stricken out, the cross-

art. 1405

examination could have no object whatsoever, and if the questions were

put to the witnesses and answered by them, they could only be taken into
account by connecting them with the answers given by those witnesses on
direct examination.” (pp. 747-748)
542 ObligatiOns and COntraCts
Text and Cases
In Rodriguez vs. Court of Appeals,35 where a particular sale was questioned
and only receipts were introduced as evidence to prove the sale, without any
showing in the said receipts of the basic elements of a contract, the Supreme
Court nevertheless removed the transaction from the Statute of Frauds for
failure of the other party to object to the presentation of oral evidence to prove
the sale, thus:
A legion of receipts there are of payments of the purchase price signed by
Nieves Cruz. True, these receipts do not state all the basic elements of a
contract of sale for they do not expressly identify the object nor fix a price
or the manner of fixing the price. The parties, however, are agreed — at
least the plaintiff has not questioned the defendants’ claim to this effect —
that the object of the sale referred to in the receipts is Nieves Cruz’ share
in the land she co-owned with her brother Emilio and that the price therefor
is P1.60 per square meter. At all events, by failing to object to the
presentation of oral evidence to prove the sale and by accepting from the
defendants a total of P27,198.60 after January 5, 1959, the plaintiff thereby
ratified the oral contract, conformably with Article 1405 of the Civil Code,
and removed the partly executed agreement from the operation of the
Statute of Frauds.
Another form of ratification removing the contract from the purview of the
Statute of Frauds is when benefits are already obtained from the agreement.
Thus, if A sold to G a particular real property and A benefited from the
transaction by already obtaining the purchase price, the contract of sale of the
real property can be enforced even if the same was not in writing.
The Statute of Frauds may only be invoked in a case for violation of contracts
or for specific performance. Hence, if the only purpose of the suit is to prove
lawful possession of a real property for purposes of registration, the absence of
a written evidence to prove such real interest over real property in order to
prove violation of the Statute of Frauds cannot be invoked. 36

Article 1406. When a contract is enforceable under the Statute of Frauds,

and a public document is necessary for its registration in the Registry of
Deeds, the parties may avail themselves of the right under Article 1357.
art. 1406

When the agreements provided in Article 1403(2) are in writing and therefore
enforceable, and the law requires that the said written document should be
transformed into a public document for its registration in the Registry of
Property, the contracting parties may compel each other to observe the form
once the contract has been perfected. They may exercise this right
simultaneously with the action upon the contract. In Almirol vs. Monserrat37
where by virtue of a verbal sale, the applicant came into actual possession of
 COntraCts 543Unenforceable Contracts (n)
the land, and where said applicants sought the registration of the subject lot
already in their possession, and where the oppositors claimed that oral proof of
the contract cannot be adduced in court where the registration was being
questioned, the Supreme Court held that, “as in this case, parol evidence of sale
is adduced not for the purpose of enforcing performance thereof, but on the
basis of the lawful possession of the applicants entitling them to have the land
thereby sold registered in their name, the statute of fraud is not applicable.” In
Pascual vs. Realty Investment, Inc.,38 a mere tenant in the subject property
cannot invoke the doctrine in the Almirol case.

Article 1407. In a contract where both parties are incapable of giving

consent, express or implied ratification by the parent, or guardian, as the
case may be, of one of the contracting parties shall give the contract the same
effect as if only one of them were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of
both contracting parties, the contract shall be validated from the inception.

In case both contracting parties are incapacitated, and the guardians of one of
the incapacitated persons ratifies the contract, the same shall be transformed
into a voidable or annullable contract. If ratification is made by the parents or
guardian of both parties, the contract shall be completely valid as if it has not
been visited by any defect or infirmity at all.

Article 1408. Unenforceable contracts cannot be assailed by third persons.

arts. 1407-1408

It is useless for a third person to assail an unenforceable contract as it cannot

be executed anyway. Besides, they are not even parties to the contract.
544 ObligatiOns and COntraCts
Text and Cases
 471

Chapter 9

VOID AND INEXISTENT CONTRACTS

Article 1409. The following contracts are inexistent and void from the
beginning:
(1) Those whose cause, object or purpose is contrary to law, morals,
good customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the
transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal
object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up
the defense of illegality be waived.

A contract which is void is no contract at all. In De Leon vs. Court of

Appeals,295 where the parties stipulated that, “in consideration for a peaceful
and amicable termination of relations between the undersigned and her lawful
husband,” the parties agreed to give some properties to the wife, monthly
support for the children, and for the wife, to agree to a judicial separation of
property plus the amendment of the divorce proceedings initiated by the wife
in the United States to conform to the agreement, the Supreme Court sustained
the lower court’s ruling that the agreement is contrary to law and Filipino
morals and public policy, because the consideration of the agreement

471

295
G.R. No. 80965, June 6, 1990, 186 SCRA 345.
546 ObligatiOns and COntraCts art. 1409
Text and Cases
was the termination of the marriage by the parties, which they cannot do on
their own and without any legal basis.

In Gardner vs. Court of Appeals,296 where a contract purporting to be a sale of

land was really without consideration, but was actually intended merely to
protect a party to a joint venture for the cash advances he was to make for the
realty subdivision that the parties wanted to put up, the Supreme Court ruled
that the contract was absolutely simulated and therefore null and void. A
similar finding was also stated in Carino vs. Court of Appeals.297

In Prudential Bank vs. Panis298 where a grantee of a government sales patent

mortgaged the same within the prohibition provided by the Public Land Act
that no encumbrance or alienation should be made of the property subject of
the patent within 5 years from the issuance thereof, the Supreme Court ruled
that the mortgage was null and void for being in violation of law.

In Maharlika Publishing Corporation vs. Tagle299 where the wife of a GSIS

official, acting for her husband who was an influential Division Chief of the
GSIS, was allowed to bid on a foreclosed property, and where she eventually
won the bidding, the Supreme Court declared the bidding and the contract of
sale resulting therefrom as null and void as they violated Article 1491 of the
Civil Code prohibiting public officers and employees from purchasing property
under their administration in an auction sale. The Supreme Court pertinently
said:
A Division Chief of the GSIS is not an ordinary employee without
influence or authority. The mere fact that he exercises ample authority with
respect to a particular activity, i.e., retirement, shows that his influence
cannot be lightly regarded.
The point is that he is a public officer and his wife acts for and his name
in any transaction with the GSIS. If he is allowed to participate in the public
bidding of properties foreclosed or confiscated by the GSIS, there will
always be the suspicion among other bidders and the general public that
the insider official had access to information and connections with his
fellow GSIS officials as to allow him to eventually acquire the property. It
art. 1409

is precisely the need to forestall such suspicions and to restore confidence

in the public service that the Civil Code now declares such transactions to
be void from the beginning and not merely voidable (Rubias vs. Batiller,

296
G.R. No. L-59952, August 31, 1984, 131 SCRA 585.
297
G.R. No. L-47661, July 31, 1987, 152 SCRA 529.
298
G.R. No. L-50008, August 8, 1987, 153 SCRA 390; Heirs of Leandro Oliver vs. Court of
Appeals, G.R. No. L-107069, July 21, 1994, 53 SCAD 453, 234 SCRA 367.
299
G.R. No. L-65594, July 9, 1986, 142 SCRA 553; Rubias vs. Batiller, G.R. No.
L-35702, May 29, 1973, 51 SCRA 120.
 COntraCts 547Void and Inexistent Contracts
51 SCRA 120). The reasons are grounded on public order and public
policy. We do not comment on the motives of the private respondents or
the officers supervising the bidding when they entered into the contract of
sale. Suffice it to say that it falls under the prohibited transactions under
Article 1491 of the Civil Code, and therefore, void under Article 1409.
In Cui vs. Arellano University300 where a law student scholar, who decided to
move to another law school, was required to refund the amount of his free
tuition fee based on a scholarship granted to him by the school on the basis of
a contract, which he signed, stating that: “In consideration of the scholarship
granted to me by the University, I hereby waive my right to transfer to another
school without having refunded to the University the equivalent of my
scholarship cash,” the Supreme Court ruled that the refund cannot be properly
demanded because the waiver was against public policy and quoted the opinion
of the Director of Private Schools, to wit:
There is one more point that merits refutation and that is whether or not
the contract entered into between Cui and Arellano University on
September 10, 1951 was void as against public policy. In the case of Zeigel
vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the
court said: ‘In determining a public policy of the State, courts are limited
to a consideration of the Constitution, the judicial decisions, the statutes,
and the practice of government officers.’ It might take more than a
government bureau or office to lay down or reestablish a public policy, as
alleged in your communication, but courts consider the practices of
government officials as one of the four factors in determining public policy
of the state. It has been consistently held in America that under the
principles relating to the doctrine of public policy, as applied to the law of
contracts, courts of justice will not recognize or uphold a transaction which
in its object, operation, or tendency, is calculated to be prejudicial to the
public welfare, to sound morality, or to civic honesty (Ritter vs. Mutual
Life Ins. Co., 169 U.S. 139; Heidng vs. Gallaghere, 64 LRA 811; Veazy vs.
Allen, 173 N.Y. 359). If Arellano University understood clearly the real
essence of scholarships and the motives which prompted this office to issue
Memorandum No. 38, s. 1949, it should not have entered into a contract of
waiver with Cui on September 10, 1951, which is a direct violation of our
Memorandum and an open challenge to the authority of the Director of
Private Schools because the contract was repugnant to sound morality and
civic honesty. And finally, in Gabriel vs. Monte de Piedad, Off. Gazette
Supp., Dec. 6, 1941, p. 67 we read: ‘In order to declare a contract void as
against public policy, a court must find that the contract as to consideration
or the thing to be done, contravenes some established interest of society, or
is inconsistent with sound policy and good morals or tends clearly to
undermine the security of individual rights. The policy enunciated in
Memorandum No. 38, 1949 is sound policy. Scholarships are awarded in
recognition of merit and to keep outstanding students in school to bolster
its prestige. In the understanding of that university scholarships award is a
business scheme designed to increase the business potential of an
educational institution. Thus, conceived it is not only inconsistent with

300
G.R. No. L-15127, May 30, 1961, 2 SCRA 205.
548 ObligatiOns and COntraCts art. 1409
Text and Cases
sound policy but also good morals. But what is morals? Manresa has this
definition. It is good customs; those generally accepted principles of
morality which have received some kind of social and practical
confirmation except in some private institutions as in Arellano University.
The University of the Philippines which implements Section 5 of Article
XIV of the Constitution with reference to the giving of free scholarships to
gifted children, does not require scholars to reimburse the corresponding
value of the scholarships if they transfer to other schools. So also with
leading colleges and universities of the United States after which our
educational practices or policies were patterned. In these institutions
scholarships are granted not to attract and to keep brilliant students in
school for their propaganda value but to reward merit or help gifted
students in whom society has an established interest or a first lien.
In Marubeni Corporation vs. Lirag7 where a cosultancy agreement was
obtained from a government agency through the use of influence of executive
officials, the Supreme Court declared the contract void and stated:
Any agreement entered into because of the actual or supposed influence
which the party has, engaging him to influence executive officials in the
discharge of their duties, which contemplates the use of personal influence
and solicitation rather than an appeal to the judgment of the official on the
merits of the object sought is contrary to public policy. Consequently, the
agreement, assuming that the parties agreed to the consultancy, is null and
void as against public policy. Therefore, it is unenforceable before a Court
of Justice.

A stipulation in a contract prohibiting a mortgagor to sell the property morta 7

ged is void as being contrary to the express provision G.R. No. 130998, August 10,
2001, 152 SCAD 668.
of Article 2130 of the Civil Code, which provides that “a stipulation 8Litonjua
vs. L & R Corporation, G.R. No. 130722, December 9, 1999, 117 SCAD a301rt. 1409

forbidding the owner from alienating the immovable mortgaged shall be void.”
However, a stipulation prohibiting the re-mortgage to another of the same
property already mortgaged to the creditormortgagee is valid. 8

The non-payment of the purchase price of a valid contract of sale is not among
the instances where the law declares a contract null and void. At most, the non-
payment gives a cause of action for rescission of the contract or specific
performance on the part of the creditor.302

The defect in a void contract is permanent and incurable. Hence, no amount of

subsequent actions of the parties can cure or ratify the defect or infirmity in a
void contract. A void agreement will not be rendered operative by the parties’

301
.
302
Peñalosa vs. Santos, G.R. No. 133749, August 23, 2001.
 COntraCts 549Void and Inexistent Contracts

alleged partial or full performance of their respective prestations. 303 It produces

no legal effects at all.304
A contract which the law denounces as void is necessarily no contract
whatever, and the acts of the parties in an effort to create one can in no wise
bring about a change of their legal status. The parties and the subject matter
of the contract remain in all particulars just as they did before any act was
performed in relation thereto.305
Thus, if A and V enter into a contract for the sale of opium, which A delivers
but which V does not want to initially pay, the later payment of V does not
make the contract valid. It is still void. Also in Arsenal vs. Intermediate
Appellate Court,306307 where a person in 1957 bought from a grantee of a
homestead patent a property subject of the patent within the prohibitory period
provided by law, which therefore made the same void as being against public
policy, and where he was in possession of the said property even up to 1974
when the case was filed, the Supreme Court refused to award the property to
the said individual even if another contract was executed after the prohibitory
period ratifying the previous sale, considering that a void contract can never be
confirmed nor ratified. Neither can the infirmity be cured by equity, thus:
At first blush, the equities of the case seem to lean in favor of the
respondent Suralta who, since 1957, has been in possession of the land
which was almost acquired in an underhanded manner by the petitioners.
We cannot however gloss over the fact that the respondent Suralta was
himself guilty of trans-gressing the law. It is a long standing principle that
equity follows the law. Courts exercising equity jurisdiction are bound by
rules of law and have no arbitrary discretion to dis- regard them.
Equitable reasons will not control against any well-settled rule of law or
public policy. (McCurdy vs. County of Shiawassee, 118 N.W. 625). Thus
equity cannot give validity to a void contract. If on the basis of equity, we
uphold the respondent Suralta’s claim over the land which is anchored on
the contracts previously executed we would in effect be giving life to a void
contract.
Lastly, in cases where the homestead has been the subject of void
conveyances, the law still regards the original owner as the rightful owner
subject to escheat proceedings by the State. In the Menil and Monzano
cases earlier cited, this court awarded the land back to the original owner
notwithstanding the fact that he was equally guilty with the vendee in
circumventing the law. This is so because this Court has consistently held
that “the pari delicto doctrine may not be invoked in a case of this kind
since it would run counter to an avowed fundamental policy of the State,

303
Chavez vs. PCGG, G.R. No. 130716, May 19, 1999, 106 SCAD 752, 307 SCRA 394.
304
Ibid.; Yuchengco, Inc. vs. Velayo, 115 SCRA 307; Tongoy vs. Court of Appeals, 123 SCRA
99.
305
Development Bank of the Philippines vs. Court of Appeals, G.R. No. 110053, October 16,
1995, 65 SCAD 82, 249 SCRA 331.
306
G.R. No. L-66693, July 14, 1986, 143 SCRA 40.
307
E. Razon, Inc. vs. Philippine Ports Authority, G.R. No. L-75197, June 22, 1997,
550 ObligatiOns and COntraCts art. 1409
Text and Cases
that the forfeiture of a homestead is a matter between the State and the
grantee or his heirs, and that until the State had taken steps to annul the
grant and asserts title to the homestead the purchaser is, as against the
vendors or his heirs, no more entitled to keep the land than any intruder.”
(Acierto, et al. vs. De los Santos, et al., 95 Phil. 887; De los Santos vs.
Roman Catholic Church of Midsayap, et al.) . x x x
We see however, a distinguishing factor, in this case that sets it apart from
the above cases. The original owners in this case, the respondent Palaos
and his wife, have never disaffirmed the contracts executed between them
and the respondent Suralta. More than that, they expressly sustained the
title of the latter in court and failed to show any interest in recovering the
land. Nonetheless, we apply our earlier rulings because we believe that as
in pari delicto may not be invoked to defeat the policy of the State neither
may the doctrine of estoppel give a validating effect to a void contract.
Indeed, it is generally considered that as between parties to a contract,
validity cannot be given to it by estoppel if it is prohibited by law or against
public policy (19 Am. Jur. 802). It is not within the competence of any
citizen to barter away what public policy by law seeks to preserve.
(Gonzalo Puyat & Sons, Inc. vs. De los Amas and Alino, 74 Phil. 3).
arts. 1410-1411

Article 1410. The action or defense for the declaration of the

inexistence of a contract does not prescribe.
There is no need to judicially file an action to make the contract void. A case
is filed merely to declare that the contract, which is already void, is in fact
void.14 Thus, if A and B enter into a contract, where it is stipulated that, for a
valuable consideration to be given by B, A is to construct a three-storey
building in three days, such a contract is void because it contemplates an
impossible service. B can just treat it as void even without a court action
making such contract void. However, B can file a case to declare that the
contract is void so that he can get back what he has given as valuable
consideration to A. The filing of a case to declare the nullity of a void contract
or to set up such a defense has no prescriptive period. It can be filed anytime.
The law does not give any limitation as to when it should be filed or asserted
as a defense.

