Obligation and Contracts Reviewer Ateneo de Davao 2017

OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA.

Ateneo de Davao College of Law 4 Manresa

Chapter 1 GENERAL PROVISIONS Art. 1156. not to do.

An obligation is a juridical necessity to give, to do or

An incomplete definition because it only refers to the debt side; it only refers to the conduct to be observed by the obligor; there is no debt without credit.

C.

Complete definition: A juridical relation between two persons, known as the creditor and debtor, whereby the former can demand from the latter the observance of a determinate conduct and in case of breach, may obtain satisfaction from the assets of the latter.

D.

o

-

Why is it a juridical necessity? Because the term, “juridical necessity” connotes that in case of noncompliance, there will be legal sanction. Note: It covers only civil obligations, not natural obligations. Characteristics of an Obligation: 1. 2. 3.

It represents an exclusively private interest It creates ties that are by nature transitory It involves the power to make the juridical tie effective in case of non-fulfillment through an economic equivalent obtained from the debtor's patrimony.

Types of obligations: a.

b.

c.

Civil obligations - those which derive their binding force from positive law, and can be enforced by court action or the coercive power of public authority. Natural obligations - refer to those which derive their binding force from equity and natural justice, and its fulfillment cannot be compelled by court action but depends exclusively on the conscience of the debtor. Moral obligations - are those which arise from moral law developed by the church and not enforceable in court. It deals with the spiritual obligation of a person in relation to his God and church

ELEMENTS of an OBLIGATION CODE: A P O E A.

B.

NB: It is not necessary that the active/passive subject (also known as the personal elements of the obligation) be determinate at the time of the constitution, but they must at least be determinable. When the subject cannot be determined, the obligatory tie can have no effect.

Active subject (creditor, obligee)Has the power to demand the prestation; it is he who in his favor the obligation is constituted, established or created; it is he who has the right to demand. Passive subject (debtor, obligor) One who is bound to perform the prestation; passive because without the demand, there will be no action, he has to wait for the demand from the creditor. Has the juridical necessity of adjusting his conduct to the demand of the creditor pursuant to the obligatory tie.

The object or the prestation The object is not a thing but a particular conduct of the debtor. It is the subject matter of the obligation which has an economic value or susceptible to pecuniary substitution in case of noncompliance.

Efficient cause or juridical tie between the two subjects The vinculum by which the debtor is bound to in favor of the creditor to perform the prestation. It is determined by knowing the sources of the obligation (Art. 1157) Note: Additional elements from RAM Notes: 5. Causa debendi/ obligationes (Castan).-- This is what makes the obligation demandable. This is the proximate why of an obligation. 6. Form.-- This is controversial. This is acceptable only if form means some manifestation of the intent of the parties. KINDS OF PRESTATION: a.

“to give” consists of the delivery of a movable or immovable thing which is either determinate (specific) or indeterminate (generic). This is in order to create a real right, or for the use of the creditor, or for its simple possession, or in order to return to its owner.

b.

“to do” involves all kinds of work or services whether physical or mental, but in most cases the essence of the act man not be such, but merely the necessity of concluding a juridical operation, such as, when a person promises to give a bond.

c.

“not to do” is a negative obligation which consists of abstaining from some act, it includes “not to give”.

REQUISITES OF PRESTATION 1. 2. 3.

it must be physically and juridically possible; it must be determinate or at least determinable according to pre-established elements or criteria; it must have a possible equivalent in money or a pecuniary value. (why: so in case of breach, one can demand damages)

Article 1157 – Sources of obligation a. Law; b. Contracts; c. Quasi-Contracts; d. Crimes; e. Quasi-delicts; The enumeration of the sources of obligation is exclusive; no obligation exists if its source is not one of those enumerated above. 1

LAKAS ATENISTA Ateneo De Davao College of Law [email protected]



Note: 1.

Unilateral promise is admitted by modern doctrine, which recognizes that unilateral engagements may give rise to obligations without the need of acceptance.

2.

Contrary to Pineda, Tolentino supports that it cannot be said with certainty that the enumeration in this article is exclusive because there is nothing which expressly precludes other sources of obligation, such as the unilateral promise to the public of an award for a certain act or accomplishment.

3.

The clear implication of Sagrada Orden vs. Nacoco is that, these five (5) are the only sources of obligations.

Articles 1158 - 1162 specify the general principles regarding the sources of obligation enumerated in Art. 1157. Art. 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. Note: When we say that law is an independent source of obligation, it does not mean that law and human acts exclude each other completely. The law cannot exist as a source of obligation, unless the acts to which its principles may be applied exists. But once those acts exist, the obligations arising from them by virtue of law are entirely independent of the agreement of the parties. NB: When the law merely acknowledges the existence of an obligation generated by an act which constitutes a contract, quasicontract, delict or quasi-delict, and its only purpose is to regulate such obligation which did not arise from it, the act itself is the source of obligation and not the law. But, when the law creates the obligation, and the act upon which it is bases is nothing more that a mere factor in determining the moment when it becomes demandable, then the source of obligation is the law itself. (i.e. a husbands’ obligation to his spouse is not anchored upon the contract of marriage but on the law which dictates it.) Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Known as the Principle of autonomy of will. The parties can stipulate anything (they have the freedom), provided that the terms of the contract are not contrary to law, public policy or public order. 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. Since a contract has the force of law between parties, each is bound to fulfill what has been expressly stipulated therein. does not apply to attorney’s contracts: courts can decide whether or not attorney’s fees are reasonable. Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII,of this book.

A quasi-contract is a juridical relation which arises from certain lawful, voluntary and unilateral act/s executed by somebody for the benefit of another and for which the former must be indemnified to the end that no one shall be enriched or benefited at the expense of another; It is a kind of contract created without the consent of one party but whose missing consent is given by law (presumptive consent). Characteristics of a Quasi-Contract a. The acts executed must be lawful b. The acts executed must be voluntary c. The acts executed must be unilateral TWO PRINCIPLE TYPES: 1. NEGOTIORUM GESTIO- (officious manager) juridical relation which takes place when somebody takes charge of the agency or management of the business or property of another without any power form the latter. The owner shall reimburse the gestor for the necessary and useful expenses incurred by the latter, and for the damages suffered by him in the performance of his functions. 2.

SOLUTIO INDEBITI – a juridical relation which takes place when somebody received something from another without any right to demand for it, and the thing was unduly delivered through mistake (compared to Art. 22 or unjust enrichment wherein there was no mistake). Obligation to return the thing arises on the part of the recipient.

Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the 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. Basis is Article 100 of RPC, that every person criminally liable is also civilly liable Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws.

Chapter 2- NATURE AND EFFECT OF OBLIGATIONS Art. 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. Refers to the obligation to give. The obligation to give may refer to a determinate object / thing or to an indeterminate or generic thing. A generic thing/ indeterminate thing is one that is indicated by its kinds, without being designated and distinguished from the others of the same kind. In an obligation to deliver a generic or indeterminate thing, the thing is determinable and becomes determinate from the time the obligation has been fulfilled or performed. A generic thing is 2




something which is not particularized or specified but has reference to a class or genus. A limited generic obligation is one when a the generic objects are classified to a particular class, i.e. one of my cars A Determinate thing is something which is susceptible of particular designation or specification. It is one which is individualized and can be identified or distinguished form the others of its kind. Read in relation to Art. 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.

b.

Suspensive conditions attached to an obligation to deliver arises only form the moment the condition happens.

c.

Suspensive periods agreed upon for the performance of the obligation gives rise to its delivery only upon the expiration of the term.

d.

Pure obligations are immediately demandable

The right to the fruits of the thing shall only be personal, and only upon the delivery of the thing, its fruits, accessory and accession shall the creditor acquire a real right over it. Classes of Delivery or Tradition: a.

REAL or ACTUAL tradition- This contemplates the actual delivery of the thing from the hand of the grantor to the hand of the grantee , if it is a personal property. If it is a real property, it is manifested by certain possessory acts executed by the grantee with the consent of the grantor such as by taking over the property; occupying the property.

b.

CONSTRUCTIVE tradition- when the delivery of the thing is not actual but representative or symbolical in essence. But there must be intention to deliver the ownership.

Effect of breach: Liability for damages, unless the loss or damage of the thing is due to a fortuitous event. Art. 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. Delivery is essential to acquire real right 1. WHEN DOES OBLIGATION TO DELIVER ARISE? a. b.

Perfection of contract if no term/condition; From the moment the term/condition arrives if there is a term

The creditor has a right to the fruits of the thing from the time to deliver it arises. The fruits referred involve only determinate things. Kinds of fruits: (cf: Property) 1) Natural 2) Civil 3) Industrial

Kinds of CONSTRUCTIVE TRADITION: i.

Tradicion Symbolica- delivery of certain symbols or things representing the thing to be delivered such as keys, titles.

ii.

Tradicion Instrumental – consists in the delivery of the instrument of conveyance to the grantee by the grantor.

iii.

Tradicion Longa Manu – consists in the pointing to a movable property within sight by the grantor to the grantee but which at the time of the transaction, the thing could not be placed yet in the possession of the grantee.

iv.

Tradicion Brevi Manu – consists in the grantee’s continuation of his possession over the thing delivered but now under a title of ownership as in case of a lessee who had purchased the property leased to him. (Jovellanos)

v.

Tradicion Constitutum Possessorium – consists in the owner’s continuous possession of the property he had sold to another person and his present possession thereof is no longer that of the owner but of a lessee. Tradicion by operation of law – consists in the delivery of the thing

The moment when the obligation to deliver arises varies in different types of obligations: a.

-

In obligations arising form law, quasi-delicts, quasicontracts and crimes, the specific provisions of law applicable to the obligation determine when the delivery should be made.

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. It gives to a person a direct and immediate juridical power over a thing, which is susceptible of being exercised against the whole world. There is a need for tradition or delivery since from the time the obligation to deliver a determinate thing arises, the creditor has only a personal right. He can only demand that the debtor deliver such thing and its fruit. The delivery or tradition of a thing constitutes a necessary and indispensable requisite for the purpose of acquiring ownership. The ownership of things is transferred not by mere agreements but by delivery. 1

vi.

3




by operation of law such as intestate succession vii.

This article presupposes that the thing can be done by the creditor himself or a third person. However, if the prestation can be done only by the debtor, the only recourse available to the creditor is a claim for damages since it is against the constitution to force the debtor to perform the obligation.

Quasi-Tradicion- consists in the delivery of incorporeal property.

Art. 1156. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted to him by article 1170, may compel the debtor to make the delivery.

Coverage: a. the obligor failed to fulfill a positive personal obligation, that is TO DO something; b. he fulfilled the obligation but in contravention of the agreement; c. There was fulfillment but the same was poor or inadequate.

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 2 or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. RULES: OBLIGATION TO DELIVER 1. Determinate thing 2. Indeterminate thing

or

generic

REMEDY Creditor may compel debtor to deliver Creditor may ask for compliance at the expense of the debtor

REMEDIES OF CREDITOR a.

b. c. d.

Demand for specific performance - This action presupposes that it is based on a contractual relationship between the contending parties. Specific performance is available even if the thing to be delivered is indeterminate. Rescission of the obligation which is under Art. 1380. Resolution of the contract under Art. 1191 if it is a reciprocal obligation. Damages exclusively or in addition to either of the first actions.

Note: if any of the above happens, the creditor is entitled to have the thing done in a proper manner, by himself or by a third person, at the expense of the debtor. The court has no discretion to merely award damages to the creditor when the act can be done in spite of the refusal or failure of the debtor to do so. Art. 1168. When the obligation consists in not doing and the obligor does what has been forbidden him, it shall also be undone at his expense. Art. 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. Demand is generally necessary, even if a period has been fixed in the obligation. Even in obligations where there is an acceleration clause, there is still a need for demand. INSTANCES when demand by Creditor not necessary in order that delay may exist: a.

General Rule: Obligation to deliver a specific thing is extinguished by fortuitous event; Indeterminate thing is however not extinguished.

b. c.

Exceptions: 1. 2.

d. e.

If obligor delays or in default; Obligor is guilty of bad faith;

Art. 1166. Obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. Art. 1167. If a person obliged to do something fails to do it, the shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. Remedies: 1. 2.

have obligation executed at debtor’s expense; obtain damages.

Thing may be ordered undone if done poorly or obligation is a negative one

when there is an express stipulation between the parties to that effect; where the law so provides; when time or period is the controlling motive or the principal inducement for the creation of the obligation; when demand would useless; when the obligor admits he is in delay

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. Note: The demand must refer to the prestation due and not to another, however, there will still be delay even if the demand was wrong if: 1. even if the demand had been absolutely correct, the debtor would not have performed the obligation, or 2. in the light of good faith he should have offered the prestation in the form and manner that it is due. When the time for the fulfillment of the obligation is fixed, no further demand is necessary. In case of doubt on whether the debtor has incurred delay, the doubt is resolved in favor of the debtor. REASON: because the 4




dispensing of demand is only an exception, it is not a general rule. The law does not require expressly that the debtor should know that the fixing of the date for the performance was a controlling motive on the part of the creditor; but this knowledge is essential in order that it can be said that the debtor has tacitly consented to incur delay without the necessity of delay. KINDS OF DELAY: A. MORA SOLVENDI – default on the part of the debtor which may either be ex re (real obligations; obligations to give) or ex persona (personal obligations; obligations to do) B. MORA ACCIPIENDI – default on the part of the creditor C. COMPESATIO MORAE – default on the part of both parties in reciprocal obligations I. MORA SOLVENDIREQUISITES FOR MORA SOLVENDI TO EXIST: 1. the obligation pertains to the debtor or obligor; 2. the obligation is determinate or liquidated, due and demandable; 3. the obligation has not been performed on its maturity date; 4. there is a demand made by the creditor on the debtor for the fulfillment of the obligation that is due. DOES NOT APPLY IN THE FF. OBLIGATIONS: 1. natural obligations; 2. negative obligations CONSEQUENCES/EFFECTS OF MORA SOLVENDI: 1. debtor may be liable for damages or interests; 2. debtor may bear the risk or loss of the things even if the default is due to fortuitous event, subject to equitable mitigation if the loss would have still occurred even if there was no default on the part of the debtor. II. MORA ACCIPIENDI- delay in the performance of the obligation based on the omission by the creditor of the necessary cooperation, especially in acceptance on his part. -

it is necessary that it be lawful for the debtor to perform, and that he can perform. REQUISITES FOR MORA ACCIPIENDI TO EXIST 1. an offer of performance by the debtor who has the required capacity; 2. the offer must be to comply with the obligation as it should be performed; 3. the creditor refuses the performance without just cause CONSEQUENCES OF MORA ACCIPIENDI 4. the responsibility of the debtor for the thing is reduced and limited to fraud and gross negligence; 5. the debtor is exempted from the risks of loss of the thing, which automatically pass to the creditor;

6. all expenses incurred by the debtor for the preservation of the thing after the mora shall be chargeable to the creditor; 7. the debtor may relieve himself from the obligation by consignation of the thing. III. COMPENSATIO MORAE – applies only in reciprocal obligations. Where the parties are both guilty of mora or mutual default, the default of one compensates the default of the other. o Delay begins when one party fulfills his obligation. o When one party does not fulfill his obligation, he releases the other from his obligations, who therefore does not become delinquent in the fulfillment. o Neither party incurs delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. CESSATION OF THE EFFECTS OF DELAY: (may the right to place the debtor in delay be renounced or waived? Yes. How: ) 1. Renunciation by the creditor, which may be implied or expressed. There is implied renunciation when the creditor, even after the delay, grants an extension of time to the debtor or agrees to a novation of the obligation. (remember Tayag vs. Leyva case. The effects of delay was not applied since there was a waiver on the part of Tayag when she accepted the payments even after the due date) 2.

Prescription

Art. 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. GROUNDS FOR LIABILITY: 1. Fraud; 2. Negligence; 3. Default; and 4. Violation of terms of obligations. Damages: MENTAL Indemnity for damages consists of: a. that agreed upon; b. in absence of agreement, legal rate of interest. Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. Art. 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 the circumstances. KINDS: 1. 2. 3.

Culpa Contractual – breach of contract Culpa Aquiliana – civil negligence, tort or quasidelict; Culpa Criminal – criminal negligence that which results in commission of crime or a delict.

Culpa Contractual 1. negligence is incidental; oblig.

Culpa Aquiliana N is direct, substantive and

Culpa Criminal N is direct, substantive 5


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. Exists- contract 2. there is pre-existing obligation.

independent; No pre-existing obligation;

3. preponderance of evidence 4. master-servant rule

- same -

5. there is a contract

Prove defendant negligent

Defense of a good father of a family that is


No pre-existing obligation except not to harm others Guilt beyond reasonable doubt ER’s guilt- civilly liable in case of insolveny Presumption of innocence until contrary is proved.

Case: Prudential Bank vs. CA: responsibility from negligence in the performance of every kind of obligation is demandable. While in the case at bar there was no bad faith, respondent still suffered anxiety, embarrassment and humiliation. Hence, entitle to recover (moral) damages. Art. 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.

Note: In the case of PHILCOMSAT v Globe: the SC held that although the parties could have foreseen the closure of the military bases, it was impossible to avoid. 3. The occurrence must be of such as to render it impossible for the debtor to fulfill his obligation in a normal manner. 4. The obligor must be free from any participation in, or aggravation of, the injury resulting to the creditor. Note: o

o

The obligor is released from liability no only when the non-performance of the obligation is due to fortuitous events, but also when it is due to the act of the creditor himself, such as defective packing.

o

EXCEPTIONS: (when obligor is still liable even if there is a fortuitous event) 1. When the law so provides; 2. When it is expressly stipulated by the parties; 3. When the nature of the obligation requires the assumption of risk; 4. When the obligor is in delay already; 5. When the obligor has promised the same thing to two or more persons who do not have the same interest (Art. 1165); 6. When the possessor is in bad faith and the thing is lost or deteriorated due to a fortuitous event; 7. When the obligor contributed to the loss of the thing during the fortuitous event; 8. When the obligor is guilty of fraud, negligence or delay or if he contravened the tenor of the obligation.

o

ASSUMPTION OF RISKS: (doctrine of created risk)

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. DILIGENCE REQUIRED: 1. 2. 3.

that agreed upon by parties; in the absence of #1, that required by law; in absence of #2, that expected of a good father of a family.

(cases) SABEDA airlines, Prudential Bank cases Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. o

General Rule: from liability.

Fortuitous

events

o

ELEMENTS OF FORTUITOUS EVENT:

absolve

Obligor

1. The cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply with his obligations must be independent of the human will, or of the debtor’s will. In the case of PAL, the hijacking was independent of the will of PAL. 2. It must be impossible to foresee the event which constitute the caso fortuito, or if it can be foreseen, it was inevitable to avoid Although under normal circumstances, it was not impossible for PAL to foresee the hijacking of the airplane, the military take over that took place that afternoon rendered the foreseeability of the event as impossible since it was the army already conducting the checking and frisking.

An obligation consisting of the delivery of a specified thing shall be extinguished when the said thing shall be lost or destroyed without the fault of the obligor and before he is in default.