The doctrine of laches cannot even apply to resist an imprescriptible legal

right, such as the right to file an action to declare a contract null and void. 15

Considering that a void contract is inexistent, restitution should generally

apply. It has been held in Development Bank of the
Philippines vs. Court of Appeals16 that
in a void contract, if both parties have no fault or are not guilty, the
restoration of what was given by each of them to the other is consequently
in order. This is because the declaration of nullity of a contract which is
 COntraCts 551Void and Inexistent Contracts
void ab initio operates to restore things to the state and condition which
they were found before the execution thereof.

Article 1411. When the nullity proceeds from the illegality of the cause or
object of the contract, and the act constitutes a criminal offense, both parties
being in pari delicto, they shall have no action against each other, and both
shall be prosecuted. Moreover, the provisions of the 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. This rule shall be applicable when only
one of the par-ties

233 SCRA 515.

Heirs of Romana Injugtiro vs. Casals, G.R. No. 134718, August 20, 2001, 153 SCAD 421.
G.R. No. 110053, October 16, 1995, 65 SCAD 82, 249 SCRA 331.
Modina vs. Court of Appeals, G.R. No. 109355, October 29, 1999, 115 SCAD
552 ObligatiOns and COntraCts art
Text and Cases
. 1412

is guilty; but the innocent one may claim what he has given, and shall not be
bound to comply with his promise. (1305)

The rule enunciated in this article applies the maxim: Ex dolo malo non oritur
actio and in pari delicto potior est conditio defendentis. The law will not aid
either party to an illegal agreement; it leaves the parties where it finds them. If
A and B enters into a contract whereby A is to kidnap X to be placed in the
custody of B, and the car to be used for the kidnapping shall thereafter be given
to A as the latter’s payment, the cause of the contract is clearly void and even
constitutes a criminal offense. If A is successful in kidnapping X, and B does
not give the car, A has no action against B for the delivery of the car. If B
already delivers the car and A does not fulfill his obligation, B has no right to
go against A. Clearly, both of them are in pari delicto. Both A and B shall be
prosecuted for kidnapping, and the car will be disposed of as an instrument of
the crime in accordance with the Revised Penal Code.

Article 1411 and the subsequent Article 1412 do not apply to inexistent
contracts.17 The in pari delicto doctrine only applies to contracts with illegal
consideration or subject matter, whether the attendant facts constitute an
offense or misdemeanor, or whether the consideration involved is merely
rendered illegal.18 Thus, if a contract has absolutely no consideration at all, or
there is total absence of consent, or there is absence of an object, such contract
is really an inexistent contract and therefore the rule on pari delicto will not
apply.19

Article 1412. If the act in which the unlawful or forbidden cause consists
does not constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither
may recover what he has given by virtue of the contract, or
demand the performance of the other’s undertaking;
(2) When only one of the contracting parties is at fault, he cannot
recover what he has given by reason of the

, 317 SCRA 696.

Ibid.
Ibid.
G.R. No. L-64693, April 27, 1984, 129 SCRA 79.
art. 1412
 COntraCts 553Void and Inexistent Contracts
contract, or ask for the fulfillment of what has been promised
him. The other, who is not at fault, may demand the return of
what he has given without any obligation to comply with his
promise. (1306)

In Lita Enterprises, Inc. vs. Intermediate Appellate Court,20 the Supreme Court
annulled all judicial proceedings of a claimant under a void contract, thus:
Unquestionably, the parties herein operated under an arrangement,
commonly known as the “kabit system,” whereby a person who has been
granted a certificate of convenience allows another person who owns motor
vehicles to operate under such franchise for a fee. A certificate of public
convenience is a special privilege conferred by the government. Abuse of
this privilege by the grantees thereof cannot be countenanced. The “kabit
system” has been identified as one of the root causes of the pre-valence of
graft and corruption in the government transportation offices. In the words
of Chief Justice Makalintal, “this is a pernicious system that cannot be too
severely condemned. It constitutes an imposition upon the good faith of the
government.”
Although not outrightly penalized as a criminal offense, the “kabit system”
is invariably recognized as being contrary to public policy and, therefore,
void and inexistent under Article 1409 of the Civil Code. It is a
fundamental principle that the court will not aid either party to enforce an
illegal contract, but will leave them both where it finds them. Upon this
premise, it was flagrant error on the part of both the trial and appellate
courts to have accorded the parties relief from their predicament. Article
1412 of the Civil Code denies them such aid. x x x
The defect of inexistence of a contract is permanent and incurable, and
cannot be cured by ratification or by prescription. As this Court said in
Eugenio v. Perfido, “the mere lapse of time cannot give efficacy to
contracts that are null and void.”
The principle of in pari delicto is well known not only in this jurisdiction
but also in the United States where common law prevails. Under American
jurisprudence, the doctrine is stated thus: “The proposition is universal that
no action arises, in equity or at law, from an illegal contract; no suit can be
main-tained for its specific performance, or to recover the property agreed
to be sold or delivered, or damages for its violation. The rule has sometimes
been laid down as though it was equally universal, that where the parties
are in pari delicto, no affirmative relief of

G.R. No. L-45255, November 14, 1986, 145 SCRA 541.

. 1412
554 ObligatiOns and COntraCts art
Text and Cases
any kind will be given to one against the other.” Although certain
exceptions to the rule are provided by law, We see no cogent reason why
the full force of the rule should not be applied in the instant case.
In Heirs of Marciana G. Avila vs. Court of Appeals21 where a teacher bought
property in violation of the Administrative Code prohibiting public officials
from purchasing property sold by the government for non-payment of taxes,
and where such purchase was nullified in the lower court prompting the teacher
to appeal to the Supreme Court to overturn the lower court’s decision so that
he can retake the property, the Supreme Court ruled that since the contract was
void because it was contrary to law, the teacher, as a party to an illegal
transaction cannot recover what she gave by reason of the contract or ask for
the fulfillment of what had been promised her pursuant to Article 1412 of the
Civil Code.

In Compania General De Tabacos De Filipinas vs. Court of Appeals 22 where

a purchaser and a seller of certain sugar quota, which was previously
mortgaged to certain banks, entered into a contract of sale purposely intending
to negate the lawful rights and claim of the banks, which foreclosed on the
mortgage, and where the buyer claimed that it should be reimbursed of what it
gave the seller in the event that it was ordered to reconvey the sugar quota to
the banks, the Supreme Court ruled:
One final question remains to be resolved, that posed by TABACALERA,
to wit: if it reconveys the sugar quota acquired from San Carlos Planters’
Association, or pay its value, should not it be reimbursed therefor by the
latter, upon its implied and express warranty against eviction? The answer
will have to be in the negative. They, the vendor and vendee, are in pari
delicto. At the time of the transaction between them they were well aware
of the encumbrance on the property dealt with; they had the common
intention of negating the rights that they knew had earlier and properly been
acquired by the mortgagee of the property they were treating of; they were
both consequently acting in bad faith. The object or the purpose of their
contract was “contrary to law, morals and good customs, public order, or
public policy.” The law says that in such a case, where “the unlawful or
forbidden cause consists does not constitute a criminal offense, x x x and
the fault is on the part of both contracting parties, neither may recover what
he has given by virtue of the contract, or demand

G.R. No. 59534, May 10, 1990, 185 SCRA 284.

G.R. No. L-23002, July 31, 1967, 20 SCRA 908.
art. 1413

the performance of the other’s undertaking.” No relief can be granted to either

party; the law will leave them where they are.
 COntraCts 555Void and Inexistent Contracts
In Rodriguez vs. Rodriguez,23 where a mother sold property to her daughter
who later sold the property to her father, for the purpose of converting the
paraphernal property of the mother to conjugal property, thereby vesting half
interest on the husband and evading the prohibition against donations from one
spouse to another during coverture, and where the wife, contending that the
sale was a circumvention of the said prohibition and therefore void according
to law, filed a case for the nullification of the transactions, the Supreme Court,
while not considering the transactions as simulated ones, nevertheless regarded
the same as a circumvention of the legal prohibition against donations between
spouses but refused to grant relief on the ground that, while the cause involved
an illicit consideration, all the parties were guilty and therefore no one can
recover what was given by virtue of the contract. It applied the rule in pari
delicto non oritur actio, denying all recovery to the guilty parties inter se.

However, the law likewise provides that when only one of the contracting
parties is at fault, he cannot recover what he has given by reason of the contract,
or ask for the fulfillment of what has been promised him. The other, who is not
at fault, may demand the return of what he has given without any obligation to
comply with his promise.

Article 1413. 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.

Under the Usury Law, in case of usurious interest, the whole interest will be
recoverable. The phrase “interest paid in excess of the interest allowed by the
usury laws” provided in Article 1413 has been interpreted by the Supreme
Court in Angel Jose vs. Chelda Enterprises 308 as contemplating the whole
amount of the interest, thus:
Neither is there a conflict between the New Civil Code and the Usury law.
Under the latter, in Sec. 6, any person who for a loan shall have paid a
higher rate or greater sum or value than is allowed in said law, may recover
the whole interest paid. The New Civil Code, in Article 1413 states:
“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.” Article 1413, in speaking of “interest paid in excess of the
interest
. 1414

allowed by the usury laws” means the whole usurious interest; that is, in a
loan of P1,000, with interest of 20% per annum or P200 for one year, if the

308
G.R. No. L-25704, April 24, 1968; Briones vs. Cammayo, G.R. No. L-23559, October 4, 1971,
41 SCRA 404.
556 ObligatiOns and COntraCts art
Text and Cases
borrower pays said P200, the whole P200 is the usurious interest, not just
that part thereof in excess of the interest allowed by law. It is this case that
the law does not allow division. The whole interest as to interest is void,
since payment of said interest is illegal. The only change effected,
therefore, by Article 1413, New Civil Code, is not to provide for the
recovery of the interest paid in excess of that allowed by law, which the
Usury Law already provided for, but to add that the same can be recovered
“with interest thereon from the date of payment.”
The foregoing interpretation is reached with the philosophy of usury
legislation in mind; to discourage stipulation on void usurious interest, said
stipulations are treated as wholly void, so that the loan becomes one
without stipulation as to payment of interest. It should not, however, be
interpreted to mean forfeiture even of the principal, for this would unjustly
enrich the borrower at the expense of the lender. Furthermore, penal
sanctions are available against a usurious lender, as a further deterrence to
usury.

Article 1414. When money is paid or property delivered for an illegal

purpose, the contract may be repudiated by one of the parties before the
purpose has been accomplished, or before any damage has been caused to a
third person. In such case, the courts may, if the public interest will thus be
subserved, allow the party repudiating the contract to recover the money or
property.
In De Leon vs. Court of Appeals25 where the parties entered into a void contract
as the consideration was the termination of marital relationship and where the
husband’s mother, who already previously gave P380,000 to the wife pursuant
to the void contract, resisted the attempt by the wife to enforce the other
provisions of the agreement on the ground that the contract was void, and
where the lower court ruled that no enforcement can be made because the
parties are in pari delicto, and therefore the mother cannot recover the
P380,000, the Supreme Court allowed the mother to recover by stating:
In the ultimate analysis therefore, both parties acted in violation of the
laws. However, the pari delicto rule, expressed in the maxims “Ex dolo
malo non oritur actio” and “In pari delicto potior est conditio
defendentis,” which refuses remedy to either
G.R. No. 80965, June 6, 1990, 186 SCRA 245.
G.R. No. L-23303, September 25, 1968, 25 SCRA 153; See also Philippine National Bank vs. De
Los Reyes, G.R. Nos. 46898-99, November 28, 1989, 179 SCRA 619.
arts. 1415-1416

party to an illegal agreement, and leaves them where they are does not
apply in this case x x x Article 1414 of the Civil Code, which is an
exception to the pari delicto rule, is the proper law to be applied. x x x
 COntraCts 557Void and Inexistent Contracts
Since the Letter-Agreement was repudiated before the purpose has been
accomplished and to adhere to the pari delicto rule in this case is to put a
premium to the circum-vention of the laws, positive relief should be
granted to Macaria. Justice would be served by allowing her to be placed
in the position in which she was before the transaction was entered into.

Article 1415. Where one of the parties to an illegal con-tract is incapable of

giving consent, the courts may, if the interest of justice so demands, allow
recovery of money or pro-perty delivered by the incapacitated person.

This provision is another exception to the, in pari delicto rule. Thus, if A is a

minor and he enters into a contract with B, whereby the latter sells to the said
minor prohibited drugs, the court may allow the minor to recover the money
he paid B in purchasing the illegal drugs. This is, however, within the discretion
of the court. If the court does not find that public policy will be served by the
return of the money, it could opt to issue an order precisely not to return the
money.

Article 1416. When the agreement is not illegal per se but is merely
prohibited, and the prohibition by the law is designed for the protection of
the plaintiff, he may, if public policy is thereby enhanced, recover what he
has paid or delivered.

In Ras vs. Sua26 where a property acquired from the government pursuant to a
law designed to give land to the landless was, in violation of the spirit of said
law, leased to third parties who refused to have the property reconveyed to the
possession of the owner-grantee despite violation of the lease agreement, and
where the third-party possessors claimed that repossession cannot be made
because the parties were in pari delicto and that the proper party to file the suit
was the government who granted the land to the owner, the Supreme Court
affirmed the decision of the lower court allowing the owner to repossess the
property and ruled:
The above contentions are without merit; they being premised on the
assumption that upon the plaintiff’s violation of Republic Act 477 he
automatically loses his rights over the land and said rights immediately
revert to the State. That is not
. 1416

correct.
In the first place, it is worthwhile to note that, unlike in a transfer of the
applicant’s rights made before the award or signing of the contract of sale,
which is specifically declared null and void and disqualifies such applicant
from further acquiring any land from the NAFCO, Republic Act 477 is
silent as to the consequence of the alienation or encumbering of the land
558 ObligatiOns and COntraCts art
Text and Cases
after the execution of the contract of sale, but within 10 years from the
issuance of the corresponding certificate of title. Considering that the aim
of the government in allowing the distribution or sale of disposable public
lands to deserving applicants is to enable the landless citizens to own the
land they could work on, and the reversion of these lands to the government
is penal in character, reversion cannot be construed to be implied from the
provision making certain acts prohibited. Whereas in this case, the interest
of the individual outweighs the interest of the public, strict construction of
a penal provision is justified. Article 1416 of the Civil Code of the
Philippines prescribes as follows:
Article 1416. When the agreement is not illegal per se but is
merely prohibited, and the prohibition by the law is designed
for the protection of the plaintiff, he may, if public policy is
thereby enhanced, recover what he has paid or delivered.
Secondly, under Section 9, Republic Act No. 477, the disposition of lands
by the NAFCO (National Abaca and Other Fibers Corporation) is to be
governed by Public Land Act (C.A. 141); and it has been ruled, in
connection with the same, that a disregard or violation of the conditions of
the land grant does not produce automatic reversion of the property to the
State, nor work to defeat the grantee’s right to recover the property he had
previously disposed of or encumbered. This was made clear by this Court
when it said:
“x x x Similar contentions were made in the case of Catalina
de los Santos vs. Roman Catholic Church of Midsayap, et al.,
94 Phil. 405, 50 Off. Gaz. 1588, but they were overruled, this
Court holding that the pari delicto doctrine may not be
invoked in a case of this kind since it would turn counter to
an avowed fundamental policy of the State that the forfeiture
of the homestead is a matter between the State and the grantee
or his heirs, and that until the State has

Olea vs. Court of Appeals, G.R. No. 109696, August 14, 1995, 63 SCAD 579, 274 SCRA 247.
Bañez vs. Court of Appeals, G.R. No. L-30351, September 11, 1974, 59 SCRA arts. 1417-1418

taken steps to annul the grant and asserts title to the

homestead, the purchaser is, as against the vendor or his
heirs, no more entitled to keep the land than an intruder.
(Acierto vs. De los Santos, 95 Phil. 887).

Article 1417. When the price of any article or commodity is determined by

statute, or by authority of law, any person paying any amount in excess of
the maximum price allowed may recover such excess.
 COntraCts 559Void and Inexistent Contracts
If the law provides the highest amount possible that can be charged from a
buyer of certain commodities, it is illegal to charge an amount higher than the
statutory ceiling. Such an excess from the limit shall be recoverable.

Article 1418. When the law fixes, or authorizes the fixing of the maximum
number of hours of labor, and a contract is entered into whereby a laborer
undertakes to work longer than the maximum thus fixed, he may demand
additional compensation for service rendered beyond the time limit.

This provision is designed to prevent exploitation of employees or laborers.

Hence, if an employer and employee enter into a contract where the employee
shall work only eight hours a day for a particular and specified compensation,
such employee cannot be forced to work beyond the said time and, if he is
required to do so, he should be paid for the extra time. Overtime pay is now
regulated by the Labor Code of the Philippines.

Article 1419. When the law sets, or authorizes the setting of a minimum wage
for laborers, and a contract is agreed upon by which a laborer accepts a lower
wage, he shall be entitled to recover the deficiency.

This is for the protection of labor. Hence, if according to law A is to receive

P200.00 a day, and he enters into an employment contract providing that he is
to get P150.00 a day, such a contract is void as the same is against the law and
so A can demand the difference of P50.00.