The exception is based on social justice: If a person, for his convenience or profit, creates risks for the public which formerly did not exist, although morally his fault or negligence may not be the cause of the damages resulting therefrom, he should nevertheless be held liable for such. If he benefits from the means that have produced the loss, it is only equitable that he should bear the consequences of such loss. Case: Yobido vs. CA: Even if the tires are new, or that it had a good brand name, it is settled that all accident caused either by defects in the automobile Or through the negligence of its driver is not a caso fortuito that would exempt the carrier from liability for damages. Moreover, a common carrier may not be absolved from liability in case of force fortuitous event alone. The common carrier must still prove that it was not negligent in causing the death or injury resulting from an accident. Petitioners should have shown that it undertook extraordinary diligence in the care of its carrier, such as conducting daily routinary check-ups of the vehicle's parts. Art. 1175. Usurious transactions shall be governed by special laws. (n) Art. 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. 6




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.

o

Kinds of Obligations: A.

PURE - When the obligation contains no term or condition whatever upon which depends the fulfillment of the obligation contracted by the debtor. it is immediately demandable and there is nothing to exempt the debtor from compliance therewith. If the debtor does not fulfill his prestation, especially after a valid demand, he is placed in default.

B.

CONDITIONAL – with a condition

Art. 1177. The creditors, after having pursued the property in 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) Rights of Creditors: 1. 2. 3. 4.

exact payment; exhaust debtor’s properties generally by attachment; subrogatory action – exercise all rights and actions except inherent rights; impugn/rescind acts or contracts done by debtor to defraud them.

Art. 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) Gen. Rule: All rights acquired in virtue of an obligation are transmissible. Exceptions: 1. 2. 3.

CONDITION- is an uncertain event w/c wields an influence on a legal relation. TERM – is that w/c necessarily must come whether the parties know when it will happen or not. INSTANCES WHEN AN OBLIGATION IS DEMANDABLE AT ONCE: a. b.

when it is pure; when it has resolutory condition.

CLASSIFICATION OF CONDITIONS A.

if law provides otherwise; if contract provides otherwise; if obligation is purely personal

SUSPENSIVE rise to obligation.

- happening of event/condition gives

RESOLUTORY – happening extinguishes the obligation.

Note: The exceptions refer to: a. those not transmissible by their nature, i.e. purely personal rights; and b. those not transmissible by law or by stipulation of the parties.

B.

of

event/condition

POTESTATIVE – depends upon the will of the debtor. CASUAL – depends on chance/will of a 3rd person. MIXED – depends partly on will of 3rd person and partly on chance.

CHAPTER 3 DIFFERENT KINDS OF OBLIGATIONS

C.

SECTION 1. - Pure and Conditional Obligations

D.

DIVISIBLE – capable of partial fulfillment. INDIVISIBLE – not capable of partial fulfillment. POSITIVE – an act is to be performed NEGATIVE – something will be omitted.

PURE AND CONDITIONAL OBLIGATIONS: o Condition: An event which is both future and uncertain upon which the existence or extinguishment of an obligation is made to depend. The element of futurity and uncertainty must concur. The condition must be imposed by the will of a party and must not be a necessary legal requisite of the act. o PAST EVENTS can be conditions too. The futurity required in past events is the future knowledge or proof of a past event unknown to the parties, not the event itself. Example: I will pay you 1,000 if the number of people who died in the 9/11 attack exceeds 2,000. In past events, the contract or obligation arises not when the event happened or the fact came into existence, but when the proof of such fact or event is presented, which would be in the future. Art. 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)

E.

CONJUNCTIVE – if all the conditions must be performed. ALTERNATIVE – if only a few of the conditions have to be performed.

Q: What does automatically/immediately demandable mean? A: Immediate demandability is not impaired when the performance of the obligation is allotted a reasonable time by the court. It does not imply immediate instantaneous compliance. Art. 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)  

payment does not depend on debtor’s will for he has promised to pay. TIME when payment is to be made depends upon the DEBTOR.

HOW LONG? COURTS will fix the duration of the period. 7




Article 1180- read in relation with Art. 1197. in cases falling under this article, the creditor should file an action to fix a period for the payment of the obligation. An action to enforce the obligation is premature if the court has not yet fixed a period. covers cases wherein the debtor binds himself to pay when his means permit him to do so, such as “I’ll pay you little by little; as soon as possible; as soon as I have the money; in partial payments ” Here, the moment of payment is dependent upon the will of he debtor but not the payment. (or not the performance of the condition) Art. 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) a. b.

Suspensive – conditions precedent/antecedent. The happening of w/c will give rise to the acquisition of a right – future & uncertain event. Resolutory -- conditions subsequent – rights are lost once the condition is fulfilled.

EFFECTS: 1. 2. 3. Note: o

This article applies only to cases where the conditions was already impossible from the time of the constitution of the obligation, and also to POSITIVE SUSPENSIVE CONDITIONS.

o

The condition must already be existing at the time of the creation of the obligation. Supervening events which would render the obligation no longer impossible does not affect the effect of annulling the obligation. In order for the condition to be considered as illicit or juridically impossible, it must consist of an act or fact for one of the parties. The mere mention of a juridically impossible condition does not annul the obligation. The criterion is the effects upon one of the parties. o Reason: one who promises something under a condition that is impossible or illicit knows that it cannot be fulfilled, and manifests that he does not have any intention to be bound.

o

Case: Padilla vs. Paredes: there was no obligation to perform since the suspensive condition did not happen. Art. 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) 3 KINDS OF CONDITIONS a. b. c.

If condition is to do an impossible or illegal thing – CONDITION & OBLIGATION ARE VOID. If condition is negative (not to do) DISREGARD CONDITION BUT OBLIGATION REMAINS. If condition is negative (not to do an illegal thing) BOTH CONDITION & OBLIGATION ARE VALID.

o NEGATIVE SUSPENSIVE CONDITIONS have the effect of converting the obligation into a pure and simple one. It is simply considered not written, thus as if no condition exists. Art. 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. (1117) - positive condition

Potestative (facultative) Casual Mixed

POTESTATIVE ON THE PART OF THE DEBTOR 1. IF SUSPENSIVE – both condition and obligation are void. 2. IF RESOLUTORY – valid.

Effect if Period of Fulfillment is not fixed: the Court considering the parties intentions should determine what period was really intended.

Pure potestative conditions renders the whole obligation void.

Art. 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.

o

This article applies only to potestative SUSPENSIVE CONDITIONS. Potestative and resolutory valid since there is immediate performance on the part of the obligor.

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. – Negative Condition

o

If it depends solely on the will of the creditor, it is valid. Reason: to allow conditions whose fulfillment depends exclusively on the debtor’s will, is to sanction illusory obligations; this cannot happen when the fulfillment depends on the will of the creditor. This is because the creditor is naturally interested in the fulfillment of the condition which will benefit him.

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119)

Art. 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)

Requisites: 1. 2.

Voluntarily made – the intent to prevent is present. Actual prevention of compliance.

Note: This refers to Constructive Fulfillment/ Implied fulfillment o

Applies to a condition which, although not exclusively within the will of the debtor, may in some way be prevented by the debtor from happening. 8


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. o

o


There is constructive fulfillment only if the act of the debtor had in fact prevented compliance with the condition. EXCEPTION: if in preventing the fulfillment of the condition the debtor acts pursuant to a right, the condition will not be deemed fulfilled. Example: B ordered A to stop building because it was against the city ordinance.

Art. 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 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.

mistake in case of a suspensive condition. (1121a) APPROPRIATE ACTIONS FOR CREDITOR TO PRESERVE HIS RIGHTS: a. b. c. d.

2nd Par: a case of solutio indebiti (undue payment) if creditor is in bad faith, debtor is entitled to fruits and interests. IF PAYMENT WAS NOT BY MISTAKE, CAN THERE BE RECOVERY? a. b.

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)

Note: -

In conditional oblig, to give, once fulfilled, shall retroact to the day of the constitution of obligation. In reciprocal oblig. – the fruits and interests during the pendency of condition, shall be deemed to have been mutually compensated. In unilateral oblig. – the debtor shall appropriate the fruits and interests received UNLESS from the nature of the obligation it should be inferred that the intention of person was different. In Obligation to do or not to do – the Court shall determine the retroactive effect of condition that has been complied with.

-

Remember: between the constitution and the happening of the suspensive condition, the creditor cannot enforce the obligation. The right of the creditor during the period is mere expectancy. (Jovellanos case: The right of Daniel to the property was merely inchoate and expectant right which would ripen into a vested right only upon his acquisition of the ownership) The moment the suspensive condition happens, the right becomes enforceable and the debtor may be compelled to perform the obligation. Cause of action accrues, and prescription is computed from this time. The EFFECTS, however, RETROACTS to the moment of constitution of such obligation. Reason: suspensive conditions are merely accidental to the obligation, they are not essential elements of the obligation. An obligation is deemed constituted when all the necessary elements are present. The suspensive condition only prevents the efficacy of the obligation. Case: DBP vs. CA Limitations to retroactivity: the right to the fruits or interests of the thing accruing before the happening of the condition, unless otherwise stipulated by the parties.

-

 





-

-

-

-

-

Art. 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

action for prohibition restraining the alienation of the thing pending the happening of the condition petition for the annotation of the creditor’s right, if real property is involved; action to demand security in case the debtor becomes insolvent; action to set aside alienations made by the debtor in fraud of the creditors;

-

-

If condition is fulfilled – NO RECOVERY If condition is not fulfilled, there should be recovery EXCEPT when a pure donation was intended. Before the happening of the suspensive condition, the debtor cannot alienate the subject property if it is a determinate thing. If the obligor alienated the determinate property to a 3 rd person (good faith on part of the 3rd person), the creditor cannot reclaim the property as the delivery of the thing vests ownership. His only recourse is damages against the debtor. However, if there was bad faith on the part of the 3rd person, he may be compelled to deliver the thing to the creditor. Creditors can however, alienate their inchoate right. If payment was a determinate thing, the cause of action is accion revindicatoria, otherwise the provisions of solution indebiti applies. If however, payment was made with the knowledge of the condition, there is an implied waiver of the condition and what has been paid cannot be recovered. No express provision regarding fruits and interests, however, there can be recovery by the provisions of solution indebiti.

Art. 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, he shall be obliged to pay damages; It is understood that the thing is lost: a. when it perishes; (physical loss) or b. goes out of commerce; (legal loss) or c. disappears in such a way that its existence is unknown or it cannot be recovered; (civil loss) (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; 9




(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) Article applies if: a. b.

DAMAGES FOR BREACH OF LEASE CONTRACT:

suspensive condition is fulfilled; and if object is specified (not generic)

a)

Art. 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of 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 the 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) EFFECTS WHEN RESOLUTORY CONDITION IS FULFILLED: 1. 2. 3. 4.

5. 6.

Obligation is extinguished; Parties shall return what they have received, including fruits & interests; Courts shall determine the retroactivity of resolutory conditions In case of loss, deterioration, or improvement, apply Art. 1189.

b)

-

Even if there is no corresponding agreement between the parties, the law provides for such power to rescind. This article does not apply when the parties made a stipulation providing for the automatic rescission of the contract in case of violation of the terms thereof without need of judicial intervention or permission.

-

The breach contemplated is the obligor’s failure to comply with an obligation already existing, not a failure of a condition to render binding that obligation. There can be no breach of a non-existent obligation. Case: “Failure to pay, in this instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring binding force. Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force. (Ong vs. CA)

-

Case: Padilla vs. Paredes : There can be no rescission of an obligation that is non-existent, considering that the suspensive condition has not yet happened. The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. The breach contemplated in the said provision is the obligor’s failure to comply with an existing obligation. When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission.

-

“Rescission” here is to be understood as “resolution” or cancellation of the contract.

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)

1. 2. 3.

4.

CHARACTERISTICS OF RIGHT TO RESCIND It exists only in reciprocal obligations. If there is a fixed period, no actions can be done before the expiration of period. can be demanded only if the plaintiff is ready, willing and able to comply with his own obligation and the other is not. not absolute  slight breach is not sufficient as held in Tayag vs. CA- The right to rescind is not absolute and will not be granted if there has been substantial performance by partial payments. it needs judicial approval in some cases – when there has already been delivery of thing. If there’s

If he selects specific performance as an action, he can demand the accrued rent plus the future rent for the unexpired term; If lessor demands rescission, he gets only the back rents and ouster the lessee plus damages but not future rents.

Note: This article is applicable only to reciprocal obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of each other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. It is not enough that both parties are creditor and debtor or each other, the reciprocity in the obligation must arise from the same cause.

Art. 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.

o

no delivery, judicial approval may not be needed; if there has been delivery, the contract stipulates for rescission in case the other has not performed. the right to rescind is implied to exist; the right to rescind may be waived expressly or impliedly

10


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. -

-

. -


Who can demand rescission: The party who can demand rescission should be the party who is ready, willing and able to comply with his own obligations while the other is not capable to perform his own. A party who has not performed his pat of the obligation cannot rescind.

Note: When the contract, however, is one of lease, and the lessee fails to pay the rents stipulated within the time agreed upon, the court will have no discretion to grant the lessee a period within which to pay the rents.

When one party fails to comply with his obligation under a contract, the other party has the right to either demand performance, or ask for the resolution of the contract. These remedies/choices are mutually exclusive. One cannot choose specific performance then rescission. Case: Velarde vs. CA: when Padilla chose to rescind the contract, although Velarde opted to pay, the choice had already been made and to allow Velarde to pay the existing amount would tantamount to a novation of the contract In cases of specific performance, there is always a need for judicial action if the other party refuses to make the delivery of the thing promised. exception: when the injured party chose specific performance, and the prestation had become impossible to perform, he may then cancel or rescind the contract. However, so long as there has been no judgment declaring rescission, however, the creditor who has asked for it may change his mind and demand specific performance instead, or vice-versa, unless he has previously renounced one of these remedies.

-

Where both parties have committed a breach of obligation, and it cannot be determined who was the first infractor, the contract shall be deemed extinguished and each shall bear his own damages.

-

EXTRAJUDICIAL rescission produces legal effects. Once one of the parties fails to comply with his obligation, the other is relieved from complying with his, and he may therefore by his own declaration elect to rescind by not performing his own undertaking.

-

When can there be extrajudicial rescission? When there has been no performance of the obligation or whatsoever. If the obligation has not yet been performed, extrajudicial declaration of rescission by the party who is ready and willing to perform would suffice. However, if the injured party has already performed such as when property has already been delivered by him to the other party, he cannot by his own declaration rescind the contract. Hence, the court must declare the rescission. Case: Cannu vs. Galang-

o

Limitations/Restrictions on the right to rescind:

-

that there was no need to fix the period since sufficient time had already lapse for the plaintiff to fulfill the condition.)

1.

2. 3.

DUE PROCESS MUST BE OBSERVED- the rescission authorized is judicial rescission; the other party must be given his day in court. It is the judgment of the court and not the mere act of the vendor which produces the rescission of the sale (Cannu) The right to rescind is SUBORDINATED TO THE RIGHTS OF 3RD PERSONS who acquired the thing in good faith. The injured party must respect the power of the court to fix period in lieu of decreeing rescission. (case: Central Univ- the court may fix the period for the fulfillment of the obligation, however, in this case, the court held

4. 5.

Evidence is needed to justify the rescission. Slight breach of the contract will not justify rescission, the breach should be substantial and fundamental as to defeat the object of the parties in making the contract.

o

EFFECTS OF RESCISSION

-

Note that the exercise of the power to rescind extinguishes the obligatory relation as if it had never been created, the extinction having a retroactive effect. The rescission has the effect of abrogating the contract in all parts and The parties will be brought back, as much as possible to the status quo before they entered into the contract. Hence, there is always a need for restitution. The resolution or cancellation shall take effect only after the creditor has notified the debtor of his choice of rescission.

(case: Laperal vs. Solid Homes. Rescission under Art. 1191 always carries with it the obligation of mutual restitution. However, in this case, Laperal was not made to pay restitution since the parties had expressly stipulated the payment for damages in case of breach.) In Ong vs. CA, the SC held that Ong was not entitled to reimbursement as regards the improvements he made on the property because he contracted these improvements in bad faith. In estimating the damages to be awarded in case of rescission or resolution, those elements of damages only can be admitted that are compatible with the idea of rescission In case of resolution of a contract of sale, the purchaser is entitled to indemnity for damages. This indemnity, in case of resolution for non-delivery of the thing sold cannot consist in the fruits, to which he is entitled only when delivery is made. Having chosen rescission, he is only entitled to the interest on the amount he has paid. Tayag case: WAIVER. o

Inapplicability of Art. 1191: 1. 2. 3. 4.

in obligations of sales of real property by installments since Maceda Law RA 6552 governs; sales of personal property by installments governed by RA 1484 (Recto Law) Contracts of partnerships Contracts of lease

Cases when judicial approval is not needed in rescission: a. b.

if there is an express stipulation of automatic rescission; if there is no express stipulation of automatic rescission in case of breach, judicial approval is needed when there 11




has been already delivery of the object—unless the debtor voluntarily returned the thing. Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor 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)

SECTION 2. - Obligations with a Period Art. 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) Period: A certain length of time which determines the effectivity or the extinguishments of obligations. PERIOD vs. CONDITION A.

As to their fulfillment – 1. 2.

B.

With reference to time 1. 2.

C.

a condition is an uncertain event; a period is an event which must happen sooner or later at a date known beforehand or a time which cannot be determined.

Period refers to future; Condition may under the law refer to past.

2.

Condition causes an obligation to arise or to cease; Period merely fixes the time or the efficaciousness of an obligation.

DIFFERENT KINDS OF TERMS/PERIODS A.

DEFINITE – exact date/time is known and given INDEFINITE – something that will surely happen, but date of happening is unknown.

B.

LEGAL – a period granted by law CONVENTIONAL/VOLUNTARY – stipulated by parties.

period

agreed

upon

or

JUDICIAL – period or term fixed by Courts for the performance of an obligation, or for its termination. C.

REQUISITES FOR A VALID PERIOD/TERM 1. 2. 3.

Must refer to the future; must be certain but can be extended; must be physical and legally possible otherwise it is void.

NOTE: An action may be brought to immediately enforce an obligation originally with a term if: a. the contract in which the terms is imposed has been cancelled by mutual agreement of the parties; or b. When the non-fulfillment of the terms of the contract resolves the period and authorizes the creditor to immediately demand performance. (the obligation is converted into a pure obligation) Art. 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 1194- Article 1189 is applicable in cases of loss, deterioration, and improvement during the pendency of condition. Thing Is Lost 1. 2. 3.

When – It perishes. It goes out of commerce. It disappears in such a way that its existence is unknown. 4. It disappears in such a way that it cannot be recovered.

Note: “Genus nunquam perit” – in an obligation to deliver generic thing the loss or destruction of anything of the same kind does not extinguish the obligation. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages.

As to Influence on the obligation 1.

IN DIEM or RESOLUTORY PERIOD– a period/term with a resolutory effect. Termination of obligation upon the arrival of said period.

EX DIE or SUSPENSIVE PERIOD– a period with suspensive effect. Obligation begin only from a day certain; upon arrival of period.

If the thing deteriorates through the fault of the debtor, the creditor may choose between (1) rescission of the agreement or obligation plus damages, or (2) fulfillment of the obligation plus damages. If the thing is improved by nature, or by time, the creditor gets the benefit. If the thing has improved through the expense of the debtor, he shall have the rights granted to a usufructuary for improvements on a thing held in usufruct. Art. 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) PERIOD W/IN W/C RECOVERY MAY BE MADE Without Debtor’s knowledge – 1. Before the debt matures ( Art. 1194) 2. Even after maturity – if creditor is in bad faith – the right prescribes in 5 years after premature payment 12




With Debtor’s knowledge – NO RECOVERY (implied waiver) Note: the law presumes that the debtor knew of the prematureness. Art. 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) Art. 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) WHEN THE COURT MAY FIX A PERIOD 1. 2.