Article 1420. In case of a divisible contract, if the illegal terms can be

separated from the legal ones, the latter may be enforced.
560 ObligatiOns and COntraCts
Text and Cases
arts. 1419-1421

If a void provision in a contract directly affects the entirety of the contract, the
contract can be considered void. However, if the provision is independently
separable from the other provisions, such provision alone shall be considered
void. Thus, in a contract of loan secured by a collateral of the debtor’s property
which, as stipulated in the contract, shall automatically be owned by the
creditor in the event of non-payment of the debt, the loan itself is valid but the
security is void. This is pactum commissorium, which is against the law,
because for the forfeiture to be valid in case of non-payment the collateral must
be foreclosed and sold at auction to the highest bidder. 27 This is also true in
case the interest is against the legal rate.

Article 1421. The defense of illegality of contracts is not available to third

persons whose interests are not directly affected.

As a general rule, there can only be mutuality of obligations in a contract

which affects the parties involved therein. Hence, even if the contract is illegal,
such a general rule is still followed. However, if a third person is greatly
prejudiced as his interest is directly affected, he may file a case for the
nullification of a contract or set the same as a defense28 even if such prejudiced
person is not a party to the void contract. Hence, if A and B enters into a
contract of sale of real property, where A sells a particular land which he does
not own to B for an illegal consideration, such a contract is void and if the
particular land area sold encroaches on the property of X, a third person,
he can seek the nullification of such contract as it directly affects his interest.

Article 1422. A contract which is the direct result of a previous illegal

contract, is also void and inexistent.

A void contract is inexistent. Hence, if a subsequent contract proceeds from

such inexistent contract, the former contract is likewise void. 29

15 .
E. Razon vs. Philippine Ports Authority, G.R. No. L-75197, June 22, 1987, 133 SCRA 515.
art. 1422
 COntraCts 561Void and Inexistent Contracts

488 ObligatiOns and COntraCts Text

and Cases

TITLE III. — NATURAL OBLIGATIONS

Article 1423. Obligations are civil or natural. Civil obligations give a right
of action to compel their performance. Natural obligations, not being based
on positive law 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. Some natural obligations are set forth in the following articles.

The 1947 Code Commission which inserted this Title in the Civil Code stated
the rationale of the provisions on natural obligations in its report, thus:
In all the specific cases of natural obligation recognized by the present
Code, there is a moral but not a legal duty to perform or pay, but the person
thus performing or paying feels that in good conscience he should comply
with his undertaking which is based on moral grounds. Why should the law
permit him to change his mind, and recover what he has delivered or paid?
Is it not wiser and more just that the law should compel him to abide by his
honor and conscience? Equity, morality, natural justice — these are, after
all, the abiding foundations of a positive law. A broad policy justifies a
legal principle that would encourage persons to fulfill their moral
obligations.
Furthermore, when the question is viewed from the side of the payee, the
incorporation of natural obligations into the legal system becomes
imperative. Under the laws in force, the payee is obliged to return the
amount received by him because the payor was not legally bound to make
the payment. But the payee knows that by all considerations of right and
justice he ought to keep what has been delivered to him. He is therefore
dissatisfied over the law, which deprives him of that which in honor and
fair dealing ought to pertain to him. Is it advisable for the State thus to give
grounds to the citizens to be justly disappointed?
To recapitulate: because they rest upon morality and because they are
recognized in some leading civil codes, natural obligations have again
become part and parcel of the Philippine
488
 562
arts. 1424-1427 Natural ObligatiOns

law.309

Article 1424. When a right to sue upon a civil obligation has lapsed by
extinctive prescription, the obligor who voluntarily performs the contract
cannot recover what he has delivered or the value of the service he has
rendered.

For example, the law provides that the prescriptive period to file a case based
on a written agreement is ten years from the time the right of action accrues.
Hence, if a creditor, by virtue of a written loan contract, does not collect the
amount of the loan after ten years from the time it should be paid, such creditor
can no longer collect from the debtor as the time within which to file the case
has already prescribed. However, if the debtor, despite the lapse of the
prescriptive period and knowing that the debt has already prescribed, pays the
creditor, such debtor can no longer recover such payment.

Article 1425. When without the knowledge or against the will of the debtor,
a third person pays a debt which the obligor is not legally bound to pay
because the action thereon has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot recover what he has paid.

For example, A is indebted to Z but the collection of such debt has already
prescribed and therefore can no longer be collected. If M pays the debt to Z,
and, later on, A voluntarily reimburses M, such payment shall be considered
valid and A cannot recover such amount from Z on the ground that M should
not have paid him.

Article 1426. When a minor between eighteen and twentyone years of age
who has entered into a contract without the consent of the parent or
guardian, after the annulment 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.

Article 1427. When a minor between eighteen and twentyone years of age,
who has entered into a contract without the consent of the parent or
guardian, voluntarily pays a sum of money or delivers a fungible thing in
fulfillment of the obligation, there shall be no right to recover the same from
the obligee who has spent or consumed it in good faith. (1160a)

490 ObligatiOns and COntraCts arts. 1428-1430

309
Report of the Code Commission, Pages 58-59.
 Text and Cases

The law provides that an incapacitated person is not obliged to make any
restitution except insofar as he has been benefited by the thing or price received
by him. A person who is “between eighteen and twenty-one years of age” is
not anymore a minor because the age of majority today, pursuant to Republic
Act No. 6809 is 18 years of age. However, if ever the law is still to apply, it
means that a minor, who voluntarily makes payment or restitution of what he
has obtained by contract even though he has no legal obligation to make
payment or restitution, can no longer recover what he has returned.

Article 1428. When, after an action to enforce a civil obligation has failed,
the defendant voluntarily performs the obligation, he cannot demand the
return of what he has delivered or the payment of the value of the service he
has rendered.

For example, if A is indebted to B for P1,000 and a civil suit is filed to collect
the amount but such suit is dismissed, A need not pay the said amount but, if
he voluntarily makes payment, he can no longer recover such payment.

Article 1429. When a testate or intestate heir voluntarily pays a debt of the
decedent exceeding the value of the property which he received by will or by
the law of intestacy from the estate of the deceased, the payment is valid and
cannot be rescinded by the payer.

For example, A is indebted to X for P10,000. A later dies, with M as his heir
who is entitled only to P5,000 from the estate of A. If M voluntarily pays X
P10,000, M can no longer recover such an amount.

Article 1430. 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. For example, M provided in his holographic will that his car shall
go to his driver X. Later, the holographic will turns out to be partly type-written
and therefore it is void as such will should be wholly hand-written by the
testator. If, despite the nullity of the will, M’s heir, Z, still voluntarily gives the
legacy of the car to X, it shall be valid and cannot be revoked anymore.
art. 1430 Natural ObligatiOns 491
492 ObligatiOns and COntraCts Text
and Cases

TITLE IV. — ESTOPPEL (n)

Article 1431. 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.

In Beronilla vs. Government Service Insurance System,310 the

Supreme Court said that
the doctrine of estoppel having its origin in equity, its applicability to any
particular case depends, to a very large extent, upon the special
circumstances of the case.
However, in each case, estoppel must be determined after carefully
considering the material facts of the case lest injustice may result. Thus in
Kalalo vs. Luz,311 the Supreme Court succinctly cautioned thus:
Estoppel has been characterized as harsh and odious, and not favored in
law. When misapplied, estoppel becomes a most effective weapon to
accomplish an injustice, inasmuch as it shuts a man’s mouth from speaking
the truth and debars the truth in a particular case. Estoppel cannot be
sustained by mere argument or doubtful inference; it must be clearly
proved in all its essential elements by clear, convincing and satisfactory
evidence.
It is a rule, however, that estoppel is not applicable against the government
suing in its capacity as sovereign or asserting governmental rights. Estoppel
likewise does not apply if a law or public policy will be violated. 312 Thus in
Republic vs. Go Bon Lee313 where the government, through the Office of the

310
G.R. No. L-21723, November 20, 1976, 36 SCRA 44.
311
G.R. No. L-27782, July 31, 1970, 34 SCRA 337.
312
Auyong Hian vs. Court of Tax Appeals, G.R. No. L-28782, September 12, 1974, 59 SCRA
110.
313
G.R. No. L-11499, April 29, 1961, 1 SCRA 1166; Go Tian An vs. Republic, G.R. No. L-19833,
August 31, 1966, 17 SCRA 1053; United Christian Missionary Society vs. Social Security System,
G.R. L-26712, December 27, 1969, 30 SCRA 982; Republic vs. Philippine Rabbit Bus Lines, Inc.,
32 SCRA 211.

492
Solicitor General, filed in 1951 a petition in court to cancel the certificate of
naturalization of a certain
566 ObligatiOns and COntraCts
Text and Cases
art. 1431

Chinese who was granted citizenship in 1941 by a lower court in Cebu, and
who took his allegiance in 1942, and where the Chinese claimed, among others,
that his citizenship cannot be reopened anymore on the ground that the
government was already in estoppel, the Supreme Court rejected the claim of
estoppel and ruled:
It is well settled that the doctrine of estoppel or of laches does not apply
against the Government suing in its capacity as Sovereign or asserting
governmental rights. It had been held that the Government is never
estopped by mistakes or errors on the part of its agents (Pineda vs. Court
of First Instance of Tayabas, 52 Phil. 803, 807), and that estoppel cannot
give validity to an act that is prohibited by law or is against public policy
(Benguet Consolidated, etc. vs. Pineda, 52 O.G. No. 4, p. 1961; Eugenio
vs. Perdido, G.R. No. L-7083, May 19, 1955).
Also, the government cannot be estopped by the mistake and errors of its
officers. 314 Thus in Collector of Internal Revenue vs. McGrath 315 where the
issue involved the collection of taxes, the Supreme Court ruled:
x x x any error made by a tax official in the assessment or computation of
taxes does not have the effect of relieving the taxpayer from the full amount
of liability as fixed by law. Errors of tax officers or officials of the
Government do not bind the Government or prejudice its right to the taxes
or dues collectible by it from its citizens.
Estoppel likewise applies to questions of fact only, not of law, about the truth
of which the other party is ignorant.316 Hence,
it has been held that if an act, conduct or misrepresentation of the party
sought to be estopped is due to ignorance founded on innocent mistake,
estoppel will not arise.317318

Article 1432. The principles of estoppel are hereby adopted insofar as they
are not in conflict with the provisions of this

314
Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803.
315
G.R. No. L-12721, February 28, 1961, 1 SCRA 639, citing Canlubang Sugar
Estate vs. Standard Alcohol Co. (Phil.), Inc., G.R. No. L-10887, April 16, 1958; Philippine
American Drug Co. vs. Collector of Internal Revenue, et al., G.R. No. L-13032, August 31 , 1959;
Teodore Lewin vs. Emilio Galang, G.R. No. L-15253, October 31, 1960.
316
Tañada vs. Cuenco, G.R. No. L-10520, February 28, 1957.
317
Kalalo vs. Luz, G.R. No. 27782, July 31, 1970, 34 SCRA 337, citing Ramiro vs. Grano, 54 Phil.
744, 750; Coleman vs. Southern Pacific Co., 141 Cal App 2d 121, 296 P2d 386.
318
Am Jur 2d 602-603.
 EstOppEl (n) 567
arts. 1432-1433

Code, the Code of Commerce, the Rules of Court and special laws.

Article 1433. Estoppel may be in pais or by deed.

The concept of estoppel was introduced in the Philippines by the Americans

and, in this regard, jurisprudence in the United States can be very helpful, thus:
Estoppel by deed is a bar which precludes one party to a deed and his
privies from asserting as against the other party and his privies any right or
title in derogation of the deed, or from denying the truth of any material
facts asserted in it. Estoppel by deed is technical in nature and such an
estoppel may conclude a party without reference to the moral equities of
his conduct.
Generally, estoppel is based upon equitable considerations. In other words,
it rests upon the inequity of allowing the party estopped from asserting a
contrary position. The principle is that when a man has entered into a
solemn engagement by deed, he shall not be permitted to deny any matter
which he has asserted therein, for a deed is a solemn act to any part of
which the law gives effect as the deliberate admission of the maker; to him
it stands for truth, and in every situation in which he may be placed with
respect to it, it is true as to him. It has been stated that it is a mistake to
liken an estoppel by deed to an estoppel in pais. It has also been stated,
speaking of estoppel by deed in general, that the true principle of estoppel,
as applicable to deeds , is to prevent circuity of actions, and to compel party
to fulfill their contracts. But where estoppel by deed arises, it is generally
limited to an action on the deed itself; in a collateral action, there is
ordinarily no estoppel.9
Equitable estoppel, or estoppel in pais, is a term applied usually to a
situation where, because of something which he has done or omitted to do,
a party is denied the right to plead or prove an otherwise important fact.
The term has also been variously defined, frequently by pointing out one
or more of the elements of, or prerequisites to, the application of the
doctrine or the situation in which the doctrine is urged. The most
comprehensive definition of equitable estoppel or estoppel in pais is that it
is the principle by which a party who knows or should know the truth is
absolutely precluded, both at law and in equity, from denying, or asserting
the contrary of, any material fact which by his words or conduct,
affirmative or negative, intentionally or culpable negligence, he has
induced another, who was excusably ignorant

Id., Pages 627-628.

arts. 1432-1433
568 ObligatiOns and COntraCts
Text and Cases
of the true facts and who had a right to rely upon such word or conduct, to
believe and act upon them thereby, as a consequence reasonably
anticipated, changing his position in such a way that he would suffer injury
if such denial or contrary assertion was allowed. In the final analysis,
however, an equitable estoppel rests upon the facts and circumstances of
the particular case in which it is urged, considered in the framework of the
elements, requisites, and grounds of equitable estoppel, and consequently,
any attempted definition usually amounts to no more than a declaration of
an estoppel under those facts and circumstances. The cases themselves
must be looked to and applied by way of analogy rather than rule.10
In Manacling vs. Bun,11 the Supreme Court differentiated the concepts of
estoppel by deed, estoppel in pais, prescription, and laches, thus:
Under Article 1431 of the Civil Code, 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. In
estoppel by pais, as related to the party sought to be estopped, it is
necessary that there be a concurrence of the following requisites: (a)
conduct amounting to false representation or concealment of material facts
or at least calculated to convey the impression that the facts are otherwise
than, and inconsistent with, those which the party subsequently attempts to
assert; (b) intent, or at least expectation that this conduct shall be acted
upon, or at least influenced by the other party; and (c) knowledge, actual
or constructive of the actual facts. In estoppel by conduct, on the other
hand: (a) there must have been a representation or concealment of material
facts; (b) the representation must have been with knowledge of the facts;
(c) the party to whom it was made must have been ignorant of the truth of
the matter; and (d) it must have been made with the intention that the other
party would act upon it.
As to prescription, this Court ruled in the Bonaga case that “[a]ctions to
declare the inexistence of contracts do not prescribe (Art. 1410, N.C.C.), a
principle applied even before the effectivity of the new Civil Code.
(Eugenio, et al. vs. Perdido, et al., supra, citing Tipton vs. Velasco, 6 Phil.
67, and Sabas vs. Germa, 66 Phil. 471).”
Laches is different from prescription. As this Court held in Nielson & Co.,
Inc. vs. Lepanto Consolidated Mining Co., the defense of laches applies
independently of prescription.

G.R. No. 27876, April 22, 1992, 208 SCRA 179.

G.R. No. L-24419, July 15, 1968, 24 SCRA 59.
569 ObligatiOns and COntraCts art
Text and Cases
. 1434

While prescription is concerned with the fact of delay, laches is concerned

with the effect of delay. Prescription is a matter of time; laches is
principally a question of inequity of permitting a claim to be enforced, this
inequity being founded on some change in the condition of the property or
the relation of the parties. Prescription is statutory; laches is not. Laches
applies in equity, whereas prescription applies at law. Prescription is based
on fixed time, laches is not.
The essential elements of laches are the following: (1) conduct on the part
of the defendant, or of one under whom he claims, giving rise to the
situation of which complaint is made and for which the complaint seeks a
remedy; (2) delay in asserting the complainant’s rights, the complainant
having had knowledge or notice of the defendant’s conduct and having
been afforded an opportunity to institute a suit; (3) lack of knowledge or
notice on the part of the defendant that the complainant would assert the
right on which he bases his suit; and (4) injury or prejudice to the defendant
in the event relief is accorded to the complainant, or the suit is not held
barred.

Article 1434. When a person who is not the owner of a thing sells or alienates
and delivers it, and later the seller or grantor acquires title thereto, such title
passes by operation of law to the buyer or grantee.