When the duration depends upon the will of the debtor. When although the obligation does not fix a period, it can be inferred that a period was intended.

INSTANCES WHEN THE COURT MAY NOT FIX THE TERM: 1. 2. 3. 4. 5.

When no term was specified because no term was ever intended; When the obligation or not is “payable on demand”; When specific periods are provided for in the law; When what appears to be a term is really a condition; When the period w/in which to ask the court to have the period fixed has itself already prescribed.

PRESCRIPTIVE PERIOD: ACTION MUST FIX THE PERIOD – 10 YEARS Art. 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; (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. (avoid legal process) (1129a) – actual absconding, intent to do so is sufficient Note: the insolvency referred to does not have to be judicially declared; it is sufficient for him to find a hard time paying off his obligations because of financial reverses that have made his assets less than his liabilities. 13




SECTION 3. - Alternative Obligations Art. 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) Alternative Obligation is one where out of the 2 or more prestations which may be given, only one is due. Art. 1200. The right of choice belongs to the debtor, 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) In obligation with a term – general rule: term is for both parties’ benefit In obligation/alternative oblig – general rule: Debtor has the right of choice. The Debtor Shall Have No Right To Choose Those Prestations Which Are: 1. Impossible. 2. Unlawful. 3. Or which could not have been the object of the obligation. Art. 1201. The choice shall produce no effect except from the time it has been communicated. (1133)

choice according to the terms of the obligation, the latter may rescind the contract with damages. (n) Art. 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) Art. 1205. When the choice has been expressly given to 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;

EFFECT OF NOTICE THAT CHOICE HAS BEEN MADE

(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)





Means of Communication to other party – oral, written, implied, express

Obligation becomes a simple obligation to do or deliver the object selected. PURPOSE: To inform the creditor that the obligation is now a simple one, no longer alternative and if already due, for the creditor to receive the object being delivered, if tender of the same has been made.



1. 2. 3. 4. 5. 6. 7.

Effect if Creditor delays in making the choice:  

REQUISITES FOR MAKING A CHOICE Made properly so that creditor or agent will know; made with full knowledge that a selection is indeed being made (if there is error – choice can be annulled) made voluntarily and freely (no force, coercion etc. ) made in due time and that is before or upon maturity; made to all the proper persons; made w/o conditions unless agreed to by the creditor; may be waived, expressly/impliedly.

Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. (1134) Example: Objects A,B & C. A&B are destroyed; C can only be delivered- if C is destroyed (fortuitous event) obligation is extinguished. Art. 1203. If through the creditor's acts the debtor cannot make a

if contract does not state to whom the right to choose is given, THE DEBTOR MAY CHOOSE.

he cannot hold the debtor in default for the debtor does not know what to deliver; if debtor wants to relieve himself from the obligation, he may petition the court to compel Creditor to accept in the alternative, at the petitioner’s option with damages.

CASES ARTICLE 1203 LEGARDA vs. MIAILHE As we have stated before, the option to demand payment of the indebtedness has to be exercised upon maturity of the obligation, which is February 17, 1943. On this date, the only currency available is the Philippine currency, or the Japanese Military notes, because all other currencies, including the English, were outlawed by a proclamation issued by the Japanese Imperial Commander on January 3, 1942. This means that the right of election ceased to exist on that date because it had become legally impossible. And this is so because in alternative obligations there is no right to choose undertakings that are impossible or illegal (Civil Code, art. 1132, par. 2). In other words, the obligation on the part of the 14




debtor to pay the mortgage indebtedness has since then ceased to be alternative. (Articles 1134 & 1136(1) of the Civil Code.) It appears, therefore, that the tender of payment made by the plaintiff in Japanese Military notes was a valid tender because it was the only currency permissible at the time, and the same was made in accordance with the agreement because payment in Japanese Military notes during the occupation is tantamount to payment in the Philippine currency. (Haw Pia vs. China Banking Corporation, 45 Off. Gaz., Supp.[9] 229; Phil. Trust vs. Araneta, 46 Off. Gaz., 4254; Allison D. Gibbs vs. Eulogio Rodriguez, 47 Off. Gaz., 186.) But the consignation of the sum of P75,920.83 in Japanese currency made by the plaintiffs with clerk of court does not have any legal effect because it was made in certified check, "does not meet the requirements of a legal tender." Art. 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)

JOINT



Each of the debtors is liable only for a proportionate part of the debt and each creditor is entitled to a proportionate part of the credit.



Each debtor – entire obligation; each creditor is entitled to demand the whole obligation.

GENERAL RULE: When there are 2 or more debtors or creditors, the obligation is JOINT. EXCEPTIONS: 1. when there is a stipulation in the contract that the obligation is solidary; 2. when the nature of the obligation requires liability to be solidary; 3. when the law declares so INSTANCES WHERE LAW IMPOSES SOLIDARY LIABILITY   

obligation arising from torts quasi-contracts; legal provisions re: the obligation of legatees and devisees; liability of principals, accomplices and accessories of a felony; bailees in commodatum.



FACULTATIVE OBLIGATION – it is one where only one prestation has been agreed upon but the obligor may render another in substitution.



1. There may be plurality of creditors 2. Plurality of both debtors and creditors; 3. Plurality of debtors.

DISTINCTIONS ALTERNATIVE

SOLIDARY

FACULTATIVE

EFFECTS OF JOINT LIABILITY

1. various things are due, but giving of one is enough;

1. only one principally due but substituted.

thing may

is be

2. if one prestation is illegal, others may be valid and the obligation remains;

2. if principal obligation is void, giving of the substitute is no longer necessary. (NULLITY OF PRINCIPAL CARRIES WITH IT THE NULLITY OF SUBSTITUTE.)

3. if it is impossible to give all except one, the one left must still be given.

3. If it is impossible to give the principal, the substitute does not have to be given; if vice versa, the principal must be given.

4. the right to choose may be given either to debtor/creditor

4. The right to choose is given only to the debtor.



Demand by one creditor upon one debtor produces effects of default only with respect to both parties but not with respect to the others;



Interruption of prescription by judicial demand of one creditor upon one debtor does not benefit the other creditors;



Vices of each obligation arising from personal defect of a particular debtor or creditor does not affect the obligation or rights of the others;



Insolvency of a debtor does not increase the responsibility of his co-debtors nor does it authorize a creditor to demand anything from his co-creditors;



In joint divisible obligation, the defense of res judicata is not extended from one debtor to another.

CASES

SECTION 4. - Joint and Solidary Obligations

HONRADO vs. CA Art. 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 a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a)

On the matter of interpretation of contracts, it is basic and fundamental that if the terms of the contract are clear, the literal meaning of the stipulation shall control. The intention of the parties to a contract must be determined from the contract itself. When petitioner Honrado signed several times on these documents as president of HCTC and as co-maker, there is no other interpretation but to conclusively presume that he bound himself also as comaker. He cannot therefore renege on the obligations and liabilities 15




attached to a co-maker. When the terms of a contract are clear and do not leave room for doubt as to the intention of the contracting parties, it is not necessary to interpret the same, the literal meaning of its clauses should be followed. The promissory note clearly stipulates a solidary obligation as shown by the following clause "For value received I/We jointly and severally promised to pay Cressida Motor Sales Corp. . . . Signed: Hadd Construction & Trading Corporation by Reynaldo C. Honrado, Jr., President and Reynaldo C. Honrado, Jr., Co-maker". In the case of Parot vs. Gemora, 10 this Court had occasion to state: Where a promissory note is signed by two or more persons promissing to pay the amount of the said note juntos o separadamente, such co-makers are individually liable for the payment of the full amount of the obligation of such contract. Therefore, petitioner Honrado is solidarily liable to pay the full amount of the obligation as stipulated in the promissory note to which private respondent is entitled PEREZ vs. GUTIERREZ



debtors

Indivisible joint obligation – requires the consent of all

CHARACTERISTICS  Obligation is joint but since it is indivisible, creditor must proceed against all the joint debtors.  Demand must be to all joint debtors;  In case of insolvency of one debtor; others are not liable for his share;  If there are joint creditors, delivery must be made to all unless authorized by others;  Each joint creditor may renounce his share Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. (n)

 

Solidarity ---the tie between parties Indivisibility --- subject matter

KINDS OF SOLIDARITY

In Tamayo vs. Aquino, also cited in Mangusang, supra, this Court, reiterating what was stated en passant in Jepte, supra, described the nature of the liability of the actual transferee of a vehicle the negligent operation of which gives rise to injuries to its passengers: The question that is posed, therefore, is how should the holder of the certificate of public convenience Tamayo participate with his transferee operator Rayos, in the damages recoverable by the heirs of the deceased passenger, if their liability is not that of joint tortfeasors in accordance with Article 2194 of the Civil Code. The following considerations must be borne in mind in determining this question. As Tamayo is the registered owner of the truck, his responsibility to the public or to any passenger riding in the vehicle or truck must be direct, for the reasons given in our decision in the case of Erezo vs. Jepte, supra, as quoted above. But as the transferee, who operated the vehicle when the passenger died, is the one directly responsible for the accident and death, he should in turn be made responsible to the registered owner for what the latter may have been adjudged to pay. In operating the truck without transfer thereof having been approved by the Public Service Commission, the transferee acted merely as agent of the registered owner and should be responsible to him (the registered owner), for any damages that he may cause the latter by his negligence." Upon the foregoing, it is quite clear that the court below erred in holding Panfilo Alajar, rather than Josefina Gutierrez, as the one directly liable to Fe Perez for the latter's injuries and the corresponding damages incurred. This Court notes moreover, that the court below inexplicably failed to hold the driver (Leopoldo Cordero), whom it found guilty of reckless imprudence, jointly and solidarily liable with Josefina Gutierrez to Fe Perez in accordance with the provisions of Art 2184 in relation to Art. 2180 of the NCC. Art. 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 to be divided into as many 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) Art. 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 debtors. If one of the latter should be insolvent, the others shall not be liable for his share. (1139)

1. 2. 3. 4. 5.

ACTIVE – on the part of creditors/obliges PASSIVE – debtors/obligors part MIXED – both CONVENTIONAL – agreed by parties LEGAL – imposed by law

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (1140) Art. 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. (1141a) Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n) Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. (1142a) Art. 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; EFFECT  Modification of an obligation by changing its object or principal conditions; by substituting the person of debtor; subrogation COMPENSATION  Is that w/c takes place when 2 persons in their own right, are creditors and debtors of each other. CONFUSION/ MERGER  W/c takes place when the characters of creditor and debtor are merged in the same person, as when a check issued by A, in the course of negotiation, is eventually endorsed to him.  The solidary obligation is extinguished; but the other is still indebted to the other for his share. 16




REMISSION (WAIVER)  That act of liberality whereby a creditor condones the obligation of the debtor; that where the creditor tells the debtor to “forget about the whole thing.” CASES ARTICLE 1211

To be sure, even if the solidary nature of Operators' liability is selfevident, American Biscuit cannot disregard such an arbitration clause stipulated in the contracts. Solidarity does not make a solidary obligor an indispensable party in a suit filed by the creditor. Article 1216 of the Civil Code says that the creditor "may proceed against anyone of the solidary debtors or some or all of them simultaneously. At the very least then, the inclusion of Operators in the case filed below is a dead issue. The dispute between the parties should have been the subject of arbitration as agreed upon

OPERATORS INC. vs. AMERICAN BISCUIT The position of Operators that under the Operating Contract and the Tripartite Agreement it is not answerable for the misfeasance of Associated, is belied by the very provisions of the Tripartite Agreement, thus: 10. Incorporating Clauses. Paragraphs 9, 10, 11, the provisions on Board of Arbitrators, 14, 15, 16 and 17 of the contract of September 26, 1953 between the American Biscuit Co., Inc. and Operators Incorporated are hereby incorporated into this Contract by way of reference and made an essential part hereof; and the word "OPERATORS" mentioned in said paragraphs is to be understood as to include the Associated Biscuit Operators Inc., for purposes of this Contract; and both the Operators Incorporated and the Associated Biscuit Operators Inc., in so far as liabilities and obligations therein contained in said paragraphs shall be made answerable to the American Biscuit Co., Inc., jointly and severally. There is thus no mistaking the fact that Operators and Associated had assumed, per their agreements, American's liabilities to its creditors in solidum. Article 1207 of the new Civil Code states that: "there is a solidary liability when the obligation expressly so states .... " What may have led Operators in denying the solidary character of its obligations was the fact that it was engaged in the manufacture of candy whereas Associated Biscuit was supposed to manufacture biscuits, and the fact that the two operators were required to invest different minimum amounts in the venture. But these conditions do not alter the solidary nature of their obligations as expressly provided. According to Article 1211 of the Civil Code, "solidarity may exist although the debtors may not be bound in the same manner and by the same periods and conditions." Accordingly, the disparity in their functions under the contracts does not vary the fact that they were bound, in connection with American's liabilities, jointly and severally. American Biscuit's own submission, however, that: The Court of Appeals erred in holding that petitioner's "accusation of breach" was, pursuant to the defendant Associated Biscuit, Inc. to carry out their terms and conditions, especially its failure to satisfy the indebtedness of petitioner mentioned therein, which, under said governing agreements, expressly grants petitioner the right to file suit for the cancellation or abrogation of the same. lacks merit. A closer scrutiny of the contracts in question will show that, contrary to the contention of American Biscuit, there was, as between itself and Operators, a disagreement as to the meaning and effect of the governing contracts, a disagreement referable, indeed, to a Board of Arbitrators pursuant to the arbitration clause. And this was violated by American Biscuit when it made Operators a co-defendant in the complaint for the cancellation of the aforesaid agreements.

Art. 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.) Effect of not proceeding against ALL – there is no waiver against those not yet sued; they may be proceeded against later.  Applies only to solidary obligation, not joint. PASSIVE SOLIDARITY & SURETYSHIP (similarities)  both the solidary debtor and the surety guarantee for another person.  both can demand reimbursement Differences:  Solidary debtor indebted for own share only; SURETY is indebted only for the share of the principal debtor;  Solidary debtor can be reimbursed with what he has paid less his own share; SURETY can be reimbursed for everything he has paid.  SD receives an extension of period of payment, others are still liable for the whole obligation minus the share of the debtor who has extension. If the principal debtor receives extension w/out surety’s consent, the surety is released. CASES DE CASTRO vs. CA The solidary liability of the four co-owners, however, militates against the De Castros' theory that the other co-owners should be impleaded as indispensable parties. A noted commentator explained Article 1915 thus "The rule in this article applies even when the appointments were made by the principals in separate acts, provided that they are for the same transaction. The solidarity arises from the common interest of the principals, and not from the act of constituting the agency. By virtue of this solidarity, the agent can recover from any principal the whole compensation and indemnity owing to him by the others. The parties, however, may, by express agreement, negate this solidary responsibility. The solidarity does not disappear by the mere partition effected by the principals after the accomplishment of the agency. If the undertaking is one in which several are interested, but only some create the agency, only the latter are solidarily liable, without prejudice to the effects of negotiorum gestio with respect to the others. And if the power granted includes various transactions some of which are common and others are not, only those interested in each transaction shall be liable for it." 17




When the law expressly provides for solidarity of the obligation, as in the liability of co-principals in a contract of agency, each obligor may be compelled to pay the entire obligation.12 The agent may recover the whole compensation from any one of the co-principals, as in this case. Indeed, Article 1216 of the Civil Code provides that a creditor may sue any of the solidary debtors. This article reads: Art. 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. Thus, the Court has ruled in Operators Incorporated vs. American Biscuit Co., Inc.13 that "x x x solidarity does not make a solidary obligor an indispensable party in a suit filed by the creditor. Article 1216 of the Civil Code says that the creditor `may proceed against anyone of the solidary debtors or some or all of them simultaneously'." (Emphasis supplied) GATEWAY ELECTRONICS vs. ASIAN BANK CORP A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same as that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. Perforce, x x x a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound. Clearly, Asianbank’s right to collect payment for the full amount from Geronimo, as surety, exists independently of its right against Gateway as principal debtor; it could thus proceed against one of them or file separate actions against them to recover the principal debt covered by the deed on suretyship, subject to the rule prohibiting double recovery from the same cause. This legal postulate becomes all the more cogent in case of an insolvency situation where, as here, the insolvency court is bereft of jurisdiction over the sureties of the principal debtor. As Asianbank aptly points out, a suit against the surety, insofar as the surety’s solidary liability is concerned, is not affected by an insolvency proceeding instituted by or against the principal debtor. The same principle holds true with respect to the surety of a corporation in distress which is subject of a rehabilitation proceeding before the Securities and Exchange Commission (SEC). As we held inCommercial Banking Corporation v. CA, a surety of the distressed corporation can be sued separately to enforce his liability as such, notwithstanding an SEC order declaring the former under a state of suspension of payment.