An illustration of the provision is as follows: if A, who is not the owner of a

car sells the same to B, the sale is unenforceable because A has no authority to
sell the property. However, if A himself delivers the property to B, and later A
buys the same from the real owner N, A cannot claim the property as his on the
ground that when he sold it to B, he was not the owner of the same. B shall be
preferred by the law and will treat the sale as completely valid even though at
the time it was actually made, the seller is not the owner. In Estoque vs.
Pajuimula12 where a co-owner sold a land which he co-owned with two other
owners and such sale was assailed as invalid because the seller could not have
sold the interest of the other co-owners without their consent, the Supreme
Court ruled that the sale was valid by applying Article 1434, thus:
While on the date of the sale to Estoque (Annex A) said contract may have
been ineffective, for lack of power in the vendor to sell the specific portion
described in the deed, the transaction was validated and became fully
effective when the next day

Article 1935 of the 1950 Civil Code.

arts. 1435-1437
570 ObligatiOns and COntraCts art
Text and Cases
(October 29, 1951) the vendor, Crispina Perez, acquired the entire interest
of her remaining co-owners (Annex B) and thereby became the sole owner
of Lot No. 802 of the Rosario Cadastral survey (Llacer vs. Muñoz, 12 Phil.
328). Article 1434 of the Civil Code of the Philippines clearly prescribes:
xxx

Article 1435. If a person in representation of another sells or alienates a

thing, the former cannot subsequently set up his own title as against the
buyer or grantee.

For example, if A constituted B as his agent to sell a car and the car was in fact
sold by B, A cannot later on claim that he was the owner to invalidate the
transaction.

Article 1436. A lessee or a bailee is estopped from asserting title to the thing
leased or received, as against the lessor or bailor.

An illustration of the provision is as follows: the lessee cannot claim

ownership over the property he is leasing precisely because, by a contract of
lease, the lessee acknowledges the fact that he is not the owner of the property
and he has only the peaceful possession thereof under such terms and
conditions as the owner and the lessee have mutually agreed. On the other
hand, a bailee in commodatum merely acquires the use of the thing loaned but
not its fruits.13 A bailee likewise acknowledges the fact that he is not the owner
of the nonconsumable object delivered to him for his use for a certain period
of time with the obligation to return the same at the expiration of said period.

Article 1437. When in a contract between third persons concerning

immovable property, one of them is misled by a person with respect to the
ownership or real right over the real estate, the latter is precluded from
asserting his legal title or interest therein, provided all these requisites are
present:
(1) There must be fraudulent representation or wrongful
concealment of facts known to the party estopped;
(2) The party precluded must intend that the other should act upon
the facts as misrepresented; (3) The party misled must have been
unaware of the true

Article 2093 of the 1950 Civil Code.

. 1438
 EstOppEl (n) 571
facts; and
(4) The party defrauded must have acted in accordance with the
misrepresentation.

An illustration of the provision is as follows: A and B have a contract of lease

where A, the lessee, has been given a preferential right to buy the property in
the event that B, the lessor, decides to sell the property. A approaches Z, and
tells him that the property is his (A’s) already because he (A) has already
exercised his preferential right, and that only the documentation is to be done.
A also tells Z that the property is being eyed by a corporation, which intends
to buy the same. This representation is made to entice Z to buy the property
and then later resell it to said corporation, thereby giving him enormous profit.
However, the real owner, in fact, has not yet offered the property for sale such
that A could not have exercised his preferential right. Also there is really no
corporation intending to buy the property. Because A is a seasoned real estate
broker, Z relied on A’s fraudulent representation and buys the property.
Therefore B ratified the sale. Later on A cannot assert a claim on the property
contending that the sale is unenforceable for not having the consent of the true
owner, B, at the time it was sold.

Article 1438. One who has allowed another to assume apparent ownership
of personal property for the purpose of making any transfer of it, cannot, if
he received the sum 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.

A thing pledged must be placed in the possession of the creditor, or of a third

person by common agreement.14 A pledge is constituted by the absolute owner
of the thing pledged to secure the fulfillment of a principal obligation. 319 It is
important that the person constituting the thing pledged has the free disposal
of his property, and in the absence thereof, he is legally authorized for the
purpose.16

An illustration of the provision is as follows: A does not want to be known as

the owner of a Mercedez Benz. He tells everybody that said car is owned by B.
B knows of this representation of A and goes along with it. A even gives B the
authority to sell, encumber or alienate the property. B decides to pledge the
property for a loan he
art. 1439

319
Article 2085(1) and (2) of the 1950 Civil Code.
572 ObligatiOns and COntraCts art
Text and Cases
obtains from X. The proceeds of the loan however goes to A who, in the first
place, has instructed B to obtain the loan. As pledgee, X now is in possession
of the car. The loan becomes due. X warns B that if no payment is made, the
pledge will be foreclosed. Learning of this legal threat by X, A cannot resist
the foreclosure by claiming that the pledge of the car is invalid because B does
not actually own it. A is estopped.

Article 1439. Estoppel is effective only as between the parties thereto or their
successors-in-interest.

The law provides that estoppel is effective only as between the parties
thereto or their successors-in-interest.
It is a general rule that in order to be effective, an equitable estoppel must
be mutual and reciprocal. Unless both parties to a transaction are bound by
an estoppel, neither is bound. Mutuality being requisite, an estoppel
operates neither in favor of, nor against, strangers — that is, persons who
are neither parties nor privies to the transaction out of which the estoppel
arose. Thus, a grantor is not estopped by his deed as against one who is
neither a party thereto nor in privity with a party.17
In Castrillo vs. Court of Appeals,18 where the lower court applied Article 1434
on estoppel in a case where Isabel Miranda sold her 1/3 share of Lot No.
188 to Doroteo Dimaranan in 1932 at the time when she was not yet the owner
thereof and that she acquired ownership only when her sister Crispina executed
a formal deed of sale in her favor in 1934, covering an area of 252 square
meters, thereby rendering unquestionable the ownership of Dimaranan and
where the heirs of Crispina assailed the application of estoppel provided for in
Article 1434, the Supreme Court said:
x x x if any body at all may be heard to challenge the
application of the doctrine of estoppel in favor of respondents
(Dimaranan), it is only the party against whom it may be
invoked — in this case the vendor, Isabel Miranda, from
whom they acquired the disputed property. Crispina Miranda
having conveyed the same to Isabel, neither she nor her
successors may raise the point to their advantage. For them
to do so would in effect be to deny the rights of Isabel

Id.
17
28 Am Jur 2d 774-775.
G.R. No. L-18046, March 31, 1964, 10 SCRA 549.
573 ObligatiOns and COntraCts art
. 1439 Text and Cases

Miranda herself, acquired by virtue of two documents

executed by Crispina in her favor, one in 1929 (Exh. A) and
the other in 1934 (Exh. C). This obviously petitioners cannot
be permitted to do.
574 ObligatiOns and COntraCts
Text and Cases
501

TITLE V. — TRUSTS (n)

Chapter 1

GENERAL PROVISIONS

Article 1440. A person who establishes a trust is called the trustor; one in
whom confidence is reposed as regards property for the benefit of another
person is known as the trustee; and the person for whose benefit the trust
has been created is referred to as the beneficiary.
Article 1441. Trusts are either express or implied. Express trusts are created
by the intention of the trustor or of the parties. Implied trusts come into being
by operation of law.

In Ramos vs. Ramos, 320 the Supreme Court, quoting jurisprudence in the
United States, defined trust and its kinds as follows:
In its technical legal sense, a trust is defined as the right enforceable solely
in equity, to the beneficial enjoyment of property, the legal title to which is
vested in another, but the word ‘trust’ is frequently employed to indicate
duties, relations, and responsibilities which are not strictly technical trusts.
(89 CJS 712) x x x x x x Express trusts are those which are created by the
direct and positive acts of the parties, by some writing or deed, or will, or
by words either expressly or impliedly evincing an intention to create a
trust (89 CJS 722).
Implied trusts are those which, without being expressed, are deducible
from the nature of the transaction as matters of intent, or which are
superinduced on the transaction by operation of law as matters of equity,
independently of the particular intention of the parties (89 CJS 724). They
are ordinarily subdivided into resulting and constructive trusts (89 CJS
722).
A resulting trust is broadly defined as a trust which is

501

320
G.R. No. L-19872, December 3, 1974, 61 SCRA 284.
 arts. 1440-1441

raised or created by the act or construction of law, but in its more restricted
sense it is a trust raised by implication of law and presumed always to have
been contemplated by the parties, the intention as to which is to be found
in the nature of their transaction, but not expressed in the deed or
instrument of conveyance (89 CJS 725). Examples of resulting trusts are
found in Articles 1448 to 1455 of the Civil Code. x x x
On the other hand, a constructive trust is a trust “raised by construction of
law, or arising by operation of law.” In a more restricted sense and as
contradistinguished from a resulting trust, a constructive trust is “a trust not
created by any words, either expressly or impliedly evincing a direct
intention to create a trust, but by the construction of equity in order to
satisfy the demands of justice. It does not arise by agreement or intention
but by operation of law.” (89 CJS 729-727). If a person obtains legal title
to property by fraud or concealment, courts of equity will impress upon the
title a so-called constructive trust in favor of the defrauded party. A
constructive trust is not a trust in the technical sense (Gayondato vs.
Treasurer of the P.I., 49 Phil. 244; see Article 1456, Civil Code).
There is a rule that a trustee cannot acquire by prescription the ownership
of property entrusted to him (Palma vs. Cristobal, 77 Phil. 712), or that an
action to compel a trustee to convey property registered in his name in trust
for the benefit of the cestui que trust does not prescribe (Manalnag vs.
Canlas, 94 Phil. 776; Cristobal vs. Gomez, 50 Phil. 810), or that the defense
of prescription cannot be set up in an action to recover property held by a
person in trust for the benefit of another (Sevilla vs. De los Angeles, 97
Phil. 875), or that property held in trust can be recovered by the beneficiary
regardless of the lapse of time (Marabilles 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).
That rule applies squarely to express trust. The basis of the rule is that the
possession of a trustee is not adverse. Not being adverse, he does not
acquire by prescription the property held in trust. Thus, Section 38 of Act
190 provides that the law of prescription does not apply “in the case of a
continuing and subsisting trust” (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 O.G. 1956, 10 SCRA 691).
The rule of imprescriptibility of the action to recover property held in trust
may possibly apply to resulting trusts as long as the trustee has not
repudiated the trust (Heirs of
arts. 1440-1441 trusts (n) 503
General Provisions
576 ObligatiOns and COntraCts
Text and Cases
Candelaria vs. Romero, 109 Phil. 500, 502-503; Martinez vs. Grano, 42
Phil. 35; Buencamino vs. Matia, 63 O.G. 11033, 16 SCRA 849).
The rule of imprescriptibility was misapplied to constructive trusts
(Geronimo and Isidro vs. Nava and Aquino, 105 Phil. 145, 153. Compare
with Cuison vs. Fernandez and Bengzon, 105 Phil. 1235, 1239; De Pasion
vs. De Pasion, 112 Phil. 403, 407).
Acquisitive prescription may bar the action of the beneficiary against the
trustee in an express trust for the recovery of the property held in trust
where: (a) the trustee has performed unequivocal acts of repudiation
amounting to an ouster of the cestui que trust; (b) such positive acts of
repudiation have been made known to the cestui que trust; and (c) the
evidence thereon is clear and conclusive (Laguna vs. Levantino, supra;
Salinas vs. Tuason, 55 Phil. 729. Compare with the rule regarding co-
owners found in last paragraph of Article 494, Civil Code; Casanas vs.
Rosello, 50 Phil. 97; Gerona vs. De Guzman, L-19060, May 29, 1964 , 11
SCRA 153, 157).
With respect to constructive trusts, the rule is different. The prescriptibility
of an action for reconveyance based on constructive trust is now settled
(Alzona vs. Capunitan, L-10228, February 28, 1962, 4 SCRA 450; Gerona
vs. De Guzman, supra; Claridad vs. Henares, 97 Phil. 973; Gonzales vs.
Jimenez, L-19073, January 30, 1965, 13 SCRA 80; Bonanga vs. Soler, 112
Phil. 651; J.M. Tuason & Co. vs. Magdangal, L-15539, January 30, 1962,
4 SCRA 84). Prescription may supervene in an implied trust (Bueno vs.
Reyes, L-22587, April 28, 1969, 27 SCRA 1179; Fabian vs. Fabian, L-
20449, January 29, 1968; Jacinto vs. Jacinto, L-17957, May 31, 1962 , 5
SCRA 371).
And whether the trust is resulting or constructive, its enforcement may be
barred by laches (90 CJS 887-889; 54 Am. Jur. 449-450; Diaz vs. Gorricho
and Aguado, supra. Compare with Mejia vs. Bampona, 100 Phil. 277).
In Salvatierra vs. Court of Appeals,321 the Supreme Court ruling on
the prescriptibility of implied trust pertinently said:
An action for reconveyance of registered land based on an implied trust
may be barred by laches. The prescriptive period for such actions is ten
(10) years from the date the right of action accrued. We have held in the
case of Armamento vs. Central Bank that an action for reconveyance of
registered land based on implied trust, prescribes in ten (10) years even if
the decree
art. 1442

of registration is no longer open to review.

In Duque vs. Domingo, especially, we went further by stating:

321
G.R. No. 107797, August 26, 1996, 73 SCAD 586, 261 SCRA 45.
 “The registration of an instrument in the Office of the Register of Deeds
constitutes constructive notice to the whole world, and therefore, discovery
of the fraud is deemed to have taken place at the time of registration. Such
registration is deemed to be a constructive notice that the alleged fiduciary
or trust relationship has been repudiated. It is now settled that an action on
an implied or constructive trust prescribes in ten (10) years from the date
the right of action accrued.”
In Cuaycong vs. Cuaycong322 where there was a conflict as to whether or not
the allegations in the complaint referred to an express or an implied trust, the
Supreme Court ruled that there was an express trust because the allegations
clearly stated that the owner of the property expressly told the defendants of
his intention to establish a trust. The Supreme Court likewise took the occasion
to distinguish an express trust from an implied trust, thus:
Our Civil Code defines an express trust as one created by the intention of
the trustor or the parties, and an implied trust as one that comes into being
by operation of law. Express trusts are those created by the direct and
positive acts of the parties, by some writing or deed or will or by words
evidencing an intention to create a trust. On the other hand, implied trusts
are those which, without being expressed, are deducible from the nature of
the transaction by operation of law as matters of equity, independently of
the particular intention of the parties. Thus, if the intention to establish a
trust is clear, the trust is express; if the intent to establish a trust is to be
taken from circumstances or other matters indicative of such intent, then
the trust is implied.

Article 1442. The principles of the general law of trusts, insofar as they are
not in conflict with this Code, the Code of Commerce, the Rules of Court and
special laws are hereby adopted.

505

Chapter 2

EXPRESS TRUSTS

Article 1443. No express trusts concerning an immovable or any interest

therein may be proved by parol evidence.

322
G.R. No. L-21616, December 11, 1967, 21 SCRA 1192.
578 ObligatiOns and COntraCts
Text and Cases
Parol evidence refers to oral evidence. To prove an express trust over
immovable properties or any interest therein, there must always be a showing
of some documents proving the same. In Pascual vs. Meneses323 where certain
properties were claimed by different persons, and some of the heirs contended
that there was allegedly an express trust over some of the real estates
constituted by some claimant as co-owners who however did not present any
documentary proof of the same, the Supreme Court rejected such claim by
merely pointing out to the requirement of Article 1443 that no express trust
concerning an immovable or any interest therein may be proved by parol
evidence.

In Ramos vs. Ramos324 where the evidence showed that the properties claimed
to be held in trust was actually the subject of a partition, the Supreme Court
ruled that there was no express trust by stating:
The plaintiffs did not prove any express trust in this case. The expediente
of the intestate proceeding, Civil Case No. 217, particularly the project of
partition, the decision and the manifestation as to the receipt of shares
(Exhs. 3, 4 and 6) negatives the existence of an express trust. Those public
documents prove that the estate of Martin Ramos was settled in that
proceeding and that adjudications were made to his seven natural children.
A trust must be proven by clear, satisfactory, and convincing evidence. It
cannot rest on vague and uncertain evidence or on loose, equivocal or
indefinite declarations (De Leon vs. Peckson, 62 O.G. 994). As already
noted, an express trust cannot be proven by parol evidence.

Article 1444. No particular words are required for the

arts. 1444-1446

creation of an express trust, it being sufficient that a trust is clearly intended.

For as long as the intention to establish a trust is very clear from the proofs,
whether by some writing or deed or will or by words, an express trust is
created.325

Article 1445. No trust shall fail because the trustee appointed declines the
designation, unless the contrary should appear in the instrument constituting
the trust.

323
G.R. No. L-18838, May 25, 1967, 20 SCRA 219.
324
G.R. No. L-19872, December 3, 1974, 61 SCRA 284.

505
325
Cuaycong vs. Cuaycong, G.R. No. L-21616, December 11, 1967, 21 SCRA 1192.
 An express trust clearly indicates that a trustor is delivering his property to a
trustee for the benefit of a beneficiary. This clear intention must be
implemented even if the trustee appointed declines the designation. In case of
refusal to accept the trust by the trustee, the court will appoint a trustee.
However, if the appointment of the trustee is a material provision, the trustor
can provide that a refusal of the trustee to accept the trust shall result in the
failure or nullification of the same.

Article 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the

trust imposes no onerous condition upon the beneficiary, his acceptance
shall be presumed, if there is no proof to the contrary.

Trust property is designed to benefit a cestui que trust or a beneficiary. If the

beneficiary does not want the trust, the trustor will not be estopped from
deciding on another beneficiary. The acceptance of the beneficiary may be
express or implied. However, the law says that if the trust imposes no onerous
condition upon the beneficiary, his acceptance shall be presumed, if there is no
proof to the contrary. An onerous condition is one which the beneficiary is
required to perform to make the trust effective or is one which should be done
for as long as the trust exists. Hence, if there is no such onerous condition, it is
in a sense an act of gratuity or liberality and therefore the acceptance of the
beneficiary shall be presumed. This presumption is in consonance with the
ordinary scheme of things that a person who is given a gift normally accepts
the same.
507

Chapter 3

IMPLIED TRUSTS

Article 1447. The enumeration of the following cases of implied trust does
not exclude others established by the general law of trust, but the limitation
laid down in Article 1442 shall be applicable.
580 ObligatiOns and COntraCts
Text and Cases
The situations giving rise to implied trust provided under this
Chapter are not exclusive. There may be others. Implied trusts may either be
resulting or constructive trusts, both coming into being by operation of law. 326
Resulting trusts are based on the equitable doctrine that valuable
consideration and not legal title determines the equitable title or interest
and are presumed always to have been contemplated by the parties. They
arise from the nature or circumstances of the consideration involved in a
transaction whereby one person thereby becomes invested with legal title
but is obligated inequity to hold his legal title for the benefit of another. On
the other hand, constructive trusts are created by the construction of equity
in order to satisfy the demands of justice and prevent unjust enrichment.
They arise contrary to intention against one who, by fraud, duress or abuse
of confidence, obtains or hold the legal right to property, which he ought
not, in equity, and good conscience, to hold.
However, it has been held that a trust will not be created when for the
purpose of evading the law prohibiting one from taking or holding real
property, he takes conveyance thereof in the name of a third person.327328
Thus when, under a homestead law, a certain person is disqualified from
obtaining a homestead patent over a certain property, it cannot be contended
that the actual possessor of the property is

507
art. 1447

merely a trustee of the disqualified person who claims to be the real beneficiary
of the homestead patent. This is so because the alleged trust is of doubtful
validity considering that it would promote a direct violation of the provisions
of the Public Land Act as regards the acquisition of a homestead patent. A
homestead applicant is required by law to occupy and cultivate the land for his
own benefit, and not for the benefit of someone else.3
Even if the situation falls under any of the provisions of this chapter, it is not
considered an implied trust if there is an express intention of the trustor to
create a trust,329 thereby making it an express trust. Hence, if a document exists
clearly involving a situation under Article 1453 but the same document states

326
Saltiga vs. Court of Appeals, G.R. No. 109307, November 25, 1999, 116 SCAD 170 , 319
SCRA 180.
327
Ibid.
328
Ibid.
329
Cuaycong vs. Cuaycong, G.R. No. L-21616, December 11, 1967, 21 SCRA 1192.
that the trustor is constituting an express trust to the beneficiary, such trust will
not be considered an implied trust but an express trust. 330

The principles of the general law of trust, in so far as they are not in conflict
with the Civil Code, the Code of Commerce, the Rules of Court and special
laws are likewise applicable as limitations to implied trusts. 331

In Policarpio vs. Court of Appeals,332333334 where a representative of the tenants

of an apartment, instead of negotiating the sale of the apartment for and on
behalf of the tenants as he was tasked to do under their association, bought the
property for himself to the detriment of the tenants, the Supreme Court ruled
that an implied trust was created and ordered the representative to execute a
deed of conveyance to the particular tenant who went to it for redress.
Pertinently, the Supreme Court said:
The conclusion we thus reach in this case, finding constructive trust under
Article 1447 of the New Civil Code, rests on the general principles on trust
which, by Article 1442 have been adopted or incorporated into our civil
law, to the extent that such principles are not inconsistent with the Civil
Code, other statutes and the Rules of Court.
This Court has ruled in the case of Sumaoang vs. Judge, RTC, Br. XXXI,
Guimba, Nueva Ecija that:

330
Id.
331
Article 1442 of the 1950 Civil Code.
332
G.R. No. 116211, March 7, 1997, 80 SCAD 302.
333
G.R. No. L-31569, September 28, 1973, 53 SCRA 168.
334
Castrillo vs. Court of Appeals, G.R. No. L-18046, March 31, 1964, 10 SCRA
582 ObligatiOns and COntraCts
Text and Cases
art. 1447

“A constructive trust, otherwise known as a trust ex

maleficio, a trust ex delicto, a trust de son tort, an involuntary
trust, or an implied trust, is a trust by operation of law which
arises contrary to intention and in invitum, against one who,
by fraud, actual or constructive, by duress or abuse of
confidence, by commission of wrong, or by any form of
unconscionable conduct, artifice, concealment or
questionable means, or who in any way against equity and
good conscience, either has obtained or holds the legal right
to property which he ought not, in equity or good conscience,
hold and enjoy. It is raised by equity to satisfy the demands
of justice. However, a constructive trust does not arise on
every moral wrong in acquiring or holding property or on
every abuse of confidence in business or other affairs;
ordinarily such a trust arises and will be declared only on
wrongful acquisitions or retentions of property of which
equity, in accordance with its fundamental principles and the
traditional exercise of its jurisdiction or in accordance with
statutory provision, takes cognizance. It has been broadly
ruled that a breach of confidence although in business or
social relations, rendering an acquisition or retention of
property by one person unconscionable against another,
raises a constructive trust.
And specifically applicable to the case at bar is the doctrine
that ‘A constructive trust is sub-stantially an appropriate
remedy against unjust enrichment. It is raised by equity in
respect of property, which has been acquired by fraud, or
where although acquired originally without fraud, it is
against equity that it should be retained by the person holding
it.’
The above principle is not in conflict with the New Civil
Code, Codes of Commerce, Rules of Court and special laws.
And since We are a court of law and of equity, the case at bar
must be resolved on the general principles of law on
constructive trust which basically rest on equitable
considerations in order to satisfy the demands of justice,
morality, conscience, and fair dealing and thus protect the
innocent against fraud. As the respondent court said, “it
behooves upon the courts to shield fiduciary relations against
every manner of chicanery or detestable design cloaked by
legal technicalities.”
Although the citations in the said case originated from American jurisprudence,
they may well be applied in our
art. 1448
 trust (n) 583
Implied Trusts
jurisdiction. “Since the law of trust has been more frequently applied in
England and in the United States than it has been in Spain, we may draw
freely upon American precedents in determining the effects of trusts,
especially so because the trust known to American and English
jurisprudence are derived from the fidei commissa of the Roman Law and
are based entirely upon civil law principles.”
Having concluded that private respondent wilfully violated the trust
reposed in him by his co-tenants, we consider it a serious matter of “justice,
morality, conscience and fair dealing” that he should not be allowed to
profit from his breach of trust. “Every person who through an act of
performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just or legal
ground, shall return the same to him.” Thus, petitioner is granted the
opportunity to purchase the property which should have been his long ago
had private respondent been faithful to his trust.

Article 1448. There is an implied trust when property is sold, and the legal
estate is granted to one party but the price is paid by another for the purpose
of having the beneficial in-terest of the property. The former is the trustee,
while the latter is the beneficiary. However, if the person to whom the title is
conveyed is a child, legitimate or illegitimate, of the one paying the price of
the sale, no trust is implied by law, it being dis-putably presumed that there
is a gift in favor of the child.

An illustration of the situation under this article is as follows: A sold to B his

shares of stock in a corporation. While the property is in the name of B, it is X
who pays the property so that he can make use of the benefits of the shares of
stock like the dividends. B is the trustee while X is the beneficiary. If X
expressly tells A and B that he intends to create a trust-relationship from the
transaction, it is clearly an express trust. However, if he does not do so, the law
nevertheless considers it an implied trust. If B is the legitimate or illegitimate
child of X, no trust is implied by law, it being disputably presumed that a gift
has been made to B by X.

In Padilla vs. Court of Appeals,8 a mortgagor sold the mortgaged property to

a third party who did not know that, by the time he bought it, it was already
foreclosed and consolidated in favor of the mortgagee. The latter later allowed
the reselling of the property to the original

549 .
arts. 1449-1450
584 ObligatiOns and COntraCts
Text and Cases
owner, but it was the third-party-buyer who paid the price in order that his
purchase of the same will push through. Subsequently, the original owners
confirmed their sale to the third-party buyer. The Supreme Court ruled that
under this situation an implied or resulting trust existed, thus:
x x x If the resale by the Government Service Insurance System upon
payment of the price of redemption by Nadera was made in favor of the
Padilla spouses, it was purely a matter of form since they were the
mortgage debtors, and the least that can be said under the circumstances is
that they should be considered as trustees under an implied or resulting
trust for the benefit of the real owner, namely, respondent Nadera. Article
1448 of the Civil Code says that “there is an implied trust when property is
sold, and the legal estate is granted to one party but the price is paid by
another for the purpose of having the beneficial interest of the property . .
. “The concept of implied trusts is that from the facts and circumstances of
a given case the existence of a trust relationship is inferred in order to effect
the presumed (in this case it is even expressed) intention of the parties or
to satisfy the demands of justice or to protect against fraud.

Article 1449. There is also an implied trust when a donation is made to a

person but it appears that although the legal estate is transmitted to the
donee, he neverthe-less is either to have no beneficial interest or only a part
thereof.

An illustrative case is as follows: A donation of a lot and the apartment on it

was made by M to N. However, despite the donation, M was still to get all the
rentals of the apartment. This is an implied trust where the trustee is the donee
and the beneficiary is the donor. This is a case of a resulting trust.

Article 1450. If the price of a sale of property is loaned or paid by one person
for the benefit of another and the conveyance is made to the lender or payor
to secure the payment of the debt, a trust arises by operation of law in favor
of the person to whom the money is loaned or for whom it is paid. The latter
may redeem the property and compel a conveyance thereof to him.

An illustration of this kind of implied trust is as follows: A wanted to buy the

property of Z. X made the payment using his own money for the benefit of A.
The money was a loan to A. When the purchase was made, the property was
placed under the name of X.
arts. 1451-1453

This was done so that X will have an assurance that the debt of A can be paid.
In this case, the trustee is the lender. A can later redeem the property by paying
 trust (n) 585
Implied Trusts
X the money paid for the property. Thereafter, A can compel X to convey the
property.

Article 1451. When land passes by succession to any person and he causes
the legal title to be put in the name of another, a trust is established by
implication of law for the benefit of the true owner.

An illustration of this kind of implied trust is as follows: A is the only

compulsory heir of M who dies. After payment of the debt of M, the net estate
of M should go to A. However, if A causes the title to the estate to be placed
in the name of Z, an implied trust is created for the benefit of A.

Article 1452. If two or more persons agree to purchase property and by

common consent the legal title is taken in the name of one of them for the
benefit of all, a trust is created by force of law in favor of the others in
proportion to the interest of each.

An illustration of this kind of implied trust is as follows: A, B and C are co-

owners of a particular land in equal parts but, by agree-ment of all of them, the
whole of the property is registered under the name only of C. In this case, C is
the trustee of the respective 1/3 shares of A and B. C is the trustee for the other
co-owners.9

Article 1453. When property is conveyed to a person in reliance upon his

declared intention to hold it for, or transfer it to another or the grantor, there
is an implied trust in favor of the person whose benefit is contemplated.

An illustration of this implied trust is as follows: A told B that the property

sold should be in his name because he shall only hold it for the benefit of X,
the real owner. An implied trust is created in favor of X.
Article 1454. If an absolute conveyance of property is made in order to
secure the performance of an obligation of the grantor toward the grantee, a
trust by virtue of law is established. If the fulfillment of the obligation is
offered by the grantor when it becomes due, he may demand the
reconveyance
G.R. No. L-19073, January 30, 1965, 13 SCRA 80; see also Fabian vs. Fabian, G.R. No. L-20449,
January 29, 1968, 22 SCRA 231; Bueno vs. Reyes, G.R. No. L-22587, arts. 1454-1456

of the property to him.

An illustration of this implied trust is as follows: M is indebted to N. A

particular property was conveyed to N by M to secure such indebtedness. N
holds the property only in trust for M. N is the trustee. Upon payment of the
debt, M can demand that the property be returned to his name.
586 ObligatiOns and COntraCts
Text and Cases
Article 1455. When any trustee, guardian or other person holding a
fiduciary relationship uses trust funds for the purchase of property and
causes the conveyance to be made to him or to a third person, a trust is
established by operation of law in favor of the person to whom the funds
belong.

An illustration of this implied trust is as follows: N constituted B as the trustee

of his funds for the benefit of Z. B, using the trust fund, purchased property
and placed it under his name or under the name of X. A trust is created and the
trustee is either B or X and the trust is in favor of Z.

Article 1456. If property is acquired through mistake or fraud, the person

obtaining it is, by force of law, considered a trustee of an implied trust for
the benefit of the person from whom the property comes.

An illustration of this implied trust is as follows: A fraudulently made X sign

an alleged loan agreement which actually turned out to be an absolute sale of
X’s property. The sale is voidable and a trust is deemed created by force of
law. The trustee is A and therefore is merely holding the property for the
benefit of X. Also in Gonzales vs. Jimenez10 where the buyer bought a property
from the seller who subsequently fraudulently caused the issuance of a patent
and a certificate of title to his son over the same property, the Supreme Court
held that the situation falls under Article 1456 and therefore an implied trust is
created in favor of the buyer. The seller and his son are deemed to hold the
property in trust for the benefit of the buyer who is the person prejudiced by
the fraudulent act.

April 28, 1969, 27 SCRA 1179; De Ocampo vs. Zaporteza, 53 Phil. 442; Gayondato vs. Treasurer
of the P.I., 49 Phil. 244; Gemora vs. De Guzman, G.R. No. L-19060, May 29 , 1964.
11
Ramos vs. Ramos, G.R. No. L-19872, December 3, 1974, 61 SCRA 284.
 . 1457

Article 1457. An implied trust may be proved by oral evidence.

An implied trust can be proven by oral evidence precisely because “it is

deducible from the nature of the transactions as matters of intent or which are
superinduced on the transaction by operation of law, independently of the
particular intention of the parties.”11
588 ObligatiOns and COntraCts art
Text and Cases
515

TITLE XVII. — EXTRA-CONTRACTUAL

OBLIGATIONS

Chapter 1

QUASI-CONTRACTS

Article 2142. Certain lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contract to the end that no one shall be unjustly
enriched or benefited at the expense of another. (n)

A quasi-contract is not an implied contract. There is no meeting of the minds

between parties. A juridical relation is created by a quasi-contract so that
nobody shall enrich himself at the expense of another.

Article 2143. The provisions for quasi-contracts in this Chapter do not

exclude other quasi-contracts which may come within the purview of the
preceding article. (n)

In Leung Ben vs. O’Brien,335 the Supreme Court described what types of quasi-
contracts are provided in the old Civil Code which discussion likewise applies
to the 1950 Civil Code provisions on quasicontracts, thus:
The two obligations treated in the chapter devoted to quasicontracts in the
Civil Code are: (1) the obligation incident to the officious management of
the affairs of other persons (gestion de negocios ajenos) and (2) the
recovery of what has been improperly paid (cobro de lo indebido). That the
authors of the Civil Code selected these two obligations for special
treatment does not signify an intention to deny the possibility of the
existence of other quasi-contractual obligations. As it is well said by the
commentator Manresa:

515

335
G.R. No. 13602, April 6, 1918, 38 Phil. 182.
 . 2143

“The number of the quasi-contracts may be indefinite as may be the

number of lawful facts, the generations of the said obligation; but the Code,
just as we shall see further on, in the impracticableness of enumerating or
including them all in a methodical and orderly classification, has concerned
itself with two only — namely the management of the affairs of other
persons and the recovery of things improperly paid — without attempting
by this to exclude the others.” (Manresa, 2nd ed., Vol. 12, p. 549)
It would indeed have been surprising if the authors of the
Code, in the light of the jurisprudence of more than a
thousand years, should have arbitrarily assumed to limit the
quasi-contracts to two obligations. The author from whom
we have just quoted further observes that the two obligations
in question were selected for special treatment in the Code
not only because they were the most conspicuous of the
quasi-contracts, but because they had not been the subject of
consideration in other parts of the Code.
(Opus citat., p. 550)
It is well recognized among civilian jurists that the quasicontractual
obligations cover a wide range. The Italian jurist, Jorge Giorgi, to whom
we have already referred, considers under this head, among other
obligations, the following: payments made upon an existing consideration
which fails; payments wrongly made upon a consideration which is
contrary to law, or opposed to public policy; and payments made upon a
vicious consideration or obtained by illicit means. (Giorgi, Teoria de las
Obligaciones, Vol. 5, Art. 130)
517

SECTION 1. — Negotiorum Gestio

Article 2144. Whoever voluntarily takes charge of the agency or

management of the business or property of another, without any power from
the latter, is obliged to continue the same until the termination of the affair
and its incidents, or to require the person concerned to substitute him, if the
owner is in a position to do so. This juridical relation does not arise in either
of these instances:
(1) When the property or business is not neglected or abandoned;
(2) If in fact the manager has been tacitly authorized by the owner;
590 ObligatiOns and COntraCts art
Text and Cases
In the first case, the provisions of Articles 1317, 1403, No. 1 , and 1404
regarding unauthorized contracts shall govern.
In the second case, the rules on agency in Title X of this Book shall be
applicable. (1888a)

Negotiorum gestio is a quasi-contract which should not be performed for

profit. An illustration of this situation is as follows: A abandons his property,
a Mango plantation, and his business therein. B decides to manage the business
and the property so that the business will earn upon harvest time. B does this
without any authority from A. B therefore becomes an officious manager
without expectation of any profit or remuneration. B must continue managing
the property or the business until it is terminated. He can also require A to have
him (B) substituted if A is in a position to do so. If the property is not
abandoned, all acts of A unauthorized and any contract entered into by him
shall be generally unenforceable. If B were authorized, the law on agency shall
apply.