MOLINO vs. SECURITY DINERS INTL CORP The Surety Undertaking expressly provides that petitioner's liability is solidary. A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable.14 Although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.15 There being no question that Danilo Alto incurred debts of P166,408.31 in credit card advances, an obligation shared solidarily by petitioner, respondent was certainly within its rights to proceed singly against petitioner, as surety and solidary debtor, without prejudice to any action it may later file against Danilo Alto, until the obligation is fully satisfied. This is so provided under Article 1216 of the Civil Code: 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 be subsequently directed against the others, so long as the debt has not been fully collected. Petitioner is a graduate of business administration, and possesses considerable work experience in several banks. She knew the full import and consequence of the Surety Undertaking that she executed. She had the option to withdraw her suretyship when Danilo upgraded his card to one that permitted unlimited purchases, but instead she approved the upgrading. While we commiserate in the financial predicament she now faces, it is also evident that the liability she incurred is only the legitimate consequence of an undertaking that she freely and intelligently obliged to. Prospective sureties to credit card applicants would be well-advised to study carefully the terms of the agreements prepared by the credit card companies before giving their consent, and pay heed to speculations that could lead to onerous effects, like in the present case where the credit applied for was limitless. At the same time, it bears articulating that although courts in appropriate cases may equitably reduce the award for penalty as provided under such suretyship agreements if the same is iniquitous or unconscionable,16 we are unable to give relief to petitioner by way of reducing the amount of the principal liability as surety under the circumstances of this case MENDOZA vs. CA Appellants contend that there was no need for the bank to foreclose the mortgage on the Urcia spouses’ property since it could run after either Teofila as co-maker or Rosario whose quedan was in the bank’s possession and is sufficient to pay the loans. The contention is untenable. Art. 1216 of the New Civil Code gives the creditor the right to "proceed against any one of the solidary debtors or some or all of them simultaneously." The choice of the solidary debtor or against whom the solidary creditor will enforce collection is left to the latter (PNB vs. Independent Planters Association, Inc., 122 SCRA 113). Similarly, the choice of remedy to effect collection pertains to the creditor. On the other hand, the bank cannot run after Rosario’s quedan because she is not indebted to it. The loan was exclusively obtained by Alberto. And Rosario did not assign her quedan to the bank as payment for Alberto’s obligations. xxxx 18




x x x The death of the debtor does not extinguish his civil liability as his estate will answer for it (Art. 1078, Civil Code). Since the quedans belong to Estanislao, the proceeds thereof should be applied to his own obligation. In this sense, Estanislao can be considered a debtor of the bank, even after his death, concerning his unpaid loans. xxxx Considering the foregoing, appellants’ computation of Estanislao’s loans from the bank is, at best, sketchy and self-serving and renders the purported overpayment implausible. Consequently, We uphold the court a quo’s finding that Estanislao is indebted to the bank in the amount of P67,000.00. As aptly observed by the trial court: "The Central Bank Report speaks for itself. It was adopted by the petitioners as their own evidence and was marked as Exhibits ‘J’, ‘RRR-1’ to ‘RRR-3’. There is presumption of regularity in the performance of official duties. And the Court finds the report of the Central Bank employees as regards the computation of the loans of the late Estanislao Ilagan to be correct." In fine, the lower court committed no error in its appealed decision. Art. 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) Art. 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) Art. 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) Art. 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) Art. 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)

PAYMENT Payment is one of the ways by which an obligation is extinguished and consists in the delivery of the thing or the rendition of the service which is the object of the obligation EFFECTS OF LOSS/ IMPOSSIBILITY 1. if w/out fault – no liability 2. if w/ fault – liable + damages and interest 3. fortuitous event after default – there is liability because of default. CASES ARTICLE 1217 DIAMOND BUILDER CONGLOMERATION vs. COUNTRY BANGKERS Article 2047 of the Civil Code specifically calls for the application of the provisions on solidary obligations to suretyship contracts. In particular, Article 1217 of the Civil Code recognizes the right of reimbursement from a co-debtor (the principal co-debtor, in case of suretyship) in favor of the one who paid (i.e., the surety). In contrast, Article 1218 of the Civil Code is definitive on when reimbursement is unavailing, such that only those payments made after the obligation has prescribed or became illegal shall not entitle a solidary debtor to reimbursement. Nowhere in the invoked CA Decision does it declare that a surety who pays, by virtue of a writ of execution, is not entitled to reimbursement from the principal co-debtor. The CA Decision was confined to the mootness of the issue presented and petitioners’ preclusion from the relief it prayed for, i.e., a stay of the writ of execution, considering that the writ had already been satisfied. More importantly, the Indemnity Agreement signed by Rogelio and the other petitioners explicitly provided for an incontestability clause on payments made by Country Bankers. The said clause reads: INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: - Any payment or disbursement made by [Country Bankers] on account of the above-mentioned Bond, its renewals, extensions, alterations or substitutions either in the belief that [Country Bankers] was obligated to make such payment or in the belief that said payment was necessary or expedient in order to avoid greater losses or obligations for which [Country Bankers] might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions, alterations, or substitutions, shall be final and shall not be disputed by the undersigned, who hereby jointly and severally bind themselves to indemnify [Country Bankers] of any and all such payments, as stated in the preceding clauses. In case [Country Bankers] shall have paid, settled or compromised any liability, loss, costs, damages, attorney’s fees, expenses, claims, demands, suits, or judgments as above-stated, arising out of or in connection with said bond, an itemized statement thereof, signed by an officer of [Country Bankers] and other evidence to show said payment, settlement or compromise, shall be prima facie evidence of said payment, settlement or compromise, as well as the liability of [petitioners] in any and all suits and claims against [petitioners] arising out of said bond or this bond application. Ineluctably, petitioners are obligated to reimburse Country Bankers the amount of P370,000.

19




MANILA ELECTRIC COMPANY vs. BENAMIRA ASDAI is held liable by virtue of its status as direct employer, while MERALCO is deemed the indirect employer of the individual respondents for the purpose of paying their wages in the event of failure of ASDAI to pay them. This statutory scheme gives the workers the ample protection consonant with labor and social justice provisions of the 1987 Constitution. However, as held in Mariveles Shipyard Corp. vs. Court of Appeals,[33] the solidary liability of MERALCO with that of ASDAI does not preclude the application of Article 1217 of the Civil Code on the right of reimbursement from his co-debtor by the one who paid,[34] which provides: ART. 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.Â 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. ASDAI may not seek exculpation by claiming that MERALCO’s payments to it were inadequate for the individual respondents’ lawful compensation.Â As an employer, ASDAI is charged with knowledge of labor laws and the adequacy of the compensation that it demands for contractual services is its principal concern and not any other’s. ESCANO vs. ORTIGAS Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding against the principal debtor for the same obligation. At the same time, there is also a legal tie created between the surety and the principal debtor to which the creditor is not privy or party to. The moment the surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is extinguished. At the same time, the surety may seek reimbursement from the principal debtor for the amount paid, for the surety does in fact “become subrogated to all the rights and remedies of the creditor.” Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the one who paid (i.e., the surety). However, a significant distinction still lies between a joint and several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety to seek reimbursement for the sums they paid out to the creditor.

Dr. Tolentino explains the differences between a solidary co-debtor and a surety: A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code. The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing between the co-debtors liable in solidum is similar to the common law suretyship. In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who effected the payment to the creditor “may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made.” Such solidary debtor will not be able to recover from the codebtors the full amount already paid to the creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not as to the particular proportional share of the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid, and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation assumed by the surety. What is the source of this right to full reimbursement by the surety? We find the right under Article 2066 of the Civil Code, which assures that “[t]he guarantor who pays for a debtor must be indemnified by the latter,” such indemnity comprising of, among others, “the total amount of the debt.” Further, Article 2067 of the Civil Code likewise establishes that “[t]he guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor.” Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several obligations should apply to sureties. We reject that argument, and instead adopt Dr. Tolentino’s observation that “[t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that suretyship is withdrawn from the applicable provisions governing guaranty.” For if that were not the implication, there would be no material difference between the surety as defined under Article 2047 and the joint and several debtors, for both classes of obligors would be governed by exactly the same rules and limitations. Accordingly, the rights to indemnification and subrogation as established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights granted to the surety who pays materially differ from those granted under Article 1217 to the solidary debtor who pays, since the “indemnification” that pertains to the latter extends “only [to] the share which corresponds to each [co-debtor].” It is for this reason that the Court cannot accord the conclusion that because 20




petitioners are identified in the Undertaking as “SURETIES,” they are consequently joint and severally liable to Ortigas. In order for the conclusion espoused by Ortigas to hold, in light of the general presumption favoring joint liability, the Court would have to be satisfied that among the petitioners and Matti, there is one or some of them who stand as the principal debtor to Ortigas and another as surety who has the right to full reimbursement from the principal debtor or debtors. No suggestion is made by the parties that such is the case, and certainly the Undertaking is not revelatory of such intention. If the Court were to give full fruition to the use of the term “SURETIES” as conclusive indication of the existence of a surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the necessary implication would be to lay down a corresponding set of rights and obligations as between the “SURETIES” which petitioners and Matti did not clearly intend. It is not impossible that as between Escaño, Silos and Matti, there was an agreement whereby in the event that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them was to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from the other two obligors. In such case, there would have been, in fact, a surety agreement which evinces a solidary obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not appear on the record. More consequentially, no such intention is reflected in the Undertaking itself, the very document that creates the conditional obligation that petitioners and Matti reimburse Ortigas should he be made to pay PDCP. The mere utilization of the term “SURETIES” could not work to such effect, especially as it does not appear who exactly is the principal debtor whose obligation is “assured” or “guaranteed” by the surety. URBANES vs. SEC OF LABOR In the case of Eagle Security Agency, Inc. v. NLRC,23 this Court held: The Wage Orders are explicit that payment of the increases are "to be borne" by the principal or client. "To be borne", however, does not mean that the principal, PTSI in this case, would directly pay the security guards the wage and allowance increases because there is no privity of contract between them. The security guards' contractual relationship is with their immediate employer, EAGLE. As an employer, EAGLE is tasked, among others, with the payment of their wages [See Article VII Sec. 3 of the Contract for Security Services, supra and Bautista v. Inciong, G.R. No. 52824, March 16, 1988, 158 SCRA 665]. On the other hand, there existed a contractual agreement between PTSI and EAGLE wherein the former availed of the security services provided by the latter. In return, the security agency collects from its client payment for its security services. This payment covers the wages for the security guards and also expenses for their supervision and training, the guards' bonds, firearms with ammunitions, uniforms and other equipments, accessories, tools, materials and supplies necessary for the maintenance of a security force. Premises considered, the security guards' immediate recourse for the payment of the increases is with their direct employer, EAGLE. However, in order for the security agency to comply with the new wage and allowance rates it has to pay the security guards, the Wage Orders made specific provision to amend existing contracts for security services by allowing the adjustment of the consideration paid by the principal to the security agency concerned. What the Wage Orders require, therefore, is the amendment of the contract

as to the consideration to cover the service contractor's payment of the increases mandated. In the end, therefore, ultimate liability for the payment of the increases rests with the principal. In view of the foregoing, the security guards should claim the amount of the increases from EAGLE. Under the Labor Code, in case the agency fails to pay them the amounts claimed, PTSI should be held solidarily liable with EAGLE [Articles 106, 107 and 109]. Should EAGLE pay, it can claim an adjustment from PTSI for an increase in consideration to cover the increases payable to the security guards. x x x (Emphasis and underscoring supplied). Passing on the foregoing disquisition in Eagle, this Court, in Lapanday, held: It is clear also from the foregoing that it is only when [the] contractor pays the increases mandated that it can claim an adjustment from the principal to cover the increases payable to the security guards. The conclusion that the right of the contractor (as principal debtor) to recover from the principal (as solidary co-debtor) arises only if he has paid the amounts for which both of them are jointly and severally liable is in line with Article 1217 of the Civil Code which provides: "Art. 1217. Payment made by one 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 payment make claim from his co-debtors only the share which corresponds to each, with 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. x x x (Emphasis and underscoring supplied). In fine, the liability of the SSS to reimburse petitioner arises only if and when petitioner pays his employee-security guards "the increases" mandated by Wage Order No. NCR-03. The records do not show that petitioner has paid the mandated increases to the security guards. The security guards in fact have filed a complaint with the NLRC against petitioner relative to, among other things, underpayment of wages Art. 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) KINDS OF DEFENSES 1. Those derived from the nature of the obligation 2. Those personal to the debtor sued. CASES PHIL BLOOMING MILLS vs. CA Art. 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. In granting the loan to PBM, TRB required Ching’s surety precisely 21




to insure full recovery of the loan in case PBM becomes insolvent or fails to pay in full. This was the very purpose of the surety. Thus, Ching cannot use PBM’s failure to pay in full as justification for his own reduced liability to TRB. As surety, Ching agreed to pay in full PBM’s loan in case PBM fails to pay in full for any reason, including its insolvency. TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of PBM’s loan. This is clear from Article 1216 of the Civil Code: ART. 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. (Emphasis supplied) Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution states that PBM’s outstanding loans may be reduced to P1.373 million subject to certain conditions like the payment of P150,000 initial payment. The resolution also states that TRB should not release Ching’s solidary liability under his surety. The resolution even directs TRB’s management to study Ching’s criminal liability under the trust documents. Ching’s own witness testified that Resolution No. 5935 was never implemented. For one, PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also rejected the document that PBM’s receiver presented which would have released Ching from his suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his suretyship. LA FARGE vs. CONTINENTAL CEMENT Obligations may be classified as either joint or solidary. "Joint" or "jointly" or "conjoint" means mancum or mancomunada or pro rata obligation; on the other hand, "solidary obligations" may be used interchangeably with "joint and several" or "several." Thus, petitioners' usage of the term "joint and solidary" is confusing and ambiguous. The ambiguity in petitioners' counterclaims notwithstanding, respondents' liability, if proven, is solidary. This characterization finds basis in Article 1207 of the Civil Code, which provides that obligations are generally considered joint, except when otherwise expressly stated or when the law or the nature of the obligation requires solidarity. However, obligations arising from tort are, by their nature, always solidary. We have assiduously maintained this legal principle as early as 1912 in Worcester v. Ocampo, in which we held: "x x x The difficulty in the contention of the appellants is that they fail to recognize that the basis of the present action is tort. They fail to recognize the universal doctrine that each joint tort feasor is not only individually liable for the tort in which he participates, but is also jointly liable with his tort feasors. x x x "It may be stated as a general rule that joint tort feasors are all the persons who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for their benefit. They are each liable as principals, to the same extent and in the same manner as if they had performed the wrongful act themselves. x x x "Joint tort feasors are jointly and severally liable for the tort which they commit. The persons injured may sue all

of them or any number less than all. Each is liable for the whole damages caused by all, and all together are jointly liable for the whole damage. It is no defense for one sued alone, that the others who participated in the wrongful act are not joined with him as defendants; nor is it any excuse for him that his participation in the tort was insignificant as compared to that of the others. x x x "Joint tort feasors are not liable pro rata. The damages can not be apportioned among them, except among themselves. They cannot insist upon an apportionment, for the purpose of each paying an aliquot part. They are jointly and severally liable for the whole amount. x x x "A payment in full for the damage done, by one of the joint tort feasors, of course satisfies any claim which might exist against the others. There can be but satisfaction. The release of one of the joint tort feasors by agreement generally operates to discharge all. x x x "Of course the court during trial may find that some of the alleged tort feasors are liable and that others are not liable. The courts may release some for lack of evidence while condemning others of the alleged tort feasors. And this is true even though they are charged jointly and severally." In a "joint" obligation, each obligor answers only for a part of the whole liability; in a "solidary" or "joint and several" obligation, the relationship between the active and the passive subjects is so close that each of them must comply with or demand the fulfillment of the whole obligation. The fact that the liability sought against the CCC is for specific performance and tort, while that sought against the individual respondents is based solely on tort does not negate the solidary nature of their liability for tortuous acts alleged in the counterclaims. Article 1211 of the Civil Code is explicit on this point: "Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions." The solidary character of respondents' alleged liability is precisely why credence cannot be given to petitioners' assertion. According to such assertion, Respondent CCC cannot move to dismiss the counterclaims on grounds that pertain solely to its individual codebtors. In cases filed by the creditor, a solidary debtor may invoke defenses arising from the nature of the obligation, from circumstances personal to it, or even from those personal to its codebtors. Article 1222 of the Civil Code provides: "A solidary debtor may, in actions filed by the creditor, avail itself 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." (Emphasis supplied). The act of Respondent CCC as a solidary debtor -- that of filing a motion to dismiss the counterclaim on grounds that pertain only to its individual co-debtors -- is therefore allowed. However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed it on behalf of Co-respondents Lim and Mariano; it did not pray that the counterclaim against it be dismissed. Be that as it may, Respondent CCC cannot be declared in default. Jurisprudence teaches that if the issues raised in the compulsory counterclaim are so intertwined with the allegations in 22




the complaint, such issues are deemed automatically joined. Counterclaims that are only for damages and attorney's fees and that arise from the filing of the complaint shall be considered as special defenses and need not be answered SECTION 5. - Divisible and Indivisible Obligations Art. 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)

 

Divisible obligation – capable of partial performance; Indivisible – not capable of partial fulfillment.

INDIVISIBILITY vs. SOLIDARITY SOLIDARITY

INDIVISIBILITY

1. refers to the tie between parties;



2. needs at least 2 debtors or creditors;



3. fault of one is fault of others



Refers to nature of obligation;

In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (1151a) OBLIGATIONS THAT ARE DEEMED INDIVISIBLE 1. Obligations to give definite things. 2. Those which are not susceptible of partial performance. 3. Even if the thing is physically divisible, it may be indivisible if so provided by law. 4. Even if the thing is physically divisible, it may be indivisible if such was the intention of the parties concerned. OBLIGATIONS THAT ARE DEEMED DIVISIBLE 1. When the object of the obligation is the execution of a certain number of days of work. 2. When the object of the obligation is the accomplishment of work by metrical units. 3. When the purpose of the obligation is to pay a certain amount in installments. 4. When the object of the obligation is accomplishment of work susceptible of partial performance. SECTION 6. - Obligations with a Penal Clause

May exist even if there is one debtor and one creditor;

of others

Fault of one – not fault

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, 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)

CLASSES/KINDS OF INDIVISIBILITY 1. Conventional – agreed to by parties; 2. Natural/absolute – nature of obligation 3. Legal – by law KINDS OF DIVISION 1. Quantitative – depends of quantity 2. Qualitative – depends of quality 3. Intellectual/ moral – one that exists merely in the mind and not in physical reality Art. 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) EFFECT OF NON-COMPLIANCE – the obligation is converted into a monetary one for indemnity. Art. 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.

PENAL CLAUSE – a coercive means to obtain from debtor compliance. It is an accessory undertaking to assume greater liability in case of breach. KINDS OF PENAL CLAUSE a. legal; b. conventional/ voluntary c. Subsidiary – when only penalty may be asked. d. Joint – when both the principal contract and penal clause can be enforced *** be noted on this points (read the book)  Penal Clause constitutes an obligation although an accessory  May become demandable in default of the unperformed principal obligation PURPOSE: to insure performance and also to substitute for damages and the payment of interest in case of non-compliance EXCEPTIONS: 1. Expressly stipulated – to the effect that damages and interests may still be recovered despite the presence of Penal clause 2. When debtor refuses to pay the penalty imposed in the obligation. 3. When debtor is guilty of fraud or dolo in the fulfillment of the obligaton. (reason: no waiver of future action for fraud) 23




CASES FILINVEST LAND vs. CA There is no question that the penalty of P15,000.00 per day of delay was mutually agreed upon by the parties and that the same is sanctioned by law. A penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to an obligation in order to insure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. Article 1226 of the Civil Code states: Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, 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. Filinvest, however, hammers on the case of Laureano v. Kilayco, decided in 1915, which cautions courts to distinguish between two kinds of penalty clauses in order to better apply their authority in reducing the amount recoverable. We held therein that: . . . [I]n 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, courts will rigidly apply the doctrine of strict construction 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, where the indemnity provided for is essentially a mere penalty having for its principal object the enforcement of compliance with the contract. But the courts will be slow in exercising the jurisdiction conferred upon them in article 1154 so as to modify the terms of an agreed upon indemnification where it appears that in fixing such indemnification the parties had in mind a fair and reasonable compensation for actual damages anticipated as a result of a breach of the contract, or, in other words, where the principal purpose of the indemnification agreed upon appears to have been to provide for the payment of actual anticipated and liquidated damages rather than the penalization of a breach of the contract. (Emphases supplied) Filinvest contends that the subject penalty clause falls under the second type, i.e., the principal purpose for its inclusion was to provide for payment of actual anticipated and liquidated damages rather than the penalization of a breach of the contract. Thus, Filinvest argues that had Pecorp completed the project on time, it (Filinvest) could have sold the lots sooner and earned its projected income that would have been used for its other projects. Unfortunately for Filinvest, the above-quoted doctrine is inapplicable to herein case. The Supreme Court in Laureano instructed that a distinction between a penalty clause imposed essentially as penalty in case of breach and a penalty clause imposed as indemnity for damages should be made in cases where there has been neither partial nor irregular compliance with the terms of the contract. In cases where there has been partial or irregular compliance, as in this case, there will be no substantial

difference between a penalty and liquidated damages insofar as legal results are concerned. The distinction is thus more apparent than real especially in the light of certain provisions of the Civil Code of the Philippines which provides in Articles 2226 and Article 2227 thereof: Art. 2226. Liquidated damages are those agreed upon by the parties to a contract to be paid in case of breach thereof. Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. Thus, we lamented in one case that “(t)here is no justification for the Civil Code to make an apparent distinction between a penalty and liquidated damages because the settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual damages and both may be reduced when proper In Ligutan v. Court of Appeals, we pointed out that the question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective as its “resolution would depend on such factors as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. FLORENTINO vs. SUPERVALUE Section 18. TERMINATION. Any breach, non-performance or non-observance of the terms and conditions herein provided shall constitute default which shall be sufficient ground to terminate this lease, its extension or renewal. In which event, the LESSOR shall demand that LESSEE immediately vacate the premises, and LESSOR shall forfeit in its favor the deposit tendered without prejudice to any such other appropriate action as may be legally authorized. Since it was already established by the trial court that the petitioner was guilty of committing several breaches of contract, the Court of Appeals decreed that she cannot therefore rightfully demand the return of the security deposits for the same are deemed forfeited by reason of evident contractual violations. It is undisputed that the above-quoted provision found in all Contracts of Lease is in the nature of a penal clause to ensure petitioner’s faithful compliance with the terms and conditions of the said contracts. A penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to an obligation in order to insure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of proof of the existence and the measure of damages caused by the breach. Article 1226 of the Civil Code states: Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses 24




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. As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on such terms and conditions as they see fit as long as they are not contrary to law, morals, good customs, public order or public policy. Nevertheless, courts may equitably reduce a stipulated penalty in the contracts in two instances: (1) if the principal obligation has been partly or irregularly complied with; and (2) even if there has been no compliance if the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code which clearly provides: Art. 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. In ascertaining whether the penalty is unconscionable or not, this court set out the following standard in Ligutan v. Court of Appeals, to wit: The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly objective. Its resolution would depend on such factor as, but not necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the supervening realities, the standing and relationship of the parties, and the like, the application of which, by and large, is addressed to the sound discretion of the court. xxx. In the instant case, the forfeiture of the entire amount of the security deposits in the sum of P192,000.00 was excessive and unconscionable considering that the gravity of the breaches committed by the petitioner is not of such degree that the respondent was unduly prejudiced thereby. It is but equitable therefore to reduce the penalty of the petitioner to 50% of the total amount of security deposits. It is in the exercise of its sound discretion that this court tempered the penalty for the breaches committed by the petitioner to 50% of the amount of the security deposits. The forfeiture of the entire sum of P192,000.00 is clearly a usurious and iniquitous penalty for the transgressions committed by the petitioner. The respondent is therefore under the obligation to return the 50% of P192,000.00 to the petitioner. SEGOVIA DEV’T CORP vs. J.L. DUMATOL REALTY The three percent (3%) penalty interest is patently iniquitous and unconscionable as to warrant the exercise by this Court of its judicial discretion. A close reading of the contracts to sell will show that the three percent (3%) penalty interest on unpaid installments on a monthly basis (per Sec. 4.1) would translate to a yearly penalty interest of thirty-six percent (36%). Assuming that respondent has an outstanding balance which runs into millions (P2,559,900.00 per HLURB Arbiter's computation), the payments respondent made (amounting to P4.4 million out of the P6.05 million contract price) would be virtually wiped out if the three percent (3%) penalty interest were imposed on the account balance. With more reason should we question the wisdom of such stipulated provision considering that respondent DUMATOL stands to lose the three (3) condominium units notwithstanding the fact that it has

substantially complied with its contractual obligations. Pending determination of the actual liability of respondent, we could only speculate on how staggering the increase in the unpaid instalments of the respondent would now be after more than a decade of litigation. Although this Court on various occasions has eliminated altogether the three percent (3%) penalty interest for being unconscionable,14 we are not inclined to do the same in this case. A reduction is more consistent with fairness and equity. We should not lose sight of the fact that petitioner remain an unpaid seller that it has suffered, one way or another, from respondent's nonperformance of its contractual obligations. In view of such glaring reality, we invoke the authority granted to us by Art. 1229 of the Civil Code, and as equity dictates, the penalty interest is accordingly reimposed on a reduced rate of one percent (1%) interest per month or twelve percent (12%) per annum. With respect to the six percent (6%) interest per annum imposed as damages, we disallow the same for lack of legal basis. As correctly pointed out by the Court of Appeals, the contracts to sell do not provide for a six percent (6%) interest on the unpaid principal and accumulated penalty and interest charges. The interest was raised for the first time on appeal as a claim for twelve, percent (12%) interest which was subsequently reduced to six percent (6%) by the HLURB. In disallowing the interest, we quote with approval the observation of the appellate court15 – x x x x We hold that there is no legal basis for its imposition. It is a basic legal principle that parties may not raise a new cause of action on appeal x x x x This matter was raised for the first time on appeal as a claim for 12% interest which was subsequently reduced by the HULRB Commissioners to 6% per annum. Respondents, (petitioner herein) never made a counterclaim for these amounts in their answer and position paper during the proceedings at the arbiter's level xxxx Neither can we find statutory justification for the imposition of the six percent (6%) interest in Art. 122616 of the Civil Code. An obligation with a penal clause is one that contains an accessory undertaking, primarily intended to induce faithful performance of the principal prestation. TAN vs. CA 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. In the case at bar, the promissory note (Exhibit "A") expressly provides for the imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan. The pertinent6 portion of the promissory note (Exhibit "A") imposing interest and penalties provides that: For value received, I/We jointly and severally promise to pay to the CULTURAL CENTER OF THE PHILIPPINES at its office in Manila, the sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx. 25


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. xxx

xxx


xxx

With interest at the rate of FOURTEEN per cent (14%) per annum from the date hereof until paid. PLUS THREE PERCENT (3%) SERVICE CHARGE. In case of non-payment of this note at maturity/on demand or upon default of payment of any portion of it when due, I/We jointly and severally agree to pay additional penalty charges at the rate of TWO per cent (2%) per month on the total amount due until paid, payable and computed monthly. Default of payment of this note or any portion thereof when due shall render all other installments and all existing promissory notes made by us in favor of the CULTURAL CENTER OF THE PHILIPPINES immediately due and demandable. (Underscoring supplied) xxx

xxx

xxx

The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code.7 On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty charge which is separate and distinct from the monetary interest on the principal of the loan. Penalty on delinquent loans may take different forms. In Government Service Insurance System v. Court of Appeals,8 this Court has ruled that the New Civil Code permits an agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the monetary interest, and as such the two are different and distinct from each other and may be demanded separately. Quoting Equitable Banking Corp. v. Liwanag,9 the GSIS case went on to state that such a stipulation about payment of an additional interest rate partakes of the nature of a penalty clause which is sanctioned by law, more particularly under Article 2209 of the New Civil Code 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 per cent per annum. The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the stipulated penalty charge. The penalty charge is also called penalty or compensatory interest. Having clarified the same, the next issue to be resolved is whether interest may accrue on the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil Code, which provides that: Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest. Art. 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 without his fault, the penalty may be enforced. (1153a) Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (n) Art. 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) WHEN PENAL CLAUSE CANNOT BE ENFORCED: 1. The breach is the fault of creditor; 2. Fortuitous event intervened unless the debtor expressly agreed on his liability in case of fortuitous event.; 3. When debtor is not yet in default. CASES TAN vs. CA There appears to be a justification for a reduction of the penalty charge but not necessarily to ten percent (10%) of the unpaid balance of the loan as suggested by petitioner. Inasmuch as petitioner has made partial payments which showed his good faith, a reduction of the penalty charge from two percent (2%) per month on the total amount due, compounded monthly, until paid can indeed be justified under the said provision of Article 1229 of the New Civil Code. In other words, we find the continued monthly accrual of the two percent (2%) penalty charge on the total amount due to be unconscionable inasmuch as the same appeared to have been compounded monthly. Considering petitioner’s several partial payments and the fact he is liable under the note for the two percent (2%) penalty charge per month on the total amount due, compounded monthly, for twentyone (21) years since his default in 1980, we find it fair and equitable to reduce the penalty charge to a straight twelve percent (12%) per annum on the total amount due starting August 28, 1986, the date of the last Statement of Account (Exhibits "C" to "C-2"). We also took into consideration the offers of the petitioner to enter into a compromise for the settlement of his debt by presenting proposed payment schemes to respondent CCP. The said offers at compromise also showed his good faith despite difficulty in complying with his loan obligation due to his financial problems. However, we are not unmindful of the respondent’s long overdue deprivation of the use of its money collectible from the petitioner. STATE INVESTMENT HOUSE vs. CA The Court does not find any reversible error committed by the respondent court in ruling that the petitioner was no longer entitled to recover any deficiency amount after the foreclosure sale on February 14, 1983. Per Statement of Account dated September 21, 1981, the obligation of the private respondent was computed to be P4,809,187.12 inclusive of interest and penalty charges. Since the private respondent failed to fulfill its obligation, petitioner then decided to foreclose the real estate mortgage on two properties of the private respondent. At the time of the auction sale on February 14, 1983, the properties were sold in the amount of P4,223,874.00 with the petitioner as the highest bidder. Deducting this amount from the outstanding obligation of P4,809,187.12 as stipulated in 26




the Statement of Account, there would therefore be a balance of only about P575,313.l2.

penalty charges of 36%, to be definitely inquitious and unconscionable. x x x

Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or P2,601,147.62 as claimed by petitioner was of no moment. The respondent court disallowed the payment of the deficiency altogether because it found that tile principal obligation of the private respondent would not have ballooned to such a horrendous amount of P4.8M as of September 21,1991 if not for the penalty charge of 3% per month or 36% per annum. The trial court justified, to wit;

Likewise, in the case at bar, the two courts below found the penalty charge of 3% a month or 36% per annum inquitious and unconscionable. Petitioner computed the amount of P4,809,187.12, as the outstanding obligation of the petitioner as of September 21, 1981 after imposing the 3% penalty charge when petitioner defaulted in their payments. This amount was no longer questioned and was particularly taken into consideration when the mortgaged properties were foreclosed and sold at the auction sale in 1983, obtaining a sum of about P4,223,874.00. These foreclosed properties located in Makati8 are undoubtedly valuable properties whose market value has greatly appreciated to substantially satisfy the payment of the outstanding obligation. Notwithstanding the balance of P575,313.12, petitioner has clearly recouped its investment and earned more than enough profit in two years (19781981) by way of penalty charges. Although petitioner claims that the penalty charge was well within the banking and business practice, no proof was adduced thereof. To allow the petitioner to recover the amount of P6,835,021.21 at the time of the foreclosure sale in 1983, or P7,651,969.41 at the time of the trial of the case in 1988 which amounts are almost three times more than the original investment of about P2,558.073.75 is rather unwarranted. We quote with favor the respondent court's ratiocination:

x x x [F]rom the various checks the defendants had sold originally to the plaintiff at the beginning of their transactions, it is shown that the amount including interests and other charges, is P2,970,566.64. For a two year period from June 9, 1978 to March 9, 1980 and up to September 26, 1981 the amount grew to P4,809,187.12. In other words, the money of the plaintiff has already earned interests and other charges to more or less P1,638,630.48. As alleged in plaintiff's complaint, the total amount purchased by plaintiff was only for P2,500,000.00. There is reason to believe that the P2,970,566.64 represented by the various checks include therein, the interest and other charges upon their maturity dates. Deducting the amount of P2,500,000.00 from P2,970,556.64 is P420,556.64. In brief, the interests and charges that plaintiff has already earned from the time it has foreclosed defendants' properties has passed the P2,000,000.00. Contrary to petitioner's contention, the respondent court acted in accordance to of Article 1229 when it declared that petitioner was no longer entitled to the payment of the deficiency amount. The disallowance of the payment of deficiency was in effect merely a reduction of the penalty charges and not as a deletion of the penalties as contended by the petitioner. On the issue of payment of surcharges and penalties, we party agree that GOYU's pitiful situation must be taken into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be deleted. x x x Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides: ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for nonpayment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in another. This provision of law will have to be applied to the established facts of any given case. Given the circumstances under which GOYU found itself after the occurrence of the fire, the Court, rules the surcharges rates ranging, anywhere from 9% to 27%, plus the

The lower court did not err in its ruling under its statement that "since plaintiff had already recovered fully the receivables from the defendants, the court, considering that the plaintiff or the two properties foreclosed by it bidded the amount of P4,233,874.00, far and above the amount it had originally given to the defendants which was only over P2,000,000.00, it is rather most shocking and unconscionable for plaintiff to still collect from the defendants the alleged collectibles of P2,601,147.62 with 3% penalty charges. The plaintiff should have stopped imposing the 3% penalty charges and other burdens when it had consolidated finally the two titles of the properties it had foreclosed" (Decision, p. 8). After due consideration and reflection on all the factual circumstances obtaining in the case at bar, it is Our opinion that the lower court properly exercised its discretion under Article 1229 of the Civil Code to reduce the penalty charges for being highly and grossly unconscionable. x x x9 While the Court recognizes the right of the parties to enter into contracts and are expected to comply with the terms and obligations, this rule is not absolute. The Court allowed to temper interest rates when necessary. Article 1229 of tile New Civil Code clearly provides: ART. 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. Likewise, Article 2227 provides: ART. 2227. Liquidated damages, whether intended as an indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable RAMNANI vs. CA We thus rule that the trial court committed reversible error when it 27




applied equitable considerations under Article 1229 of the Civil Code to justify the defaults of Choithram and Ortigas.

mis-step and when we upheld the orders of the trial court dated January 7, 1994 and April 5, 1994. They should be rescinded.

In Commercial Credit Corporation of Cagayan de Oro v. Court of Appeals,4 this Court held:

By way of conclusion, it is elementary that if a party fails or refuses to abide by a compromise agreement, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand.5 This rule must be followed. For indeed, "it is not the province of the court to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not contain.

"(Article 1229) . . . applies only to obligations or contract, subject of a litigation, the condition being that the same has been partly or irregularly complied with by the debtor. The provision also applies even if there has been no performance, as long as the penalty is iniquitous or unconscionable. It cannot apply to a final and executory judgment." Moreover, equity does not apply to a situation when fraud and dilatory schemes exist. The incidents, during the supposed tender of payment, support a finding of continuing insincerity, recalcitrance, and bad faith on the part of the Choitram family. But these were not taken into account by the trial court. In the first place, the tender of payment was effected late with no valid reason for the delay. Second, the tender of payment is of doubtful validity. It bears reiterating that the checks were personal checks payable, not to spouses Ishwar, but to the RTC Branch Clerk of Court. They were not manager's or cashier's checks. Spouses Ishwar also state that the tender was conditional. It carried what they called "unacceptable conditions." The checks could not be indorsed to them because they were "Not transferable." The term and maturity were limited in nature. Third and most important, the intent to really pay as agreed upon was missing. It was not a genuine or sincere tender. Instead of making good on the stipulated payment, the Choithram family created a situation in such a way that the balance of P25 million was to be paid to the Bureau of Internal Revenue, not to spouses Ishwar. Thus, Choitram peremptorily wrote a poison letter to the BIR requesting "clarification" on the alleged tax liabilities of spouses Ishwar, and of his (Choithram's) "obligations" as payor. Choithram maliciously concealed from the BIR the material fact that Ishwar, although an alien, is a permanent resident of the Philippines, and his income and amounts received under the Tripartite Agreement are, therefore, not subject to 30% withholding tax at source. Under the Tax Code, a final 30% withholding tax at source is mandated to be collected only from non-resident aliens. The BIR promptly issued an assessment based on an incomplete presentation of facts by Choithram, directing him to withhold Twenty Million One Hundred Fifty Thousand Pesos (P20,150,000.00) For the mischief of the Choithram family, spouses Ishwar were needlessly compelled to litigate before the Court of Tax Appeals and subsequently before the Court of Appeals, and in the process wasted time and incurred expenses just to correct the harm done by the said family. The Court of Tax appeals reversed the BIR and ruled that Ishwar is a resident alien and his income is not subject to 30% automatic final withholding tax at source. Subsequently, the Court of Appeals affirmed the CTA ruling on the status of Ishwar as a resident alien. The administrative and judicial processes which Ishwar had to undergo because of the deceit and unscrupulous acts of the Choithram family consumed five (5) exhausting years, from 1993 until the dispute was finally resolved in 1998. Indeed, incessant bad faith on the part of the Family Choithram is evident.

MANILA INTERNATIONAL AIRPORT vs. ALA INDUSTRIES "The principle of autonomy of contracts must be respected."41 The Compromise Agreement was a contract perfected by mere consent;42 hence, it should have been respected. Item 3 thereof provided that failure of petitioner to pay within the stipulated period would entitle respondent to a writ of execution to enforce all the claims that had been pleaded by the latter in the Complaint. This provision must be upheld, because the Agreement supplanted the Complaint itself. Although judicial approval was not required for the perfection of that Agreement once it was granted, it could not and must not be disturbed except for vices of consent or forgery. 43 No such infirmity can be found in the subject Compromise Agreement. Its terms are clear and leave no doubt as to their intention. Thus, the literal meaning of its stipulations must control.44 It "must be strictly interpreted and x x x understood as including only matters specifically determined therein or which, by necessary inference from its wording, must be deemed included." 45 The lower court was without power to relieve petitioner from an obligation it had voluntarily assumed, simply because the Agreement later turned out to be unwise, disastrous or foolish.46 It had no authority to impose upon the parties a judgment different from or against the terms and conditions of their Compromise Agreement.47 It could not alter a contract by construction or make a new one for the parties; "its duty is confined to the interpretation of the one which they have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not contain." 48 It could not even set aside its judgment without declaring in an incidental hearing that the Agreement was vitiated by any of the grounds enumerated in Article 2038 of the Civil Code.49 Above all, neither the Agreement nor the court’s approval of it was ever questioned or assailed by the parties. Basic is the rule that if a party fails or refuses to abide by a compromise agreement, the other may either enforce it or regard it as rescinded and insist upon the original demand.50 For failure of petitioner to abide by the judicial compromise, respondent chose to enforce it. The latter’s course of action was in accordance with the very stipulations in the Agreement that the lower court could not change. Respondent is thus entitled to a writ of execution for the total amount contained in the Compromise Agreement. The Court cannot reduce it. The partial payment made by petitioner does not at all contravene Article 1229 of the Civil Code,52 which is applicable only to contracts that are the subjects of litigation, not to final and executory judgments

A second hard look at the history of these cases shows that it was a 28




Art. 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. (1155)

Payment is defined as not only the delivery of money but also the performance, in any other manner, of an obligation. Payment is the satisfaction or fulfillment of a prestation that is due, resulting in the extinguishment of the obligation of the debtor. (Pineda); Payment and performance is identical. Two kinds of payment:

CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS Art. 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; (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) CLASSIFICATION OF CAUSES OF EXTINGUISMENT A.

Substitution of Performance Compensation Novation dacion en pago

3.

Agreement to Obligation (a) Subsequent to Obligation unilateral waiver natural waiver remission mutual dissent compromise

Requisites of a valid payment: 1. Capacity of the person paying; 2. Capacity of the person receiving the payment; 3. Delivery of the full amount or the full performance of the prestation; 4. Propriety of time, place and manner of payment; 5. Acceptance of the payment by the creditor.

Art. 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)

HOW PAYMENT/ PERFORMANCE IS MADE 1. If monetary obligation, by delivery of money – in full payment unless otherwise stipulated in contract; 2. if debt is delivery of thing/s, by delivery of such thing/s 3. if debt is doing of a personal undertaking, by performance of said undertaking;if debt is not doing of something, by refraining from doing such. Note: A debtor cannot compel the creditor to accept partial payment. But, he can accept partial payment. If he voluntarily accepts such payments then he is deemed to have waived the requirements in Art. 1233 that the performance of the obligation is not considered complete unless there is complete delivery or complete performance.

(b) Simultaneous with Creation of Obligation resolutory term or extinctive period resolutory condition or condition subsequent B.