In Sison and Azarraga vs. Balgos,336 where the guardian of certain minors died
without paying the redemption price on behalf of the minors with respect to a
certain property to which the said minors

517
. 2144

were entitled, and where the uncle of the said minors took upon himself to
deposit the redemption price in court so that the period to redeem will not
prescribe, and where the authority of the said uncle was questioned, the
Supreme Court ruled that there was a quasicontract created, and therefore the
act of the uncle in preserving the property of the minors was valid. Pertinently,
the Supreme Court ruled:
In the lamentable situation in which these poor children were left from the
2nd of May, when their guardian Isidro Azarraga died, until the 17th of the
same month, on which date the period for redemption expired, the law was
not obliged to abandon them to their faith. Leodegario Azarraga was
reduced to the expedient of voluntarily undertaking to carry out a business
matter for another and effected the redemption by depositing the price
thereof.
“The following are circumstances under which one may undertake to carry
out a business matter for another (gestion de negocios ajenos)” says
Manresa, “and complete the juridic conception which we have just given

336
G.R. No. L-10305, September 5, 1916, 34 Phil. 885.
of such undertaking: (1) That they relate to determined things or affairs,
and that there be no administrator or representative of the owner who is
charged with the management thereof; (2) that it be foreign to all idea of
express or tacit mandate on the part of the owner, for it very often may
happen even without his knowledge; it is authorized by Law 26, title 12, of
the 5th Partida and continues to be authorized by the Code, which latter, in
fulfillment of base 21, aforecited, of the law of May 18, 1888, maintained
the doctrine sanctioned by the old law; and (3) that the actor be inspired by
the beneficent idea of averting losses and damages to the owner or to the
interested party through the abandonment of the things that belong to him
or of the business in which he may be interested, that is, that administration
is not for profit, or, as stated in Law 29, of the title and Partida cited, with
the avaricious idea of gain. ‘Without these circumstances,’ says Sanchez
Roman, ‘the quasi-contract with which we are now dealing does not exist;
and, on the contrary, reduced to its just and natural limits, it is of
unquestionable utility’ (12 Manresa, 547 and 548).’ ”
On the following page, 549, he adds:
“And as the law cannot and should not presume that the
administrator undertakes the venture for unlawful and
immoral purposes, but simply for the good of the owner or of
the persons who are interested in the things or affairs
affected, it confers upon the administrator the capacity of
mandatory, and in such capacity requires of him that he
fulfills his trust
592 ObligatiOns and COntraCts
Text and Cases
art. 2144

under conditions similar to those under which the mandatory would fulfill
his own * * *”
In effect, Article 1888 of the Civil Code provides:
“A person who voluntarily takes charge of the agency or
administrator of the business of another, without
authorization, is obliged to continue to manage the same until
the business and its incidents are terminated, or to notify the
interested person in order that the latter may come to
substitute him in his management, should he be in a condition
to do so for himself.”
That is what Leodegario Azarraga did. He took steps to do what was most
indispensable, namely, to deposit the redemption price in order to prevent
the action from prescribing, and as the minors or owners of the land could
not themselves provide for its continuance, Azarraga called upon the
guardian ad bona, Tomas Sison, to undertake the matter in addition to his
own duties as guardian for the persons of the minors, in which capacity
Azarraga had also been appointed on the 24th of the same month of May
1991. And these two are the persons who continued the action for
redemption after the prescription of the action had been prevented by
means of the deposit of the price of the redemption in conformity with
Section 465 of the Code of Civil Procedure.
The defendant’s third defense is without merit. It consists in the assertion
that the minors could not contract nor bind themselves with Azarraga
because Article 1893 of the Civil Code expressly provides that: “The owner
of property or a business who avails himself of the advantages of the
administration of another, even when he has not expressly ratified it, shall
be liable for the obligations contracted for his benefit, and he shall
indemnify the administrator for the necessary and useful expenses which
he may have in charge of his duties. The same obligation shall pertain to
said owner when the object of said administration should have been to
avoid any imminent or manifest damage, even when no profit results
therefrom.” Furthermore, the minor, although usually incapable of
contracting or binding himself, cannot disavow the efficacy of the
contracted obligation when it redounds to his benefit, because of the
principle that no one may enrich himself to the prejudice of another.
Article 2145. The officious manager shall perform his duties with all the
diligence of a good father of a family, and pay the damages which through
his fault or negligence may be suffered by the owner of the property or
business under
arts. 2145-2146
 Extra-COntraCtual ObligatiOns 593
Quasi-Contracts
Sec. 1 — Negotiorum Gestio
management.
The courts may, however, increase or moderate the indemnity according to
the circumstances of each case. (1889a)

The law requires that the degree of diligence to be exercised by the officious
manager is that exercised by a good father of a family. This means the ordinary
degree of care which a reasonable and prudent person will do given the same
circumstances the officious manager is in. If he causes damage to the property
of the owner, he shall be liable to such owner. An officious manager is in a
sense an intruder in the business or the property of the owner. However, if his
intrusion is with the objective of preserving, managing and taking care of the
property without any intent to gain, a quasi-contract is created. He cannot
escape liability by stating that there was no obligation on his part to take over
the property or business in the first place. Once he takes over, he is charged
with the responsibility to take care of it.

On the other hand, if indeed the owner suffers damage due to the negligence
or fault of the officious manager, the court can increase or moderate the
indemnity according to the circumstances.

Article 2146. If the officious manager delegates to another person all or

some of his duties, he shall be liable for the acts of the delegate, without
prejudice to the direct obligation of the latter toward the owner of the
business.
The responsibility of two or more officious managers shall be solidary,
unless the management was assumed to save the thing or business from
imminent danger. (1890a)

The officious manager can delegate the management of the properties to

another. However, he will be responsible for the acts of the said delegate. Such
person to whom the management has been delegated shall likewise be directly
responsible to the owner. The liability of two or more officious managers is
solidary. The owner can seek the full amount of damages from anyone of the
officious managers.

Article 2147. The officious manager shall be liable for any fortuitous event:
(1) If he undertakes risky operations which the owner was not accustomed
to embark upon;
(2) If he has preferred his own interest to that of the
art. 2147
594 ObligatiOns and COntraCts
Text and Cases
owner;
(3) If he fails to return the property or business after demand by the owner;
(4) If he assumed the management in bad faith. (1891a)

Generally, the happening of a fortuitous event affecting an obligation excuses

the person charged from performing the obligation. In case of negotiorum
gestio, Article 2148 does not excuse the officious manager from liability due
to fortuitous event.

The first case is when the officious manager undertakes risky operations
which the owner is not accustomed to embark upon. Thus, if the business of
the owner is simply providing a warehouse for dolls and other toys, and the
officious manager decides to allow the storing of highly inflammable materials
in the warehouse, the officious manager shall be liable if the warehouse is
burned due to a fortuitous event, such as the striking of lightning.
The second case is when the officious manager has preferred his own interest
to that of the owner. For example, the officious manager takes over the business
of the owner of warehousing goods. In the meantime, the officious manager
also stores some of his goods in the warehouse. In the event that a flood occurs,
and he first saves his goods, before the goods of the owner and the latter’s
clients, from being destroyed, the officious manager will be liable for the loss
due to the fortuitous event.
The third situation is when the officious manager fails to return the property
or business after demand by the owner. Once the owner demands the return of
the business, the officious manager should readily return it. He has no right to
keep it for himself. Hence, if the property is destroyed by fortuitous event, the
officious manager will be held liable for his act of unduly retaining what is not
his.

The fourth situation is when the officious manager assumes the management
in bad faith. For example, the officious manager takes over the warehousing
business of the owner so that he can get the clients of the owner for his
(officious manager’s) own warehousing business. Such officious manager
shall be liable for the loss of the warehousing business of the owner caused by
a fortuitous event.

Article 2148. Except when the management was assumed to save the
property or business from imminent danger, the officious manager shall be
liable for fortuitous events:
arts. 2148-2150
 Extra-COntraCtual ObligatiOns 595
Quasi-Contracts
Sec. 1 — Negotiorum Gestio
(1) If he is manifestly unfit to carry on the management;
(2) If by his intervention he prevented a more competent person taking up
the management. (n)

The officious manager has no business taking over the abandoned property or
business of somebody if he has no knowledge or is not competent to undertake
the management. Hence, if a teacher takes on the farming business of another,
he shall be liable for any damage caused by a fortuitous event. He should have
been prudent enough to know that he cannot possibly undertake something
which he has no competence in. If another person who is competent to take
over the farming business decides to manage the same and the said teacher
prevents him from doing so on the ground that he has been there first, such
teacher will be liable if the property is destroyed by a fortuitous event.
However, if the said teacher manages the said farming business to save it from
imminent danger, he will not be liable for damages caused by a fortuitous
event.

Article 2149. The ratification of the management by the owner of the

business produces the effects of an express agency, even if the business may
not have been successful. (1892a)

Ratification means that the owner agrees to whatever the officious manager
has done. It cures even the defects which the officious manager has committed.
If ratification happens, the law on agency applies and even if the business is
not successful, such agency by virtue of ratification shall be recognized.

Article 2150. Although the officious management may not have been
expressly ratified, the owner of the property or business who enjoys the
advantages of the same shall be liable for obligations incurred in his interest,
and shall reimburse the officious manager for the necessary and useful
expenses and for the damages which the latter may have suffered in the
performance of his duties.
The same obligation shall be incumbent upon him when the management
had for its purpose the prevention of an imminent and manifest loss,
although no benefit may have been derived. (1893)

The owner must always reimburse the officious manager for all expenses
which have inured for the benefit or advantage of the owner. Hence, if the
officious manager pays taxes on the property so
arts. 2151-2152
596 ObligatiOns and COntraCts
Text and Cases
that it will not be foreclosed, the owner must reimburse the officious manager
for the payment made by the latter. Even if no benefit has been derived but the
officious manager takes over to save the property or business from imminent
loss, the officious manager should likewise be reimbursed for obligations
incurred for the owner’s interest, including useful and necessary expenses.

Article 2151. Even though the owner did not derive any benefit and there
has been no imminent and manifest danger to the property or business, the
owner is liable as under the first paragraph of the preceding article,
provided: (1) The officious manager has acted in good faith, and
(2) The property or business is intact, ready to be returned to the owner. (n)

Whether or not there is benefit and whether or not there is imminent danger
are immaterial for purposes of reimbursing the officious manager of useful and
necessary expenses and of payment made in furtherance of the owner’s interest
if the officious manager has acted in good faith and the property or business is
intact, ready to be returned to the owner. The very fact that the property is intact
means that the officious manager has prudently and with due diligence
managed the property.

Article 2152. The officious manager is personally liable for contracts which
he has entered into with third persons, even though he acted in the name of
the owner, and there shall be no right of action between the owner and third
persons. These provisions shall not apply:
(1) If the owner has expressly or tacitly ratified the management; or
(2) When the contract refers to things pertaining to the owner of the
business. (n)
If the officious manager decides to manage the property or business, and for
this reason, he buys some decorations to be placed in the property, such
officious manager shall be the only one responsible for the payment of such
decorations even if he acts in the name of the owner. The seller of the
decorations has no right of action against the owner in the event the officious
manager does not pay for them. However, the owner shall pay for them if he
has expressly or tacitly ratifies the act of the officious manager. If the buying
and selling of
 Extra-COntraCtual ObligatiOns 597
Quasi-Contracts
Sec. 1 — Negotiorum Gestio
. 2153

decoration is the very object of the business of the owner, the owner shall be
liable.

Article 2153. The management is extinguished:

(1) When the owner repudiates it or puts an end thereto;
(2) When the officious manager withdraws from the management, subject
to the provisions of Article 2144;
(3) By the death, civil interdiction, insanity or insol-vency of the owner or
the officious manager. (n)

The management is extinguished if the owner repudiates it or puts an end to

it. The owner still has the power of dominion over his property or his business.
Hence his decision must prevail over that of the officious manager. If owner
does not want the officious manager, this decision should prevail. In Benedicto
vs. Board of Adminis-trators,337 the Supreme Court had the occasion to apply
the rules on negotiorum gestio especially the occasion when it should be
terminated thus:
After the February Revolution in 1986, the properties, assets, and business
of Broadcast City were abandoned, leaving no one to look after them.
When the PCGG was created in February 1986, its chairman, now Sen.
Jovito Salonga, requested the Ministry of National Defense and the
Ministry of Infor-mation, in the interest of national security, to sequester
Broadcast City pending clarification of its uncertain financial condition, as
well as its legal and beneficial ownership.
In compliance with the PCGG’s recommendation, the Ministry of National
Defense on March 6, 1986, requested the Minister of Information to
immediately undertake the management and administration of the
sequestered facilities.
On April 8, 1986, President Corazon C. Aquino issued Executive Order
No. 11 creating a Board of Administrators “to manage and operate the
business and affairs of Broadcast City.” Executive Order No. 11 provided
that the Board of Administrators shall “function in all respects like a Board
of Directors of a corporation under the Corporation Code,” exercise “all
the powers imposed on trustees under the principles of the general law on
trust and officious managers under the law on extracontractual obligations”
(Sec. 3), and fixed its term existence to

337
G.R. No. 87710, March 31, 1992, 207 SCRA 659.
598 ObligatiOns and COntraCts art
Text and Cases
art. 2153

be “coterminous with the investigation of the seized assets by the

Presidential Commission on Good Government and until final disposition
of the seized assets in accordance with the findings of the Commission.”
(Sec. 7) The members of the board were to hold office “at the pleasure of
the President.”
Pursuant to Section 1 of Executive Order No. 11, the Minister of
Information appointed the members of the Board of Administrators on
April 11, 1986.
The petitioner filed in the Supreme Court an action against the PCGG to
annul the sequestration, and to recover the management, of Broadcast City
(G.R. No. 74974 entitled, “Roberto S. Benedicto vs. PCGG, et al.”). This
case was transferred to, and is now pending in, the Sandiganbayan.
On December 18, 1986, the petitioner and the PCGG allegedly entered into
an agreement to reorganize and reinstate the Boards of Directors of RPN,
BBC, IBC and other related media corporations. Two-thirds (2/3) of the
members of the reorganized Boards of Directors would be nominees of the
petitioner. Said boards of directors would “exercise all powers of
administration and management of the sequestered com-panies.”
Pursuant to that agreement, a reorganized Board of
Directors was elected for each of the Broadcast City corporations. x x x

However, the respondent Board of Administrators refused to relinquish the

management, operation, and control of Broadcast City to the reorganized
Boards of Directors. This petition for prohibition and mandamus was filed
against the Board of Administrators by Benedicto, as controlling
stockholder of the “Broadcast City” corporations.
In the light of this ruling, which we reiterated in the Cojuangco cases, and
in view of the reorganization of the Boards of Directors of the RPN, IBC
and BBC television stations to administer and manage those sequestered
Broadcast City companies, the authority of the Board of Administrators as
“trustee and officious manager” of the same corporations, has become
functus oficio. In negotiorum gestio, the authority of the officious manager
of a property or business is extinguished when the owner demands the
return of the same (Art. 2153, Civil Code). With the reorganization of the
respective Boards of Directors of the Broadcast City companies, where
PCGG controls 2/3 of the board membership, the Board of Administrators
has become a supernumerary. The reason for its existence has ceased. This
view is bolstered by the fact that Broadcast City is not a purely commercial
venture but a media enterprise covered by
. 2153
 Extra-COntraCtual ObligatiOns 599
Quasi-Contracts
Sec. 1 — Negotiorum Gestio
the freedom of the press provision of the Constitution, and that under our
ruling in Liwayway Publishing, Inc., et al. vs. PCGG, et al. (160 SCRA
716) the Government, through the PCGG, may not lawfully intervene and
participate in the management and operations of a private mass media to
maintain its freedom and independence as guaranteed by the Constitution
(Art. XVI, Sec. 11 , 1987 Constitution ).
The officious manager can withdraw from the property or the business and this
will put an end to his management. However, he must require the person
concerned or the owner to substitute him if such owner is in a position to do
so. If the owner is not in a position to do so, he must continue and withdraw
only upon the termination of the affair and its incidents.

By the death of the officious manager, his duty naturally ceases. Civil
interdiction is an accessory penalty to a principal penalty as punishment for the
commission of a crime and it deprives the offender during the time of his
sentence of the rights of parental authority, or guardianship, either as to the
person or property of any ward, of marital authority, of the right to manage his
property and of the right to dispose of such property by any act or any
conveyance inter vivos.338 Insanity and insolvency clearly restrict the capacity
to act of an individual. Insanity deprives the person of reason, while insol-
vency deprives the person of the financial liquidity to manage his affairs as his
liabilities surpass his assets.

338
Article 34 of the Revised Penal Code of the Philippines.
 527

SECTION 2. — Solutio Indebiti

Article 2154. If something is received when there is no right to demand it,

and it was unduly delivered through mistake, the obligation to return it
arises. (1895)

Article 2154 deals with solutio indebiti. In Velez vs. Balzaraza339 where it was
found out that an obligor paid money which did not constitute either payment
of rentals or interest and therefore was not due, the Supreme Court, applying
Article 1895 of the Old Civil Code which is now Article 2154 of the present
Civil Code, ruled that there was solutio indebiti and further explained:
The liability of plaintiff to return the excess payments is in keeping with
Article 1895 of the Civil Code which provides that, “when something is
received which there is no right to collect, and which by mistake has been
unduly delivered, the obligation to restore it arises.” The two requisites are
present: (1) there is no right to collect these excess sums; and (2) the
amounts have been paid through mistake by defendants. Such mistake is
shown by the fact that the parties in their contracts never intended that
either rents or interest should be paid, and by the further fact that when
these payments were made, they were intended by defendants to be applied
to the principal, but they overpaid the amounts loaned to them.
Article 1895 of the Civil Code above quoted, is therefore applicable. This legal
provision, which determines the quasicontract of solutio indebiti, is one of the
concrete manifesta- tions of the ancient principle that no one shall enrich
himself unjustly at the expense of another. In the Roman Law Digest the maxim
was formulated thus: “Jure naturae acquum est, neminem cum alterius
detrimento et injuria fieri locupletiorem.” And the Partidas declared: “Ninguno
non deue enrique cerse tortizeramente con dano de otro.” Such axiom has grown
through the centuries in legislation, in the science of law and in court decisions.
The lawmaker has found it one of the helpful guides in framing statutes and
codes. Thus, it is unfolded in many articles

527

339
G.R. No. 48389, July 27, 1942, 73 Phil. 630.
art Extra-COntraCtual ObligatiOns 601
Quasi-Contracts
Sec. 2 — Solutio Indebiti
. 2154

scattered in the Spanish Civil Code. (See for example, Articles 360, 361,
464, 647, 648, 797, 1158, 1163, 1295, 1303, 1304, 1893 and 1895, Civil
Code). This time-honored aphorism has also been adopted by jurists in their
study of the conflict of rights. It has been accepted by the courts, which
have not hesitated to apply it when the exigencies of right and equity
demanded its assertion. It is a part of that affluent reservoir of justice upon
which judicial discretion draws whenever the statutory laws are inadequate,
because they do not speak or do so with a confused voice.
In City of Cebu vs. Judge Piccio, etc. & Caballero,340 the Supreme Court again
had the occasion to restate the indispensable requisites of the juridical relation
of solutio indebiti as follows:
a) he who paid was not under obligation to do so; and (b) that the payment
was made by reason of an essential mistake of fact (Hoskyn vs. The
Goodyear Tire, etc., CA, 40 Off. Gaz., Supp. 11, 245; Velez vs. Balzarza,
73 Phil. 630).
In Adres vs. Manufacturers Hanover & Trust Corp., 341 the Supreme Court
decided an interesting case which dealt on the issue of solutio indebiti. The
pertinent portions of the case are as follows:
Petitioner, using the business name “Irene Wearing Apparel,” was engaged
in the manufacturer of ladies garments, children’s wear, men’s apparel and
linens for local and foreign buyers. Among its foreign buyers was Facets
Funwear, Inc. ( hereinafter referred to as FACETS) of the United States.
In the course of the business transaction between the two, FACETS from
time to time remitted certain amounts of money to petitioner in payment
for the items it had purchased. Sometime in August 1980, FACETS
instructed the First National State Bank of New Jersey, Newark, New
Jersey, U.S.A. (here-inafter referred to as FNSB) to transfer $10,000.00 to
petitioner via Philippine National Bank, Sta. Cruz Branch, Manila (here-
inafter referred to as PNB).
Acting at said instruction, FNSB instructed private respondent Manufacturers
Hanover and Trust Corporation to effect the above-mentioned transfer through
its facilities and to charge the amount to the account of FNSB with private
respondent. Although private respondent was able to send a telex to PNB to
pay petitioner $10,000.00 through the Pilipinas Bank, where petitioner had an
account, the payment was not effected immediately because the payee
designated in the telex

340
G.R. Nos. 48389 and L-14876, December 31, 1960, 110 Phil. 558.
341
G.R. No. 82670, September 15, 1989, 177 SCRA 618.
602 ObligatiOns and COntraCts art
Text and Cases
. 2154

was only “Wearing Apparel.” Upon query by PNB, private respondent sent
PNB another telex dated August 27, 1980 stating that the payment was to
be made to “Irene’s Wearing Apparel.” On August 28, 1980, petitioner
received the remittance of $10,000.00 through Demand Draft No. 225654
of the PNB.
Meanwhile, on August 25, 1980, after learning about the delay in the
remittance of the money to petitioner, FACETS informed FNSB about the
situation. On September 8, 1980, unaware that petitioner had already
received the remittance, FACETS informed private respondent about the
delay and at the same time amended its instruction by asking it to effect the
payment through the Philippine Commercial and Industrial Bank (
hereinafter referred to as PCIB) instead of PNB.
Accordingly, private respondent, which was also unaware that petitioner
had already received the remittance of $10,000.00 from PNB instructed the
PCIB to pay $10,000.00 to petitioner. Hence, on September 11, 1980,
petitioner received a second $10,000.00 remittance.
Private respondent debited the account of FNSB for the second $10,000.00
remittance effected through PCIB. However, when FNSB discovered that
private respondent had made a duplication of the remittance, it asked for a
credit of its account in the amount of $10,000.00. Private respondent
complied with the request.
Private respondent asked petitioner for the return of the second remittance
of $10,000.00 but the latter refused to pay. On May 12, 1982 a complaint
was filed with the Regional Trial Court, Branch CV, Quezon City which
was decided in favor of petitioner as defendant. The trial court ruled that
Art. 2154 of the New Civil Code is not applicable to the case because the
second remittance was made not by mistake but by negligence and
petitioner was not unjustly enriched by virtue thereof [Records, p. 234]. On
appeal, the Court of Appeals held that Art. 2154 is applicable and reversed
the RTC decision.
xxx xxx xxx
The sole issue in this case is whether or not the private respondent has the
right to recover the second $10,000.00 remittance it had delivered to
petitioner. The resolution of this issue would hinge on the applicability of
Art. 2154 of the New Civil Code which provides that:
Art. 2154. If something received when there is no right to
demand it, and it was unduly deli-vered through mistake, the
obligation to return it arises. x x x x x x x x x
. 2154
art Extra-COntraCtual ObligatiOns 603
Quasi-Contracts
Sec. 2 — Solutio Indebiti
For this article to apply the following requisites must concur: “(1) that he
who paid was not under obligation to do so; and (2) that payment was made
by reason of an essential mistake of fact” [City of Cebu vs. Piccio, 110
Phil. 558, 563 (1960)].
It is undisputed that private respondent delivered the second $10,000.00
remittance. However, petitioner contends that the doctrine of solutio
indebiti does not apply because its requisites are absent.
First, it is argued that petitioner had the right to demand and therefore to
retain the second $10,000.00 remittance. It is alleged that even after the
two $10,000.00 remittances are credited to petitioner’s receivables from
FACETS, the latter allegedly still had a balance of $49,324.00. Hence, it is
argued that the last $10,000.00 remittance being in payment of a
preexisting debt, petitioner was not thereby unjustly enriched.
The contention is without merit.
The contract of petitioner, as regards the sale of garments and other textile
products, was with FACETS. It was the latter and not private respondent
which was indebted to petitioner. On the other hand, the contract for the
transmittal of dollars from the United States to petitioner was entered into
by private respondent with FNSB. Petitioner, although named as the payee
was not privy to the contract of remittance of dollars. Neither was private
respondent a party to the contract of sale between petitioner and FACETS.
There being no contractual relation between them, petitioner had no right
to apply the second $10,000.00 remittance delivered by mistake by private
res-pondent to the outstanding accounts of FACETS.
Petitioner next contends that the payment by respondent bank of the
second $10,000.00 remittance was not made by mistake but was the result
of negligence of its employees.
In connection with this the Court of Appeals made the following findings of
facts.
The fact that Facets sent only one remittance of $10,000.00 is not disputed.
In the written interrogatories sent to the First National State Bank of New
Jersey through the Consulate General of the Philippines in New York,
Adelaide C. Schachel, the investigation and reconciliation clerk in the said
bank testified that a request to remit a payment for Facets Funwear, Inc.
was made in August, 1980. The total amount which the First National State
Bank of New Jersey actually requested the plaintiff-appellant
Manufacturers Hanover & Trust Corporation to remit to Irene’s Wearing
Apparel was US$10,000.00. Only one remittance was requested by First
National State Bank of New
. 2154

Jersey as per instruction of Facets Funwear (Exhibit “J,” pp. 4-5).

That there was a mistake in the second remittance of US$10,000.00 is
borne out by the fact that both remittance have the same reference invoice
604 ObligatiOns and COntraCts art
Text and Cases
number which is 26380. (Exhibits “A-1-Deposition of Mr. Stanley
Panasow” and “A-2-Deposition of Mr. Stanley Panasow”).
Plaintiff-appellant made the second remittance on the wrong assumption
that defendant-appellee did not receive the first remittance of
US$10,000.00. [Rollo, pp. 26-27]
It is evident that the claim of petitioner is anchored on the appreciation of
the attendant facts which petitioner would have this Court review. The
Court holds that the finding by the Court of Appeals that the second
$10,000.00 remittance was made by mistake, being based on substantial
evidence, is final and conclusive.
xxx xxx xxx
Petitioner invokes the equitable principle that when one of two innocent
persons must suffer by the wrongful act of a third person, the loss must be
borne by the one whose negligence was the proximate cause of the loss.
The rule is that principles of equity cannot be applied if there is a provision
of law specifically applicable to a case Phil. Rabbit Bus Line, Inc. vs.
Arciaga, G.R. No. L-29701, March 16, 1987, 148 SCRA 433; Zabat, Jr.
vs. Court of Appeals, G.R. No. L-36958, July 10, 1986, 142 SCRA 587;
Rural Bank of Parañaque, Inc. vs. Remolado, G.R. No. 62051, March 18,
1985, 135 SCRA 409; Cruz vs. Pahati, 98 Phil. 788 (1956). Hence, the
Court in the case of De Garcia vs. Court of Appeals, G.R. No. L-20264,
January 30, 1971, 37 SCRA 129, citing Aznar vs. Yapdiangco, G.R. No. L-
18536, March 31, 1965, 13 SCRA 486, held:
. . . The common law principle that where one of two innocent persons must
suffer by a fraud perpetrated by another, the law imposes the loss upon the
party who, by his misplaced confidence, has enabled the fraud to be
committed, cannot be applied in a case which is covered by an express
provision of the new Civil Code, specifically Article 559. Between a
common law principle and a statutory provision, the latter must prevail in
this jurisdiction. [ at p. 135]
Having shown that Art. 2154 of the Civil Code, which embodies the
doctrine of solutio indebiti, applies in the case at bar, the Court must reject
the common law principle invoked by petitioner.
. 2155

Finally, in her attempt to defeat private respondent’s claim petitioner

makes much of the fact that from the time the second $10,000.00
remittance was made, five hundred and ten days had elapsed before private
respondent demanded the return thereof. Needless to say, private
respondent instituted the complaint for recovery of the second $10,000.00
remittance well within the six years prescriptive period for actions based
upon a quasi-contract [ Art. 1145 of the New Civil Code ].
art Extra-COntraCtual ObligatiOns 605
Quasi-Contracts
Sec. 2 — Solutio Indebiti
Article 2155. Payment by reason of a mistake in the construction or
application of a doubtful or difficult question of law may come within the
scope of the preceding article. (n)

Solutio indebiti, generally involves only a mistake of fact. However, under

Article 2155, a mistake of law is allowed if the mistake is brought about by the
construction or application of a doubtful or difficult question of law. In
Gonzalo Puyat and Sons, Inc. vs. City of Manila where the appellee, by mistake
paid taxes which were not due as the appellant was exempted from the same,
and the said mistake in payment was, among others, the result of a complicated
correlation and application of various municipal and national laws, the
Supreme Court ruled that there was solutio indebiti by stating:
In refutation of the above stand of appellants, appellee avers that the
payments could not have been voluntary. At most, they were paid
“mistakenly and in good faith” and “without protest in the erroneous belief
that it was liable thereof.” Voluntarines is incompatible with protest and
mistake. It submits that this is a simple case of “solutio indebiti.”
Appellants do not dispute the fact that appellee-company is exempted from
the payment of the tax in question. This is manifest from the reply of
appellant City Treasurer stating that sales of manufactured products at the
factory site are not taxable either under the Wholesalers’ Ordinance or
under the Retailers’ Ordinance. With this admission, it would seem clear
that the taxes collected from appellee were paid, thru an error or mistake,
which places said act of payment within the pale of the new Civil Code
provision on solutio indebiti. The appellant City of Manila, at the very start,
notwithstanding the Ordinance imposing the Retailer’s Tax, had no right to
demand payment thereof.
“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. 2154,
NCC).
. 2155

Appellee categorically stated that the payment was not voluntarily made
(a fact found also by the lower court), but on the erroneous belief, that they
were due. Under this circum-stances, the amount paid, even without protest
is recoverable. “If the payer was in doubt whether the debt was due, he may
recover if he proves that it was not due” (Art. 2156, NCC). Appellee had
duly proved that taxes were not lawfully due. There is, therefore, no doubt
that the provisions of solutio indebiti, of the new Civil Code, apply to the
admitted facts of the case.
With all, appellant quoted Manresa as saying: “x x x De la misma opinion
son el Sr. Sanchez Roman y el Sr. Galcon, et cual afirma que si la paga se
hizo por error de derecho, ni existe el cuasicontrato ni esta obligado a la
restitucion el que cobro, aunque no se debiera lo que se pago” (Manresa,
606 ObligatiOns and COntraCts art
Text and Cases
Tomo 12, paginas 611-612). This opinion, however, has already lost its
persuasive-ness, in view of the provisions of the Civil Code, recognizing
“error de derecho” as a basis for the quasi-contract, of solutio indebiti.
“Payment by reason of a mistake in the construction or
application of a doubtful or difficult question of law may
come within the scope of the preceding article.” (Art. 2155)
There is no gainsaying the fact that the payments made by appellee was
due to a mistake in the construction of a doubtful question of law. The
reason underlying similar provisions, as applied to illegal taxation, in the
United States, is expressed in the case of Newport vs. Ringo, 37 Ky. 635.
636; 10 S.W. 2, in the following manner:
It is too well settled in this state to need the citation of
authority that if money be paid through a clear mistake of law
or fact, essentially affecting the rights of the parties, and
which in law or conscience was not payable, and should not
be retained by the party receiving it, it may be recovered.
Both law and sound morality so dictate. Especially should
this be the rule as to illegal taxation. The taxpayer has no
voice in the imposition of the burden. He has the right to
presume that the taxing power has been lawfully exercised.
He should not be required to know more than those in
authority over him, nor should he suffer loss by complying
with what he bona fide believes to be his duty as a good
citizen. Upon the contrary, he should be promoted to its ready
performance by refunding to him any legal exaction paid by
him in ignorance of its illegality; and certainly, in such a case,
if be subject to a penalty for non-payment, his
 Extra-COntraCtual ObligatiOns 607
Quasi-Contracts
Sec. 2 — Solutio Indebiti
arts. 2156-2157

compliance under belief of its legality, and without awaiting

a resort to judicial proceedings should not be regarded in law
as so far voluntary as to affect his right of recovery.”
“Every person who through an act or performance by another, or any other
means, acquires or comes into possession of something at the expense of
the latter without just or legal grounds, shall return the same to him” (Art.
22, Civil Code). It would seem unedifying for the government (here the
City of Manila), that knowing it has no right at all to collect or to receive
money for alleged taxes paid by mistake, it would be reluctant to return the
same. No one should enrich himself unjustly at the expense of another.

Article 2156. If the payer was in doubt whether the debt was due, he may
recover if he proves that it was not due. (n)

For example, a debtor pays a creditor prematurely because he is not

sure whether the debt is already due. The creditor accepts it . The debtor can
recover what he has paid prior to the due date of the debt provided that the
demand for reimbursement is not made after the debt has become due. This is
a case of solutio indebiti.

Article 2157. The responsibility of two or more payees, when there has been
payment of what is not due, is solidary. (n)

An illustration of this article is as follows: A is indebted to B and C for P2,000.

The obligation is of a solidary nature such that A can pay only to one of them
the whole obligation, and the debt is considered paid as to both. Thus, if A pays
B the amount of P2,000, the debt is considered paid. It is up to C to claim from
B his share of the credit which is P1,000. If there is payment by mistake, A can
recover from either B or C the amount which he has paid. This is true, even if
in the meantime, C has not yet obtained his P1,000.