Requisites of Valid Payment: 1. the very thing/ service contemplated must be paid; 2. fulfillment must be complete.

VOLUNTARY 1. Performance Payment consignation 2.

1. It is normal (or voluntary) when the obligor voluntarily pays the obligation. 2. It becomes abnormal (involuntary) when the creditor institutes an action to collect payment in order that the obligor shall comply with his obligation.

INVOLUNTARY 1. by failure to bring an action (prescription) 2. resolutory/ condition subsequent (merger/confusion; in personal obligation- death; change of civil status) 3. by reason of object – impossibility of performance; loss of thing due

While it may be true that there is no payment if there is no complete delivery or performance of the service, there are two exceptions to the general rule. And those are Art. 1234 and 1235. Art. 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. Note:

SECTION 1. - Payment or Performance



In 1234 there has been substantial performance by the obligor in good faith. So, if there has been substantial performance IN GOOD FAITH by the obligor, then the obligor can recover as though there had been strict and complete fulfillment, less of course the damages suffered by the creditor.



The omission or defect must be slight and unimportant, that is, it must not be so material as to frustrate the accomplishment of the intended work.

Art. 1232 Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n) PAYMENT – mode of extinguishing obligation consists of:  delivery of money;  performance in any other manner of an obligation;

29


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. 


There must be no willful or intentional deviation from the contract or prestation by the debtor, and the omission or defect must not be material, otherwise, the performance will not amount to substantial compliance.

Art. 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)

The creditor can refuse payment by a 3rd person, EXCEPT: 1. 2.

Instance when RECOVERY can be had from Creditor and not from Debtor: 1. 2. 3. 4.

In this case, OBLIGEE is in ESTOPPEL – barred from further action for claims. How shall it happen? The creditor accepts the performance despite knowledge of the incompleteness or irregularity and without protest or objection accepts the performance. In effect, he is deemed to have waived the irregularity because the law requires that he must know the incompleteness or irregularity of the performance and accept it without protest or objection.

The De Castros also contend that Artigo's inaction as well as failure to protest estops him from recovering more than what was actually paid him. The De Castros cite Article 1235 of the Civil Code which reads: Art. 1235. When the obligee accepts the performance, knowing its incompleteness and irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. The De Castros' reliance on Article 1235 of the Civil Code is misplaced. Artigo's acceptance of partial payment of his commission neither amounts to a waiver of the balance nor puts him in estoppel. This is the import of Article 1235 which was explained in this wise: "The word accept, as used in Article 1235 of the Civil Code, means to take as satisfactory or sufficient, or agree to an incomplete or irregular performance. Hence, the mere receipt of a partial payment is not equivalent to the required acceptance of performance as would extinguish the whole obligation."16 (Emphasis supplied) There is thus a clear distinction between acceptance and mere receipt. In this case, it is evident that Artigo merely received the partial payment without waiving the balance. Thus, there is no estoppel to speak of.



If the 3rd person pays the obligation of the debtor with the knowledge and consent of the debtor, the payor is entitled to be reimbursed for the full amount. The same applies if the debtor knows that the third person is making the payment but he did not object thereto, or he did not repudiate the same at anytime.



If payment was made without the knowledge or without the consent of the debtor, the reimbursement shall be only up to the amount or extent by which the debtor was benefited. (With knowledge but without consent of debtor falls under this situation)

From transcription: So, if he does not consent even if he knew about it, how much can the 3rd person demand reimbursement? Only to the extent that the debtor is benefited. What if he has the knowledge but he does not say anything? Full reimbursement, because the law does not require that knowledge and consent must come together. There can be knowledge without the consent, in effect he has the knowledge but the consent is tacit or implied. Because if he does not want that the 3rd person will pay his obligation, then definitely he would express his refusal, diba? This is just like the MU sa inyo. So, if he pays with the knowledge, then the third person can demand full reimbursement, or with the consent. Consent of course always means with the knowledge. Knowledge does not always mean there is consent because consent can be implied. But with the knowledge but without the consent, only so much as the payment redounded to the benefit of the debtor, and we call that beneficial reimbursement. 

Consequently, if the debt had already prescribed or had already been compensated, the payment would no longer be beneficial. Under this situation, the payor is definitely not entitled to reimbursement from the debtor.



Another effect if payment was with the knowledge and consent is that the 3rd is subrogated into the rights of the former creditor. He becomes the new creditor. But if it is without the consent or against the will of the debtor or without the knowledge, then he has no right to demand that he be subrogated into the right of the creditors. Such right is not granted to him by law as stated in Art. 1237.

Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a) Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a)

Prescription; Remission; Paid/performed debt; When legal compensation had already taken place

NB:

DE CASTRO vs. CA In any event, we find that the 5 percent real estate broker's commission is reasonable and within the standard practice in the real estate industry for transactions of this nature.

When stipulated; If said 3rd person has an interest in the fulfillment of the obligation.

SUBROGATION – act of putting somebody into the shoes of the Creditor, hence, enabling the former to exercise all the rights and actions that could be exercised by the creditor. Rights w/c may be exercised by Person subrogated in the Place of Creditor: 1.

arising from mortgage; 30


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. 2. 3.


guaranty; penalty

of the obligation, the minor cannot recover the same from the creditor who accepted it or consumed it in good faith.

CASE

Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a)

ARTICLE 1236 DOMINION INSURANCE CORPORATION vs. CA

TO WHOM PAYMENT MUST BE MADE

In this case, when the risk insured against occurred, petitioner’s liability as insurer arose. This obligation was extinguished when respondent Guevarra paid the claims and obtained Release of Claim Loss and Subrogation Receipts from the insured who were paid. Thus, to the extent that the obligation of the petitioner has been extinguished, respondent Guevarra may demand for reimbursement from his principal. To rule otherwise would result in unjust enrichment of petitioner. SUBROGATION

REIMBURSEMENT

1. recourse can be had to the mortgage or guaranty or pledge;

no recourse

2. debt is extinguished in one sense but a new creditor appears with same rights;

new creditor has different rights

3. there is something more than a personal action of recovery.

Personal action

1. 2. 3.

To person in whose favor the obligation has been constituted (creditor); successor in interest; to any person authorized to receive it (eg. Guardian of insane, agent)

Q: Pedro borrowed money (900,000) from Juan, who is married to Petra. Petra died. They had a child, JR (17 years old). Juan remarried to Jane. Juan died. Pedro, when the obligation became due and demandable, paid Jane. Is the payment valid? Answer: The payment is not valid despite the authority of Juan. It belongs to the first marriage. What about the authority? Authority terminates upon the death of the person executing that authority. It terminates upon the death, diba? So, the payment is not valid. So, kanino pala nya ibayad? To the administrator of the property. Now, if JR is of age, then the payment to JR is valid. But definitely not to the 2nd wife, because the 2nd wife is not part of the agreement. This belongs to the estate of the former marriage. (Discussion of Culaba case) CASE

Art. 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. If the creditor accepts payment even if it is against the will of the debtor, the payment is still valid, only that we will apply 1236, with respect to reimbursement. But take note that if the payment made by the third person who does not intend to be reimbursed exceeds P5,000 the requirement of the law is that the payment must be in writing.(to be considered as a valid donation) But the payment is still valid since the consent of the debtor is immaterial as the extinguishment of the obligation is concerned. Art. 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 to the provisions of article 1427 under the Title on "Natural Obligations." (1160a) PAYMENT BY AN INCAPACITATED PERSON GENERAL RULE: If payment is made by incapacitated to give: 1. payment is not valid – if accepted; 2. creditor cannot be compelled to accept; 3. remedy of consignation is not proper.

a

person

EXCEPT: Art. 1247 -- The minors who entered into a contract, without the consent of the parents or the guardian, but voluntarily pays a sum of money or delivers a fungible thing for the fulfillment

BPI vs. CA the account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal because it had admitted in the Holdout Agreement the questioned ownership of the money deposited in the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco and Lim was being claimed by them and that one-half was being claimed by the heirs of Velasco. Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs of Velasco cannot be construed as a final determination or adjudication that the account belonged to Velasco. We have ruled that when the ownership of a particular property is disputed, the determination by a probate court of whether that property is included in the estate of a deceased is merely provisional in character and cannot be the subject of execution. Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect thereto, had no right to pay to 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 31




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.25 Payment made by the debtor 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. 26 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. Art. 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 the payment. (1163a) If payment was made to the incapacitated creditor who cannot administer his property, or if he has not kept the thing delivered, the debtor may be compelled by the creditor to pay anew when he regains capacity, or by the latter’s representative during the time of the incapacity of the creditor. (Pineda) Benefit may be in the form of financial, moral or intellectual advantages which must be proved. From Transcription: Payment to a third person shall also be valid if it has redounded to the benefit of the creditor. So, you have the burden of proving that payment made to the third person redounded to the benefit of the creditor. But benefit need not be proved in the following instances: 1.

2.

3.

if after the payment, the third person acquires the creditor's rights – Ex: you have an obligation to deliver a diamond ring, and it was received by a third person, and later on you saw the third person wearing the same ring, the presumption is that he had acquired ownership over the property you had delivered; the creditor ratifies the payment to the third person. So it follows that at the time of payment, the creditor had no authority to accept payment, but when you made the payment, he ratified it. Ratification comes after, because if it is prior, ano yan? Authorization. The presumption is that the payment was without his authority, only that he ratified it. You lead the debtor to believe that the third person is authorized to receive payment.

Other instances where payment to a third person releases the debtor: 1.

When the creditor assigns his credit to a third person, without the consent of the debtor, and the debtor paid the original creditor. When a creditor assigns credit to a third person, the third person becomes the new creditor, but in as much as he did not inform the debtor, and the debtor paid the old creditor, the payment is still valid. Why? Because he did not inform the debtor.

2.

Another instance is, under 1242 payment is made to a third person in possession of the credit. In possession of the credit, not the evidence of the credit.

What is the difference between a person in possession of the credit? An example of a document which is the credit itself is a check payable to the order of the bearer, or in cash. But if what is presented is the evidence of the credit, an example a promissory note payable to the order of Pedro, the person must present evidence that he is Pedro. So, that is the difference between possession of the credit and the evidence of the credit. Cases: Culaba vs. CA; PnB vs. CA; Sering vs. CA; Meat Packing vs. Sandiganbayan; FEB vs. Diaz Realty; Seguvia Dev't case; Pabugais vs. Sahijwani; Torquator vs. Bernabe; Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164) Requisites: 1. Payment must be in good faith; 2. Payee must be in possession of the credit itself. Art. 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) Judicial order prompted by an order of attachment, injunction, or garnishment GARNISHMENT- takes place when the debtor of a debtor is ordered not to pay the latter so that preference would be given to the latter’s creditor. INTERPLEADER – action in w/c a certain person in possession of certain property wants claimants to litigate among themselves for the same. INJUNCTION – a judicial process by virtue of w/c a person is generally ordered to refrain from doing something. Art. 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, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will. (1166a) EXCEPTIONS: 1. 2. 3.

In case of FACULTATIVE OBLIGATION In case there is another agreement resulting in:  Dation in payment  Novation In case of waiver by creditor

SPECIAL FORMS OF PAYMENT 1. 2. 3. 4.

Dation in payment Application of payments Assignment in favor of Creditors (cession) Tender of payment and consignation.

32


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. I.

DATION IN PAYMENT ADJUDICACION EN PAGO

/DATION

Ateneo de Davao College of Law 4 Manresa EN

PAGO/

Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. (n) Concept: Property is alienated to the creditor in satisfaction of a debt in money. At the time of the constitution of the obligation what is due is money, but at the time of fulfillment, the debtor could no longer deliver the money. So, what he did instead is to offer that instead of the money, he will deliver another thing in lieu of the money. If the creditor accepts, then the obligation is extinguished, depending on the agreement of the parties. If it extinguishes the entire obligation then there is full extinguishment. But, if it will only be based on the value of the thing that is delivered, and it is not sufficient to cover the monetary obligation, then there is partial fulfillment. Take note that as soon as the agreement has been perfected, it is no longer governed by the law on obligations and contracts but the law on sales. SALE

DATION IN PAYMENT

1. no pre-existing credit;

1. credit;

2. gives rise to obligations;

2. Extinguishes obligation;

3. cause/consideration is the price or obtaining the object;

3. Extinguishment of his debt & acquisition of object offered in credit (part of creditor);

4. greater freedom determining price;

4.

in

5. giving of price may generally end the obligation of buyer.

There is pre-existing

the

Less freedom

5. May extinguish completely or partially the credit.

CONDITIONS under w/c a Dation in Payment is valid 1. 2. 3.

If creditor consents; If dation in payment will not prejudice the other creditors; If debtor is not judicially declared insolvent.

Q: Suppose there was an agreement between the parties but the debtor delivered a car and the creditor accepts, what presumption arises? Is dation in payment presumed? A: When there is delivery and you cannot presume what the agreement of the parties is, and money is exchanged for the delivery, the presumption is there is merely a pledge. Art. 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 into consideration. (1167a) Except: if there is WAIVER.



When the Kind and quantity cannot be determined w/out need of a new agreement, the contract is VOID. Art. 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. (1168a) Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations 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) GEN. RULE: Payment shall be complete EXCEPT: 1. when it is stipulated otherwise; 2. when different prestations are subject to different conditions or terms; 3. when debt is part liquidated and part unliquidated; 4. when a joint debtor pays his share or the creditor demands the same; 5. when a solidary debtor pays only the part demandable; 6. in case of compensation, when one debt is bigger than the other; 7. when work is to be done by parts. Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170) LEGAL TENDER – is that w/c a debtor may compel a creditor to accept in payment of the debt. case of International Corporate Bank vs. Gueco MANDARIN VILLA vs. CA We note that Mandarin Villa Seafood Village is affiliated with BANKARD. In fact, an "Agreement" 6 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 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 a party to the said agreement, the above-quoted stipulation conferred a favor upon the private respondent, a holder of credit card validly issued by 33




BANKARD. This stipulation is a stipulation pour autri 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. 8 In this case, private respondent's offer to pay by means of his BANKARD credit card constitutes not only an acceptance of the said stipulation but also an explicit communication of his acceptance to the obligor. In addition, the record shows that petitioner posted a logo inside Mandarin Villa Seafood Village stating that "Bankard is accepted here. 9 This representation is conclusive upon the petitioner which it cannot deny or disprove as against the private respondent, the party relying thereon. Petitioner, therefore, cannot disclaim its obligation to accept private respondent's BANKARD credit card without violating the equitable principle of estoppel. Anent the second issue, petitioner insists that it is not negligent. In support thereof, petitioner cites its good faith in checking, not just once but twice, the validity of the aforementioned credit card prior to its dishonor. It argues that since the verification machine flashed an information that the credit card has expired, petitioner could not be expected to honor the same much less be adjudged negligent for dishonoring it. Further, petitioner asseverates that it only followed the guidelines and instructions issued by BANKARD in dishonoring the aforementioned credit card. The argument is untenable. The test for determining the existence of negligence in a particular case may be stated as follows: Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinary prudent person would have used in the same situation? If not, then he is guilty of negligence. 11 The Point of Sale (POS) Guidelines which outlined the steps that petitioner must follow under the circumstances provides. xxx xxx xxx CARD EXPIRED a. Check expiry date on card. b. If unexpired, refer to CB. b.1. If valid, honor up to maximum of SPL only. b.2. If in CB as Lost, do procedures 2a to 2e., b.3. If in CB as Suspended/Cancelled, do not honor card. c. If expired, do not honor card.

the customer the courtesy of better treatment. Petitioner, however, argues that private respondent's own negligence in not bringing with him sufficient cash was the proximate cause of his damage. It likewise sought exculpation by contending that the remark of Professor Lirag 15 is a supervening event and at the same time the proximate cause of private respondent's injury. We find this contention also devoid of merit. While it is true that private respondent did not have sufficient cash on hand when he hosted a dinner at petitioner's restaurant, this fact alone does not constitute negligence on his part. Neither can it be claimed that the same was the proximate cause of private respondent's damage. We take judicial notice 16of the current practice among major establishments, petitioner included, to accept payment by means of credit cards in lieu of cash. Thus, petitioner accepted private respondent's BPI Express Credit Card after verifying its validity, a fact which all the more refutes petitioner's imputation of negligence on the private respondent. PAPA vs. A.U. VALENCIA It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00) in cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in check on 15 June 1973, in payment of the purchase price of the subject lot. Petitioner himself admits having received said amounts, 9 and having issued receipts therefor. Petitioner's assertion that he never encashed the aforesaid check is not substantiated and is at odds with his statement in his answer that "he can no longer recall the transaction which is supposed to have happened 10 years ago." After more than ten (10) years from the payment in party by cash and in part by check, the presumption is that the check had been encashed. As already stated, he even waived the presentation of oral evidence. Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay.