Article 2158. When the property delivered or money paid belongs to a third
person, the payee shall comply with the provisions of Article 1984. (n)

An illustration of this article is as follows: A is obliged to pay B his obligation

by giving B a watch. Despite the fact that the payment is not yet due, A gives
B the watch which turns out to be stolen from X. At the time of his receipt of
the watch, B has no obligation to ask A questions as to who owns the watch.
However, if B later finds out that X really owns the watch, B must advise X
that he (B) is in possession
arts. 2158-2159
608 ObligatiOns and COntraCts
Text and Cases
of his (X’s) watch. X must claim the watch within one month from the advice.
If X does not claim the watch, B is excused from all liability if, A, because of
solutio indebiti, claims back the watch, and B gives back the watch to A.
However, if at the time A gives the watch of B, the latter has reasonable
grounds to believe that it has been acquired unlawfully, B can return the same
to A. The above situation is pursuant to Article 1984 of the 1950 Civil Code
which provides:
Article 1984. The depositary cannot demand that the depositor prove his
ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen and who its
true owner is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it within the
period of one month, the depositary shall be relieved of all responsibility
by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the thing has not
been lawfully acquired by the depositor, the former may return the same.

Article 2159. Whoever in bad faith accepts an undue payment, shall pay
legal interest if a sum of money is involved, or shall be liable for fruits
received or which should have been received if the thing produces fruits.

If the creditor knows that the payment is not yet due and payment is tendered
to him, he must inform the debtor that payment is not yet due. Should the
creditor accept such premature payment, he is therefore in bad faith and shall
be liable for interest from the time he accepts payment up to the time he returns
it upon demand of the debtor.
Article 2160. He who in good faith accepts an undue payment of a thing
certain and determinate shall only be responsible for the impairment or loss
of the same or its accessories and accessions insofar as he has thereby been
benefited. If he has alienated it, he shall return the price or assign the action
to collect the sum. (1897)

An illustration of this article is as follows: A is obliged to give

B a house on January 1, 1997. Believing that it was due on August 1, 1996, A
delivered the house on said date. B likewise did not know that the house was
still due on January 1, 1997. B was in good faith. On November 1996, the house
was rented in the amount of P2,000 per
arts. 2160-2161

hour by a movie producer for a particular motion picture and, while shooting,
the kitchen was accidentally burned. After the shooting of the motion picture,
 Extra-COntraCtual ObligatiOns 609
Quasi-Contracts
Sec. 2 — Solutio Indebiti
B was paid the rent in the amount of P30,000 for 15 hours. On December 1996,
A discovered that the house was not yet due and demanded its return. B can
return the house and pay the amount of the kitchen which has been impaired,
because he (B) has been benefited by the house when he had it rented.

Article 2161. As regards the reimbursement for improvements and expenses

incurred by him who unduly received the thing, the provisions of Title V of
Book II shall govern. (1898)

Title V of Book II of the 1950 Civil Code governs, among others, the rights of
a possessor in good faith and bad faith as to the improvements and expenses.
Pertinently, it provides the following rules:
Article 546. Necessary expenses shall be refunded to every possessor; but
only the possessor in good faith may retain the thing until he has been
reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with
the same right of retention, the person who has defeated him in the
possession having the option of refunding the amount of the expenses or of
paying the increase in value which the thing may have acquired by reason
thereof.
Article 547. If the useful improvements can be removed without damage
to the principal thing, the possessor in good faith may remove them, unless
the person who recovers the possession exercises the option under
paragraph 2 of the preceding article.
Article 548. Expenses for pure luxury or mere pleasure shall not be
refunded to the possessor in good faith; but he may remove the ornaments
with which he has embellished the principal thing if it suffers no injury
thereby, and if his successor in the possession does not prefer to refund the
amount expended.
Article 549. The possessor in bad faith shall reimburse the fruits received
and those which the legitimate possessor could have received, and shall
have a right only to the expenses mentioned in paragraph 1 of Article 546
and in Article 443. The expenses incurred in improvements for pure luxury
or mere pleasure shall not be refunded to the possessor in bad faith; but he
may remove the object for which such expenses have been incurred,
provided that the thing suffers no injury thereby, and that the lawful
possessor does not prefer to retain them by paying
art. 2162

the value they may have at the time he enters into possession.
Article 550. The costs of litigation over the property shall be borne by every
possessor.
610 ObligatiOns and COntraCts
Text and Cases
Article 551. Improvements caused by Nature or time shall always inure to
the benefit of the person who has succeeded in recovering possession.
Article 552. A possessor in good faith shall be liable for the deterioration
or loss of the thing possessed, except in cases in which it is proved that he
has acted with fraudulent intent or negligence, after the judicial summons.
A possessor in bad faith shall be liable for deterioration or loss in every case,
even if caused by fortuitous event.
Article 553. One who recovers possession shall not be obliged to pay for
improvements which have ceased to exist at the time he takes possession
of the thing.

Article 2162. He shall be exempt from the obligation to restore who,

believing in good faith that the payment was being made of a legitimate and
subsisting claim, destroyed the document, or allowed the action to prescribe,
or gave up the pledges, or cancelled the guaranties for his right. He who paid
unduly may proceed only against the true debtor or the guarantors with
regard to whom the action is still effective. (1899)

An illustration of this rule is as follows: A is indebted to B in the amount of

P1,000. It is an oral contract of loan and hence it prescribes in 6 years from the
time it falls due. X is the guarantor of the indebtedness. As guarantor, X will
only pay B if B has unsuccessfully exhausted all efforts to collect from A upon
the maturity of the debt. The debt becomes due and A fails to pay B. B has not
yet exhausted all efforts to collect from A. Believing that he is principally liable
also for the debt, X pays B on the fifth year since the debt has become due. B
also believed in good faith that he could collect from X and hence accepts the
payment from X. In the meantime, more than six years have already lapsed
since the debt has become due. B does not demand from A anymore because
he has already been paid by X on the fifth year. In this case, X paid B by
mistake. X cannot recover the money paid by mistake from B because, if this
is allowed, B cannot anymore recover payment from A as B’s cause of action
against A has prescribed. X can only recover from A , the true debtor. Since a
quasicontract of solutio indebiti exists from the time X made the payment
art. 2163

on the fifth year, he has six years from such payment within which to file an
action against A, the principal debtor. This is so because, considering that a
quasi-contract prescribes after six years from the time the cause of action
accrues, the action to collect from A is still effective.

Article 2163. It is presumed that there is a mistake in the payment if

something which had never been due or had already been delivered was
 Extra-COntraCtual ObligatiOns 611
Quasi-Contracts
Sec. 2 — Solutio Indebiti
delivered; but he from whom the return is claimed may prove that the delivery
was made out of liberality.

A debtor who pays in solutio indebiti may recover what he has paid by mistake.
However, the person to whom the payment has been made can show that such
payment is a gift or a donation by showing the proper evidence like a valid
deed of donation.
612 ObligatiOns and COntraCts
Text and Cases
539

SECTION 3. — Other Quasi-Contracts

Article 2164. When, without the knowledge of the person obliged to give
support, it is given by a stranger, the latter shall have a right to claim the
same from the former, unless it appears that he gave it out of piety and
without intention of being repaid. (1894a)

Article 2164 was adopted in Article 206 of the Family Code of the Philippines1
which now provides:
Article 206. When, without the knowledge of the person obliged to give
support, it is given by a stranger, the latter shall have a right to claim the
same from the former, unless it appears that he gave it without the intention
of being reimbursed.
In the case of De Marcaida vs. Redfern2 where a spouse borrowed a sum of
money on different occasions from her sister and where the sister and her
husband sued the husband of the borrowing spouse for reimbursement, the
Supreme Court explained the application of Article 1894 of the Old Civil Code
which is the precursor of Article 2164 of the 1950 Civil Code and Article 206
of the Family Code, thus:
The case falls squarely within the provisions of the first paragraph of
Article 1894 of the Civil Code. This Article provides: “When, without the
consent of the person who is bound to give support to a dependent, a
stranger supplies it, the latter shall be entitled to recover the same from the
former, unless it appears that he gave it out of charity, and without
expectation of recovering it.” For one to recover under the provisions of
Article 1894 of the Civil Code, it must be alleged and proved, first, that
support has been furnished a dependent of one bound to give support but
who fails to do so; second, that the support was supplied by a stranger; and
third, that the support was given without without the knowledge of the
person charged with the

Executive Order No. 209 which took effect on August 3, 1988.

2
49 Phil. 489 cited in Persons and Family Relations Law by Melencio S. Sta. Maria, Jr., 2nd
edition, Rex Printing Company, Inc., 84 P. Florentino St., Quezon City, page 530.
Article 195 of the Family Code of the Philippines, Executive Order No. 209
539
art. 2165
 duty. The negative qualification is when the support is given the expectation of
recovering it.
With special reference to the combined facts and law, it may be conceded
that Mr. and Mrs. Ramirez did not support Mrs. Redfern with money out
of charity. The third requisite of the law is also taken out of consideration
since Mr. Redfern is the first to acknowledge that the money was handed
to his wife by Mr. and Mrs. Ramirez without his knowledge. We think,
however, that there is a failure of proof as to the first essential, and possibly
the second essential, of the law.
The first requisite of the law has a legal introduction, but ends as a question
of fact. The husband and the wife are mutually bound to support each other.
By support is under-stood all that is necessary for food, shelter, clothing
and medical attendance, according to the social standing of the family.
Parents are also required to bring up and educate their children. But in this
connection, the point of interest is that the wife accepted the assistance
from another, when it is not shown that she had ever made any complaint
to her husband or any of his agents with regard to her allowance. The
testimony of the husband is uncontradicted that he had given his English
agent instructions to furnish his wife with any reasonable sum she needed
bearing in mind his financial condition, but she never took advantage of
this offer. Mr. Redfern’s reason for reducing the allowance, he says, was
his precarious financial situation in 1921 and 1922. Before one can tender
succor to the wife of another with an expectation of recouping himself for
the loan, the husband should be given an opportunity to render the needful
assistance.
With reference also to the first requirement of the law abovementioned, it
is clear that there is evidence in the record which corroborates the finding
of the trial judge that the defendant was amply providing for his wife and
children in London. But a wife’s fortune and a husband’s fortune coincide.
For children of proper age to be made to look after themselves, is not
always hardship. As to the £600 (pounds) first advanced to Mrs. Redfern,
this was not primarily for support because she retained it for sometime
before using it.

Article 2165. When funeral expenses are borne by a third person, without
the knowledge of those relatives who were obliged to give support to the
deceased, said relatives shall reimburse the third person, should the latter
claim reimbursement. (1894a)
The following are obliged to support each other: 1) the spouses; 2) legitimate
ascendants and descendants; 3) parents and their
arts. 2166-2167 Extra-COntraCtual ObligatiOns 541
Quasi-Contracts Sec. 3 —
Other Quasi-Contracts

legitimate children and the legitimate and illegitimate children of the latter; 4)
parents and their illegitimate children and the legitimate and illegitimate
children of the latter; and 5) legitimate brothers and sisters, whether of full or
half-blood.3 Whenever two or more persons are obliged to give support, the
liability shall devolve upon the following persons in the following order: 1) the
614 ObligatiOns and COntraCts
Text and Cases
spouse; 2) the descendants in the nearest degree; 3) the ascendants in the
nearest degree; and 4) the brothers and sisters.4

An illustration of the rule provided in this provision is as follows: A was the

daughter of X and Y. A died. G was the one who shouldered the expenses for
A’s funeral. If G did this benevolent act as an act of charity, X and Y need not
reimburse him. If G intended to be reimbursed, he can only be paid after
demanding payment from X and Y.

Article 2166. When the person obliged to support an orphan, or an insane

or other indigent person unjustly refuses to give support to the latter, any
third person may furnish support to the needy individual, with right of
reimbursement from the person obliged to give support. The provisions of
this article apply when the father or mother of a child under eighteen years
of age unjustly refuses to support him.

Article 2166 has been adopted by Article 207 of the Family Code of the
Philippines which provides:
Article 207. When the person obliged to support another unjustly refuses
or fails to give support when urgently needed by the latter, any third person
may furnish support to the needy individual, with right of reimbursement
from the person obliged to give support. This Article shall particularly
apply when the father or mother of a child under the age of majority
unjustly refuses to support or fails to give support to the child when
urgently needed.

Article 2167. When through an accident or other cause a person is injured

or becomes seriously ill, and he is treated or helped while he is not in a
condition to give his consent to a contract, he shall be liable to pay for the
services of the physician or other person aiding him, unless the service has
been rendered out of pure generosity.

which took effect on August 3, 1988.

4
Id., Article 199.
arts. 2168-2170

For example, A is bumped by a car and is seriously injured. He becomes

unconscious. X sees A and brings him to the hospital. A’s injuries need
immediate treatment but, since he is in coma, he cannot give his consent. The
doctor nevertheless treats his injuries lest it becomes more serious. When A
recovers, he has the obligation to pay the services of the doctor unless the latter
does not want to be paid.
 Article 2168. When during a fire, flood, storm or other calamity, property is
saved from destruction by another person without the knowledge of the
owner, the latter is bound to pay the former just compensation.

For example, the house of A starts to catch fire but A is not in the house. When
the garage of the house is already on fire, Z goes inside the burning garage and
pushes the car of A out of the same without the knowledge of A. The car is
saved from destruction. In this case, A is bound to pay Z just compensation
unless Z does not want to accept it.

Article 2169. When the government, upon the failure of any person to
comply with health or safety regulations concerning property, undertakes to
do the necessary work, even over his objection, he shall be liable to pay the
expenses.

For example, a municipal ordinance prohibits the throwing of spoiled food

outside of the house in a waste can without any plastic bag. A does not abide
by the said ordinance and continually throws spoiled food in a wooden garbage
container. To prevent the spread of disease, the municipal government can put
the spoiled food inside a plastic bag first and then provide the owner of the
house with a garbage can at the owner’s expense even if he does not want to.

Article 2170. When by accident or other fortuitous event, movables

separately pertaining to two or more persons are commingled or confused,
the rules on co-ownership shall be applicable.

The commingling here is unintentional as it is the result of an accident or

fortuitous event.
Article 2171. The rights and obligations of the finder of lost personal
property shall be governed by Articles 719 and 720.
arts. 2171-2172 Extra-COntraCtual ObligatiOns 543
Quasi-Contracts
Sec. 3. — Other Quasi-Contracts

With respect to lost personal property, this provision provides that Articles
719 and 720 will apply. These provisions provide:
Article 719. Whoever finds a movable, which is not treasure, must return
it to its previous possessor. If the latter is unknown, the finder shall
immediately deposit it with the mayor of the city or municipality where the
finding has taken place.
The finding shall be publicly announced by the mayor for two consecutive
weeks in the way he deems best.
If the movable cannot be kept without deterioration, or without the
expenses which considerably diminish its value, it shall be sold at public
auction eight days after publication.
616 ObligatiOns and COntraCts
Text and Cases
Six months from the publication having elapsed without the owner having
appeared, the thing found, or its value, shall be awarded to the finder. The
finder and the owner shall be obliged, as the case may be, to reimburse the
expenses.
Article 720. If the owner should appear in time, he shall be obliged to pay,
as a reward to the finder, one-tenth of the sum or of the price of the thing
found.

Article 2172. The right of every possessor in good faith to

reimbursement for necessary and useful expenses is governed by Article
546.

The provision refers to Article 546 insofar as the right of every possessor in
good faith to reimbursement for necessary and useful expenses are concerned.
Article 546 provides:
Article 546. Necessary expenses shall be refunded to every possessor; but
only the possessor in good faith may retain the thing until he has been
reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with
the same right of retention, the person who has defeated him in the
possession having the option of re-funding the amount of the expenses or
of paying the increase in value which the thing may have acquired by
reason there-of.

Article 2173. When a third person, without the knowledge of the debtor, pays
the debt, the rights of the former are governed by Articles 1236 and 1237.

Articles 1236 and 1237 are provisions on the law of obligations especially on
the matter of payment or performance. They provide:
Article 1236. The creditor is not bound to accept payment
arts. 2173-2175

or performance by a third person who has no interest in the fulfillment of

the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the
debtor, he can recover only insofar as the payment has been beneficial to
the debtor.
Article 1237. Whoever pays on behalf of the debtor without the knowledge
or against the will of the latter, cannot compel the creditor to subrogate him
in his rights, such as those arising from a mortgage, guaranty, or penalty.
 Article 2174. When in a small community a majority of the inhabitants of
age decide upon a measure for protection against lawlessness, fire, flood,
storm or other calamity, any one who objects to the plan and refuses to
contribute to the expenses but is benefited by the project as executed shall be
liable to pay his share in the expenses.

For example, the people of a certain barrio decide to engage a security force
to protect their community because of rampant lawlessness. For this reason,
the people agree to contribute to the expenses of this security force. G however
refuse to make any contribution. In the event that the security force apprehend
robbers intending to rob the house of G, G should pay his share in the expenses
for the community’s engagement of the security force to protect the people
from criminals.

Article 2175. Any person who is constrained to pay the taxes of another shall
be entitled to reimbursement from the latter.

For example, A is the neighbor of G whose property is about to be forfeited to

the government because of unpaid real estate taxes.
A can pay the taxes but G must reimburse him.