A cursory reading of said rule reveals that whenever the words CARD EXPIRED flashes on the screen of the verification machine, petitioner should check the credit card's expiry date embossed on the card itself. If unexpired, petitioner should honor the card provided it is not invalid, cancelled or otherwise suspended. But if expired, petitioner should not honor the card. In this case, private respondent's BANKARD credit card has an embossed expiry date of September 1990. 13 Clearly, it has not yet expired on October 19, 1989, when the same was wrongfully dishonored by the petitioner. Hence, petitioner did not use the reasonable care and caution which an ordinary prudent person would have used in the same situation and as such petitioner is guilty of negligence. In this connection, we quote with approval the following observations of the respondent Court. Mandarin argues that based on the POS Guidelines (supra), it has three options in case the verification machine flashes "CARD EXPIRED". It chose to exercise option (c) by not honoring appellee's credit card. However, appellant apparently intentionally glossed over option "(a) Check expiry date on card" (id.) which would have shown without any shadow of doubt that the expiry date embossed on the BANKARD was "SEP 90". (Exhibit "D".) A cursory look at the appellee's BANKARD would also reveal that appellee had been as of that date a cardholder since 1982, a fact which would have entitled

While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given. 11 It has, likewise, been held that if no presentment is made at all, the drawer cannot be held liable irrespective of loss or injury 12 unless presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under this provision and if its no-payment is caused by his negligence, payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. Considering that respondents Valencia and Peñarroyo had fulfilled their part of the contract of sale by delivering the payment of the purchase price, said respondents, therefore, had the right to compel petitioner to deliver to them the owner's duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession and enjoyment of the lot in question. 34




BIANA vs. GIMENEZ Petitioner contends that there is yet no redemption in this case because what were tendered by the respondent by way of exercising of his right of redemption are postdated checks. To petitioner, the tender did not operate as payment of the redemption price, hence respondent is not entitled to a deed of redemption. To buttress his argument, petitioner invokes the ruling in Philippine Airlines, Inc. vs. Hon. Court of Appeals, et al. where this Court ruled that payment in check issued in the name of an absconding sheriff did not operate as payment of the judgment obligation. On surface, petitioner’s posture appears to hold water. However, a close scrutiny of the facts obtaining in PAL reveals that petitioner’s reliance on the ruling thereon is misplaced. First and foremost, what is involved in PAL is the payment of a judgment obligatio and thus, the Civil Code provisions on payment of obligations, particularly Article 1249 thereof, are applicable. In glaring contrast, the instant case involves not the payment of an obligation but the exercise of a right, i.e., the right of redemption. Accordingly, the Civil Code provisions on payment of obligations may not be applied here. What applies is the settled rule that a mere tender of a check is sufficient to compel redemption. In the words of this Court in Fortunado, et al. vs. Court of Appeals, et al.: We are not, by this decision, sanctioning the use of a check for the payment of obligations over the objection of the creditor. What we are saying is that a check may be used for the exercise of the right of redemption, the same being a right and not an obligation. The tender of a check is sufficient to compel redemption but is not in itself a payment that relieves the redemptioner from his liability to pay the redemption price. In other words, while we hold that the private respondents properly exercise their right of redemption, they remain liable, of course, for the payment of the redemption price. (Emphasis supplied). Moreover, PAL is casts against a factual backdrop entirely different from the present case. There, the sheriff in whose name the checks were made payable absconded or disappeared, making it impossible for the judgment oblige and the court to collect from him the amount of the judgment obligation. In fact, this Court made it clear in PAL that the pronouncement therein made was arrived at “under the peculiar circumstances surrounding [that] case”, which, to stress, do not obtain herein. The records before us are bereft of any evidence indicating that Sheriff Garchitorena absconded or disappeared with the checks of respondent. Quite the contrary, in the letter of Deputy Sheriff Madera addressed to Santos B. Mendones, the former even stated that “in this connection, please come to our office on Monday December 10, 1979 to withrow [sic] the above-mentioned amount, because at present Atty. Manuel Garchitorena is still on vacation leave”. Clearly, therefore, it is not impossible for the judgment oblige or the court to collect the amount of the judgment obligation from Sheriff Garchitorena who even issued a receipt bearing date 19 July 1979 acknowledging that he “received from the Gimenez Park Subdivision and George G. Gimenez the sum of FIVE THOUSAND SIX HUNDRED FIFTEEN & 89/100 in full payment and satisfaction of the judgment xxx”. Besides, Sheriff Madera himself deducted the aggregate amount of the four (4) checks (P5,615.89) from respondent Gimenez’ liability when he submitted the itemization requested by the latter’s counsel, Atty. Augusto A. Pardalis. Art. 1250. In case an extraordinary inflation or deflation of the

currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n) Applies only to cases where a contract or agreement is involved. This does not apply where obligation to pay arises from law, independent of contracts. (This applies only to contractual obligations, to indebtedness. This will not apply to quasi-delict, quasi-contract, to obligations arising from law. Purely contractual obligations; payment of monetary obligations. CASES FILIPINO PIPE AND FOUNDRY CORP vs. NAWASA 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 said currency, and such decrease or increase could not have reasonably foreseen or was manifestly beyond contemplation the 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 wives, who would rush to upload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions." (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. CITIBANK vs. SABENIANO In case petitioners are still ordered to refund to respondent the amount of her dollar accounts with Citibank-Geneva, petitioners beseech this Court to adjust the nominal values of respondent’s dollar accounts and/or her overdue peso loans by using the values of the currencies stipulated at the time the obligations were established in 1979, to address the alleged inequitable consequences resulting from the extreme and extraordinary devaluation of the Philippine currency that occurred in the course of the Asian crisis of 1997. Petitioners base their request on Article 1250 of the Civil Code which reads, "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 35




agreement to the contrary." It is well-settled that Article 1250 of the Civil Code becomes applicable only when there is extraordinary inflation or deflation of the currency. Inflation has been defined as the sharp increase of money or credit or both without a corresponding increase in business transaction. There is inflation when there is an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level. In Singson v. Caltex (Philippines), Inc., this Court already provided a discourse as to what constitutes as extraordinary inflation or deflation of currency, thus We have held extraordinary inflation to exist when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. An example of extraordinary inflation, as cited by the Court in Filipino Pipe and Foundry Corporation vs. NAWASA, supra, is that which happened to the deutschmark in 1920. Thus: "More recently, in the 1920s, 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 wives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon", New York: Simon and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd ed.) The supervening of extraordinary inflation is never assumed. The party alleging it must lay down the factual basis for the application of Article 1250. Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and statistics submitted by plaintiff-appellant proved that there has been a decline in the purchasing power of the Philippine peso, but this downward fall cannot be considered "extraordinary" but was simply a universal trend that has not spared our country. Similarly, in Huibonhoa vs. Court of Appeals, the Court dismissed plaintiff-appellant's unsubstantiated allegation that the Aquino assassination in 1983 caused building and construction costs to double during the period July 1983 to February 1984. In Serra vs. Court of Appeals, the Court again did not consider the decline in the peso's purchasing power from 1983 to 1985 to be so great as to result in an extraordinary inflation. Like the Serra and Huibonhoa cases, the instant case also raises as basis for the application of Article 1250 the Philippine economic crisis in the early 1980s --- when, based on petitioner's evidence, the inflation rate rose to 50.34% in 1984. We hold that there is no legal or factual basis to support petitioner's allegation of the existence of extraordinary inflation during this period, or, for that

matter, the entire time frame of 1968 to 1983, to merit the adjustment of the rentals in the lease contract dated July 16, 1968. Although by petitioner's evidence there was a decided decline in the purchasing power of the Philippine peso throughout this period, we are hard put to treat this as an "extraordinary inflation" within the meaning and intent of Article 1250. Rather, we adopt with approval the following observations of the Court of Appeals on petitioner's evidence, especially the NEDA certification of inflation rates based on consumer price index: xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in any single year; (b) the highest official inflation rate recorded was in 1984 which reached only 50.34%; (c) over a twenty one (21) year period, the Philippines experienced a singledigit inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and 1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and 1989) when the Philippines experienced double-digit inflation rates, the average of those rates was only 20.88%; (e) while there was a decline in the purchasing power of the Philippine currency from the period 1966 to 1986, such cannot be considered as extraordinary; rather, it is a normal erosion of the value of the Philippine peso which is a characteristic of most currencies. "Erosion" is indeed an accurate description of the trend of decline in the value of the peso in the past three to four decades. Unfortunate as this trend may be, it is certainly distinct from the phenomenon contemplated by Article 1250. Moreover, this Court has held that the effects of extraordinary inflation are not to be applied without an official declaration thereof by competent authorities. The burden of proving that there had been extraordinary inflation or deflation of the currency is upon the party that alleges it. Such circumstance must be proven by competent evidence, and it cannot be merely assumed. In this case, petitioners presented no proof as to how much, for instance, the price index of goods and services had risen during the intervening period. All the information petitioners provided was the drop of the U.S. dollar-Philippine peso exchange rate by 17 points from June 1997 to January 1998. While the said figure was based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it is also significant to note that the BSP did not categorically declare that the same constitute as an extraordinary inflation. The existence of extraordinary inflation must be officially proclaimed by competent authorities, and the only competent authority so far recognized by this Court to make such an official proclamation is the BSP. Neither can this Court, by merely taking judicial notice of the Asian currency crisis in 1997, already declare that there had been extraordinary inflation. It should be recalled that the Philippines likewise experienced economic crisis in the 1980s, yet this Court did not find that extraordinary inflation took place during the said period so as to warrant the application of Article 1250 of the Civil Code. Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on equitable considerations. Among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must come with clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he who has done inequity shall not have equity. Petitioner Citibank, hence, cannot invoke Article 1250 of the Civil Code because it does not come to court with clean hands. The delay in the recovery by respondent of her dollar accounts with Citibank-Geneva was due to the unlawful act of petitioner Citibank in using the same to liquidate 36




respondent’s loans. Petitioner Citibank even attempted to justify the off-setting or compensation of respondent’s loans using her dollar accounts with Citibank-Geneva by the presentation of a highly suspicious and irregular, and even possibly forged, Declaration of Pledge. ALMEDA vs. BATHALA MARKETING Petitioners’ reliance on the sixth condition of the contract is, likewise, unavailing. This provision clearly states that respondent can only be held liable for new taxes imposed after the effectivity of the contract of lease, that is, after May 1997, and only if they pertain to the lot and the building where the leased premises are located. Considering that RA 7716 took effect in 1994, the VAT cannot be considered as a “new tax” in May 1997, as to fall within the coverage of the sixth stipulation. Neither can petitioners legitimately demand rental adjustment because of extraordinary inflation or devaluation. Petitioners contend that Article 1250 of the Civil Code does not apply to this case because the contract stipulation speaks of extraordinary inflation or devaluation while the Code speaks of extraordinary inflation or deflation. They insist that the doctrine pronounced in Del Rosario v. The Shell Company, Phils.Limited should apply. Essential to contract construction is the ascertainment of the intention of the contracting parties, and such determination must take into account the contemporaneous and subsequent acts of the parties. This intention, once ascertained, is deemed an integral part of the contract. While, indeed, condition No. 7 of the contract speaks of “extraordinary inflation or devaluation” as compared to Article 1250’s “extraordinary inflation or deflation,” we find that when the parties used the term “devaluation,” they really did not intend to depart from Article 1250 of the Civil Code. Condition No. 7 of the contract should, thus, be read in harmony with the Civil Code provision. That this is the intention of the parties is evident from petitioners’ letter dated January 26, 1998, where, in demanding rental adjustment ostensibly based on condition No. 7, petitioners made explicit reference to Article 1250 of the Civil Code, even quoting the law verbatim. Thus, the application of Del Rosario is not warranted. Rather, jurisprudential rules on the application of Article 1250 should be considered. Article 1250 of the Civil Code states: 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. Inflation has been defined as the sharp increase of money or credit, or both, without a corresponding increase in business transaction. There is inflation when there is an increase in the volume of money and credit relative to available goods, resulting in a substantial and continuing rise in the general price level.In a number of cases, this Court had provided a discourse on what constitutes extraordinary inflation, thus: [E]xtraordinary inflation exists when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been

reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. The factual circumstances obtaining in the present case do not make out a case of extraordinary inflation or devaluation as would justify the application of Article 1250 of the Civil Code. We would like to stress that the erosion of the value of the Philippine peso in the past three or four decades, starting in the mid-sixties, is characteristic of most currencies. And while the Court may take judicial notice of the decline in the purchasing power of the Philippine currency in that span of time, such downward trend of the peso cannot be considered as the extraordinary phenomenon contemplated by Article 1250 of the Civil Code. Furthermore, absent an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation during a given period, the effects of extraordinary inflation are not to be applied. EQUITABLE PCI BANK vs. NG SHEUN NGOR Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation. Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to recognize the effects of extraordinary inflation (or deflation). The RTC never mentioned that there was such a stipulation either in the promissory note or loan agreement. Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by the BSP on the date of maturity REYES vs. NHA "The constitutional limitation of 'just compensation' is considered to be the sum equivalent to the market value of the property, broadly described to be the price fixed by the seller in open market in the usual and ordinary course of legal action and competition or the fair value of the property as between one who receives, and one who desires to sell, it being fixed at the time of the actual taking by the government. Thus, if property is taken for public use before compensation is deposited with the court having jurisdiction over the case, the final compensation must include interests on its just value to be computed from the time the property is taken to the time when compensation is actually paid or deposited with the court. In fine, between the taking of the property and the actual payment, legal interests accrue in order to place the owner in a position as good as (but not better than) the position he was in before the taking occurred. x x x This allowance of interest on the amount found to be the value of the property as of the time of the taking computed, being an effective forbearance, at 12% per annum should help eliminate the issue of the constant fluctuation and inflation of the value of the currency over time. Article 1250 of the Civil Code, providing that, in case of extraordinary inflation or deflation, the value of the currency at the time of the establishment of the obligation shall be the basis for the payment when no agreement to the contrary is stipulated, has strict application only to contractual obligations. In other words, a contractual agreement is needed for the effects of extraordinary inflation to be taken into account to alter the value of the currency." Records show that there is an outstanding balance of P1,218,574.35 that ought to be paid to petitioners.16 It is not disputed that respondent NHA took actual possession of the expropriated properties in 1977.17 Perforce, while petitioners are not entitled to the return of the expropriated property, they are entitled to be paid the balance of P1,218,574.35 with legal interest thereon at 12% per annum computed from the taking of the property in 1977 until the due amount shall have been fully paid.

37




PIA vs. CA The Bulacan trial court, in its 1979 decision, was correct in imposing interests on the zonal value of the property to be computed from the time petitioner instituted condemnation proceedings and “took” the property in September 1969. This allowance of interest on the amount found to be the value of the property as of the time of the taking computed, being an effective forbearance, at 12% per annum should help eliminate the issue of the constant fluctuation and inflation of the value of the currency over time. Article 1250 of the Civil Code, providing that, in case of extraordinary inflation or deflation, the value of the currency at the time of the establishment of the obligation shall be the basis for the payment when no agreement to the contrary is stipulated, has strict application only to contractual obligations. In other words, a contractual agreement is needed for the effects of extraordinary inflation to be taken into account to alter the value of the currency. All given, the trial court of Bulacan in issuing its order, dated 01 March 2000, vacating its decision of 26 February 1979 has acted beyond its lawful cognizance, the only authority left to it being to order its execution. Verily, private respondents, although not entitled to the return of the expropriated property, deserve to be paid promptly on the yet unpaid award of just compensation already fixed by final judgment of the Bulacan RTC on 26 February 1979 at P6.00 per square meter, with legal interest thereon at 12% per annum computed from the date of "taking" of the property, i.e., 19 September 1969, until the due amount shall have been fully paid COMMISIONER OF PUBLIC HIGHWAYS vs. BURGOS Article 1250 of the New Civil Code seems to be the only provision in our statutes which provides for payment of an obligation in an amount different from what has been agreed upon by the parties because of the supervention of extra-ordinary inflation or deflation. Thus, the Article provides: ART. 1250. In case extra-ordinary 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. 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. We have expressed this view in the case of Velasco vs. Manila Electric Co., et al., L-19390, December 29, 1971. 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 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 effects 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. We hold, therefore, that under the law, in the absence of any agreement to the contrary, even assuming that there has been an

extraordinary inflation within the meaning of Article 1250 of the New Civil Code, a fact We decline to declare categorically, the value of the peso at the time of the establishment of the obligation, which in the instant case is when the property was taken possession of by the Government, must be considered for the purpose of determining just compensation. Obviously, there can be no "agreement to the contrary" to speak of because the obligation of the Government sought to be enforced in the present action does not originate from contract, but from law which, generally is not subject to the will of the parties. And there being no other legal provision cited which would justify a departure from the rule that just compensation is determined on the basis of the value of the property at the time of the taking thereof in expropriation by the Government, the value of the property as it is when the Government took possession of the land in question, not the increased value resulting from the passage of time which invariably brings unearned increment to landed properties, represents the true value to be paid as just compensation for the property taken. Art. 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. 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) WHERE PAYMENT MUST BE MADE  

If there is a stipulation – in designated place. if there is no stipulation  if its determinate, at the place where the thing might be at the time the obligation was constituted.  If its generic/personal, at the domicile of the Debtor.

Note: the creditor shall bear the expenses, unless the debtor changes his domicile in bad faith. Transcription: Now what about if payment is made through couriers, like the LBC? Suppose the debtor sent the money through the LBC, and the courier ran away with the money, who shall bear the loss? It depends. If it was the creditor was the one who said that it should be sent to him through the courier, then he bears the loss. What will the creditor do? Wala na syang pag-asa? The creditor would run after the courier. But if it was through the initiative of the debtor, then he should bear the loss? Merisi. Why is he merisi? What will be your defense? In the absence of any stipulation, payment shall be made in the domicile of the debtor. II.APPLICATION OF PAYMENT Art. 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 the payment is made, the former cannot complain of 38




the same, unless there is a cause for invalidating the contract. (1172a) APPLICATION OF PAYMENT – shows w/c debt, out of 2 or more debts owing the same creditor, is being paid. Note: The right to choose w/c debt to serve first is vested to the DEBTOR except:  If there was a valid prior but contrary agreement;  Debtor cannot choose to pay part of the principal ahead of the interest unless the creditor consents. Note: When shall the debtor make the choice? At the time payment shall be made, but subject to certain conditions: First, that he cannot apply it to a debt which will not cover the entire obligation because under the law, the creditor cannot be compelled to accept partial payment. Second, he cannot choose to apply it first to the principal. The law says interest should be paid first before the principal. Third, he cannot choose a debt that is not yet due and demandable. Fourth, he cannot choose a debt or an obligation which is not of the same kind of the other debt. So those are the limitations. REQUISITES FOR APPLICATION OF PAYMENT 1. 2. 3. 4. 5.

There must be 2 or more debts (severalty of debts); Debts must be of the same kind; Debts are owed by the same debtor in favor of the same creditor; All debts must be due unless contrary is provided – eg. Stipulated by parties. Payment is not enough to extinguish all the debts.

RULE WHEN DEBTS ARE NOT YET DUE – there may be application of payments when: a. the parties so stipulate; b when application of payment is made by the party for whose benefit the term has been constituted. HOW APPLICATION IS MADE Debtor designates B. If not, creditor makes it – known or made at the time of the issuance of the receipt; unless there is cause for voiding the contract ( ex. Creditor does it w/o debtor’s consent) C. If both do not avail of it, by operation of law. (Applying Arts. 1253 and 1254) REVOCATION GEN. RULE: Once application of payment is made, it cannot be revoked. EXCEPT:  If both parties agree  Even if both parties agree, if it will prejudice 3rd persons— cannot revoke

WHEN APPLICATION CANNOT BE AVAILED OF?  In case of partner-creditor  Surety or a solidary guarantor – one debt only not several. From transcription: Now, suppose, the debtor has 50,000, and the debtor has to make the choice under the given situation: 1. 2. 3. 4. 5.

20,000 due on June 25, 2004 with an interest of 6% plus a penalty of 2% on the interest in case of delay; 20,000 due on Dec. 25, 2004, secured by a mortgage. 10,000 without interest; a 4 carat pink diamond ring 50,000 with interest and penalty due on Dec. 24, 2006.

To where shall the 50,000 be applied? To the most onerous of the debts already due and demandable. The most onerous of the 3 debts due is the 20,000 because of the penalty. The debt with a mortgage is less onerous because there is only that tendency to lose the mortgage, and once the mortgage is foreclosed, the obligation is extinguished. A simple debt, (without interest) is the least onerous because it can run up to how many years and the amount would be the same. Number 4 cannot be the subject of application of payment because it is not of the same kind. Likewise, 50,000 is the most onerous of the debts, however, it is not yet due and demandable. So, the application of payment will only be centered on the 3. Art. 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) Interest must be paid first except if creditor consents to payment of the principal first WHAT INTEREST IS SUPPOSED TO BE PAID?  interest by way of compensation;  interest by way of damages by way of default. CASES SWAGMAN HOTELS & TRAVEL vs. CA This Court finds to be contrary to the evidence on record the finding of both the trial court and the Court of Appeals that the renegotiation in December 1997 resulted in the reduction of the interest from 15% to 6% per annum and that the monthly payments of US$750 made by the petitioner were for the reduced interests. It is worthy to note that the cash voucher dated January 1998 states that the payment of US$750 represents “INVESTMENT PAYMENT.” All the succeeding cash vouchers describe the payments from February 1998 to September 1999 as “CAPITAL REPAYMENT.” All these cash vouchers served as receipts evidencing private respondent’s acknowledgment of the payments made by the petitioner: two of which were signed by the private respondent himself and all the others were signed by his representatives. The private respondent even identified and confirmed the existence of these receipts during the hearing. Significantly, cognizant of these receipts, the private respondent applied these payments to the three consolidated principal loans in the summary of payments he submitted to the court. Under Article 1253 of the Civil Code, if the debt produces interest, payment of the principal shall not be deemed to have been made until the interest has been covered. In this case, the private respondent would not have signed the receipts describing the 39




payments made by the petitioner as “capital repayment” if the obligation to pay the interest was still subsisting. The receipts, as well as private respondent’s summary of payments, lend credence to petitioner’s claim that the payments were for the principal loans and that the interests on the three consolidated loans were waived by the private respondent during the undisputed renegotiation of the loans on account of the business reverses suffered by the petitioner at the time. There was therefore a novation of the terms of the three promissory notes in that the interest was waived and the principal was payable in monthly installments of US$750. Alterations of the terms and conditions of the obligation would generally result only in modificatory novation unless such terms and conditions are considered to be the essence of the obligation itself. The resulting novation in this case was, therefore, of the modificatory type, not the extinctive type, since the obligation to pay a sum of money remains in force. Thus, since the petitioner did not renege on its obligation to pay the monthly installments conformably with their new agreement and even continued paying during the pendency of the case, the private respondent had no cause of action to file the complaint. It is only upon petitioner’s default in the payment of the monthly amortizations that a cause of action would arise and give the private respondent a right to maintain an action against the petitioner. MAGDALENA ESTATES vs. RODRIGUEZ We do not agree with the contention of the appellants. It is very clear in the promissory note that the principal obligation is the balance of the purchase price of the parcel of land known as Lot 7K-2-G, Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc. undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it accepted the payment of P5,000.00 because it knew that that was the complete amount undertaken by the surety as appearing in the contract. The liability of a surety is not extended, by implication, beyond the terms of his contract.1 It is for the same reason that the appellee cannot apply a part of the P5,000.00 as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil Code, but the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the same kind of a single creditor. They 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.2 Besides, Article 1253 of the Civil Code is merely directory, and not mandatory. 3 Inasmuch as the appellee cannot protest for non-payment of the interest when it accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we cannot now say that there was a waiver or condonation on the interest due. Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application cannot 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) BURDENSOME DEBTS 1. Older accounts in case of running accounts 2. Interest-bearing debts;

3. 4. 5. 6. 7. 8.

If 2 interest-bearing debts, that w/c charges the higher interest; debts secured by mortgage/pledge; debts w/ penal clause; advances for subsistence than cash advances; a debt where debtor is in mora (default) exclusive debt than solidary

Note: The “more burdensome rule” does not apply if debtor has used “application of payment”. From transcription; What are the rules to remember? 1.

Creditor cannot be forced to accept partial payment.

2.

Payment cannot be applied to the principal first if there is interest due. Except: if creditor agrees.

3.

The debtor cannot also pay the debt not yet due. Exception: if the period is for the benefit of the debtor, he can choose a debt not yet due.

4.

When the parties have an agreement as to which debt shall be paid first, then the debtor cannot vary the agreement.

5.

All obligations must be due and of the same kind, generally. Exception: unless the obligation is converted into the payment of damages. It becomes monetary in character.

III. PAYMENT BY CESSION OR ASSIGNMENT It is the process of transfer of debtor’s property to creditors not subject to execution so that the latter may sell them and thus apply the proceeds to their credits. The purpose of the transfer or the assignment or the cession, is for the creditors to sell these properties, and to apply the proceeds in proportion to their respective credit. An assignment of credit is an agreement by virtue of which the owner of a credit, by legal causes (such has sale, dation, etc) without the need of the debtor’s consent, transfers the credit and its accessory rights to another who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. Art. 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) 2 Kinds of Assignment 1. Legal – majority of creditors must agree 2. Voluntary – all creditors must agree REQUISITES FOR VOLUNTARY ASSIGNMENT 1. More than 1 debt 2. More than 1 creditor 3. Complete or partial insolvency of debtor 4. Abandonment of all debtor’s property not exempt from execution to the creditors 5. Acceptance or consent on creditor’s part

40




EFFECTS OF VOL. ASSIGNMENT

note or notes, to all intent and purposes, an integral part hereof."



Creditors do not become owners; merely assignees with authority to sell;



Debtor is released up to the amount of the net proceeds unless stipulated;



Creditors will collect credits in the order of preference agreed upon or in default, in the order established by law.

DACION EN PAGO 1. does not properties;

CESSION affect

all

In general, properties;

affects

more

Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of two or more creditors and involves the assignment of all the debtor's property. Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which reads: "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." It bears stressing that the assignment, being in its essence a mortgage, was but a security and not a satisfaction of indebtedness.

all SUBSECTION 3. - Tender of Payment and Consignation

2. does not require plurality of creditors;

Requires creditor;

than

1

3. only the specific creditor’s consent is needed; (transfer is only in favor of one creditor to satisfy a debt)

All creditors’ consent; (there are various creditors)

4. may take place during solvency; (no presumption of insolvency)

Requires full/partial insolvency; (there is presumption of insolvency)

5. transfers ownership upon delivery;

Does not transfer ownership, only possession and administration are transferred to the creditors with the authorization to convert the property into cash with which the debts shall be paid.

IV. TENDER OF PAYMENT AND CONSIGNATION TENDER OF PAYMENT – the act of offering the creditor what is due him together with a demand that the creditor accept the same. CONSIGNATION – the act of depositing the thing due with court or judicial authorities whenever the creditor cannot accept or refuse to accept payment. From transcription: tender of payment is the manifestation made by the debtor to the creditor of his desire to comply with his obligation with the offer of immediate performance. But mere tender alone does not extinguish the obligation. It must be followed by consignation, if the creditor refuses what you have tendered, without just cause. Note: Tender and consignation is only true if there is a debt due. Because if it were in an exercise of a right, then mere tender is sufficient, as in the case of exercising the right to repurchase (Meat Packing case). Like the case of DBP, that act of the respondent in buying the property was an exercise of the right to repurchase.

6. there is an act of novation

Not an act of novation

7. May totally extinguish the obligation and release the debtor

Only extinguishes the credits to the extent of the amount realized from the properties assigned, unless otherwise agreed upon.

Art. 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 consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases:

CASES DBP vs. CA We find no merit in DBP's contention that the assignment novated the promissory notes in that the obligation to pay a sum of money the loans (under the promissory notes) was substituted by the assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed out by CUBA, the said assignment merely complemented or supplemented the notes; both could stand together. The former was only an accessory to the latter. Contrary to DBP's submission, the obligation to pay a sum of money remained, and the assignment merely served as security for the loans covered by the promissory notes. Significantly, both the deeds of assignment and the promissory notes were executed on the same dates the loans were granted. Also, the last paragraph of the assignment stated: "The assignor further reiterates and states all terms, covenants, and conditions stipulated in the promissory note or notes covering the proceeds of this loan, making said promissory

(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 receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. (1176a) REQUISITES OF A VALID TENDER OF PAYMENT 1. 2. 3.

Must be in legal tender (lawful currency) – not a check but if there is consent – valid; It must include whatever interest is due; It must be unconditional; but if made with conditions and no protest on creditor’s part, he cannot later on prescribe the terms for the validity of the acceptance w/c he had already made – complete payment; 41


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. 4.


The obligation must be due.

SAN DIEGO vs. ALZUL

Requisites wherein the creditor is deemed to have unjustly refused the tender of payment 1. That there was previous tender of payment 2. That the tender of payment was of the very thing due, or in case of money obligations, that the legal tender currency was offered; 3. That the tender of payment was unconditional; and, 4. that the creditor refused to accept payment without just cause. CASES RICARDO vs. FERNANDEZ The judgment favoring the ejectment of petitioners being consistent with law and jurisprudence can only be affirmed. The alleged consignation of the P20.00 monthly rental to a bank account in respondent’s name cannot save the day for the petitioners simply because of the absence of any contractual basis for their claim to rightful possession of the subject property. Consignation based on Article 1256 of the Civil Code indispensably requires a creditordebtor relationship between the parties, in the absence of which, the legal effects thereof cannot be availed of. Article 1256 pertinently provides: Art. 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 consignation of the thing or sum due. Unless there is an unjust refusal by a creditor to accept payment from a debtor, Article 1256 cannot apply. In the present case, the possession of the property by the petitioners being by mere tolerance as they failed to establish through competent evidence the existence of any contractual relations between them and the respondent, the latter has no obligation to receive any payment from them. Since respondent is not a creditor to petitioners as far as the alleged P20.00 monthly rental payment is concerned, respondent cannot be compelled to receive such payment even through consignation under Article 1256. The bank deposit made by the petitioners intended as consignation has no legal effect insofar as the respondent is concerned. TAYAG vs. CA Lastly, petitioners argue that there was no valid tender of payment nor consignation of the sum of P18,520.00 which they acknowledge to have been deposited in court on January 22, 1981 five years after the amount of P27,000.00 had to be paid (p. 23, Memorandum for Petitioners; p. 162, Rollo). Again this suggestion ignores the fact that consignation alone produced the effect of payment in the case at bar because it was established below that two or more heirs of Juan Galicia, Sr. claimed the same right to collect (Article 1256, (4), Civil Code; pp. 4-5, Decision in Civil Case No. 681-G; pp. 6768, Rollo). Moreover, petitioners did not bother to refute the evidence on hand that, aside from the P18,520.00 (not P18,500.00 as computed by respondent court) which was consigned, private respondent also paid the sum of P13,908.25 (Exhibits "F" to "CC"; p. 50, Rollo). These two figures representing private respondent's payment of the fourth condition amount to P32,428.25, less the P3,778.77 paid by petitioners to the bank, will lead us to the sum of P28,649.48 or a refund of P1,649.48 to private respondent as overpayment of the P27,000.00 balance.

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. It should be distinguished from tender of payment. 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 extrajudicial, 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. Tender and consignation, where validly made, produces the effect of payment and extinguishes the obligation. There is no dispute that a valid tender of payment had been made by respondent. Absent however a valid consignation, mere tender will not suffice to extinguish her obligation and consummate the acquisition of the subject properties. In St. Dominic Corporation involving the payment of the installment balance for the purchase of a lot similar to the case at bar, where a period has been judicially directed to effect the payment, the Court held that a valid consignation is made when the amount is consigned with the court within the required period or within a reasonable time thereafter. We ruled as follows: First of all, the decision of the then Court of Appeals which was promulgated on October 21, 1981, is quite clear when it ordered the payment of the balance of the purchase price for the disputed lot within 60 days “from receipt hereof” meaning from the receipt of the decision by the respondents. It is an admitted fact that the respondents received a copy of the decision on October 30, 1981. Hence, they had up to December 29, 1981 to make the payment. Upon refusal by the petitioner to receive such payment, the proper procedure was for the respondent to consign the same with the court also within the 60-day period or within a reasonable time thereafter We agree with petitioner’s assertion that even granting arguendo that the instant case for consignation was instituted within the 30-day period or within a reasonable time thereafter, it would still not accord respondent relief as no valid consignation was made. Certainly, the records show that there was no valid consignation made by respondent before the HLURB as she did not deposit the amount with the quasi-judicial body as required by law and the rules. Pertinently, the first paragraph of Article 1258 of the Civil Code provides that “[c]onsignation 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 (emphasis supplied).” It is true enough that respondent tendered payment to petitioner three (3) times through a Solidbank Manager’s Check No. 1146 in the amount of PhP 187,380 on August 29 and 30, 1996 and September 28, 1996. It is true likewise that petitioner refused to accept it but not without good reasons. Petitioner was not impleaded as a party by the Ventura spouses in the Malabon City RTC case for quieting of title against Wilson Yu nor in the appealed case to the CA nor in G.R. No. 109078. Petitioner is of the view that there was no jurisdiction acquired over its person and hence, it is not bound by the final judgment and June 42




17, 1996 Resolution in G.R. No. 109078. Secondly, petitioner believed that respondent Alzul has lost her rights over the subject lot by the rescission of the sale in her favor due to the latter’s failure to pay the installments and also as a result of her transferee’s failure to pay the agreed amortizations. And even in the face of the refusal by petitioner to accept tender of payment, respondent is not left without a remedy. It is basic that consignation is an available remedy, and respondent, with the aid of her counsel, could have easily availed of such course of action sanctioned under the Civil Code. Considering the tenor of our June 17, 1996 Resolution, respondent ought to have consigned the amount with the court of origin within the non-extendible period of 30 days that was accorded her or within a reasonable time thereafter. As cited earlier, 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. It is of no moment if the refusal to accept payment be reasonable or not. Indeed, consignation is the remedy for an unjust refusal to accept payment. The first paragraph of Art. 1256 of the Civil Code precisely provides that “[i]f 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 consignation of the thing or sum due (emphasis supplied).” The proper and valid consignation of the amount due with the court of origin, which shall judicially pronounce the validity of the consignation and declare the debtor to be released from his/her responsibility, shall extinguish the corresponding obligation. Moreover, in order that consignation may be effective, the debtor must show that: (1) there was a debt due; (2) the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because s/he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due or because the title to the obligation had been lost; (3) previous notice of the consignation had been given to the person interested in the performance of the obligation; (4) the amount due was placed at the disposal of the court; and (5) after the consignation had been made, the person interested was notified of the action. Respondent did not comply with the provisions of law particularly with the fourth and fifth requirements specified above for a valid consignation. In her complaint for consignation and specific performance, respondent only prayed that she be allowed to make the consignation without placing or depositing the amount due at the disposal of the court of origin. Verily, respondent made no valid consignation. LLOBRERA vs. HERNANDEZ The judgment favoring the ejectment of petitioners being consistent with law and jurisprudence can only be affirmed. The alleged consignation of the P20.00 monthly rental to a bank account in respondent’s name cannot save the day for the petitioners simply because of the absence of any contractual basis for their claim to rightful possession of the subject property. Consignation based on Article 1256 of the Civil Code indispensably requires a creditordebtor relationship between the parties, in the absence of which, the legal effects thereof cannot be availed of. Article 1256 pertinently provides:

Art. 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 consignation of the thing or sum due. Unless there is an unjust refusal by a creditor to accept payment from a debtor, Article 1256 cannot apply. In the present case, the possession of the property by the petitioners being by mere tolerance as they failed to establish through competent evidence the existence of any contractual relations between them and the respondent, the latter has no obligation to receive any payment from them. Since respondent is not a creditor to petitioners as far as the alleged P20.00 monthly rental payment is concerned, respondent cannot be compelled to receive such payment even through consignation under Article 1256. The bank deposit made by the petitioners intended as consignation has no legal effect insofar as the respondent is concerned. PASRICHA vs. DON LUIS DISON REALTY INC Consignation shall be made by depositing the things due at the disposal of a judicial authority, before whom the tender of payment shall be proved in a proper case, and the announcement of the consignation in other cases. In the instant case, consignation alone would have produced the effect of payment of the rentals. The rationale for consignation is to avoid the performance of an obligation becoming more onerous to the debtor by reason of causes not imputable to him. Petitioners claim that they made a written tender of payment and actually prepared vouchers for their monthly rentals. But that was insufficient to constitute a valid tender of payment. Even assuming that it was valid tender, still, it would not constitute payment for want of consignation of the amount. Well-settled is the rule that tender of payment must be accompanied by consignation in order that the effects of payment may be produced Moreover, Section 1, Rule 62 of the Rules of Court provides: Section 1. When interpleader proper. – Whenever conflicting claims upon the same subject matter are or may be made against a person who claims no interest whatever in the subject matter, or an interest which in whole or in part is not disputed by the claimants, he may bring an action against the conflicting claimants to compel them to interplead and litigate their several claims among themselves. Otherwise stated, an action for interpleader is proper when the lessee does not know to whom payment of rentals should be made due to conflicting claims on the property (or on the right to collect). The remedy is afforded not to protect a person against double liability but to protect him against double vexation in respect of one liability. Notably, instead of availing of the above remedies, petitioners opted to refrain from making payments. Neither can petitioners validly invoke the non-delivery of Rooms 36, 37 and 38 as a justification for non-payment of rentals. Although the two contracts embraced the lease of nine (9) rooms, the terms of the contracts - with their particular reference to specific rooms and the monthly rental for each - easily raise the inference that the parties intended the lease of each room separate from that of the others. There is nothing in the contract which would lead to the conclusion that the lease of one or more rooms was to be made dependent upon the lease of all the nine (9) rooms. Accordingly, the use of each room by the lessee gave rise to the corresponding 43




obligation to pay the monthly rental for the same. Notably, respondent demanded payment of rentals only for the rooms actually delivered to, and used by, petitioners. It may also be mentioned that the contract specifically provides that the lease of Rooms 36, 37 and 38 was to take effect only when the tenants thereof would vacate the premises. Absent a clear showing that the previous tenants had vacated the premises, respondent had no obligation to deliver possession of the subject rooms to petitioners. Thus, petitioners cannot use the non-delivery of Rooms 36, 37 and 38 as an excuse for their failure to pay the rentals due on the other rooms they occupied. In light of the foregoing disquisition, respondent has every right to exercise his right to eject the erring lessees. The parties’ contracts of lease contain identical provisions, to wit: In case of default by the LESSEE in the payment of rental on the fifth (5th) day of each month, the amount owing shall as penalty bear interest at the rate of FOUR percent (4%) per month, to be paid, without prejudice to the right of the LESSOR to terminate his contract, enter the premises, and/or eject the LESSEE as hereinafter set forth; Art. 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) REQUISITES OF CONSIGNATION 1. Existence of a valid debt; 2. Valid prior tender of payment, unless tender is excused; 3. Prior notice of consignation (before deposit); 4. Actual consignation (deposit); 5. Subsequent notice of consignation 6. Hearing; 7. Judgment

A: Yes. The original obligation is revived. Q: Can he withdraw after the court finds that consignation is proper? A: Generally, no, unless or the exception is the creditor consents. Q: what are the consequences if the creditor consents to the withdrawal after the finding of the court that consignation is proper? One of the consequences is that the creditor loses the preference of credit; He loses the security attached to that obligation. EFFECT OF PROPER CONSIGNTATION: It retroacts to the time of consignation. Likewise, all interest shall be deemed to stop running from the time of consignation. Art. 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 shall also be notified thereof. (1178) HOW IS CONSIGNATION MADE? 1. 2.

The things due must be deposited with the proper judicial authorities; There must be proof that:  Tender was previously made;  Or that the creditor had previously notified the debtor that consignation will be made (in case tender is not required)

CASE CEBU INTL FINANCE CORP vs. CA

DEPOSIT; EFFECTS OF 1. The property is in “custodia legis”; 2. Not exempt from attachment and execution; 3. But if property be perishable by nature, the court may order the sale of the property; 4. The debtor by consigning the thing practically makes himself the agent or receiver of the court, particularly if for some reason, the property cannot actually be placed in the hands of the court. From transcription: REQUISITES FOR VALID CONSIGNATION 1. There must be a debt due; there must be a debt owing. 2. That the consignation was made because of some legal cause provided in the present article. (the unjust refusal of the creditor) 3. Previous notice of the consignation has been given to the persons interested in the performance of the obligation. 4. That the amount or thing due was placed at the disposal of the court (actual consigning or depositing the thing due with the clerk of court); and 5. That after the consignation had been made, the persons interested were notified thereof. Q: what if the debtor decides to withdraw what has been consigned, would that be allowed?

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. 17 It is an agreement between two or more persons who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of losing. 18 The compromise agreement could not bind a party who did not sign the compromise agreement nor avail of its benefits. 19 Thus, the stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His money could not be the subject of an agreement between CIFC and BPI. Although Alegre's money was in custody of the bank, the bank's possession of it was not in the concept of an owner. BPI cannot validly appropriate the money as its own. The codal admonition on this issue is clear: Art. 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. BPI's confiscation of Alegre's money constitutes garnishment without the parties going through a valid proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to subject to his claim the property of the defendant in the hands of 44




a third person or money owed to such third person or a garnishee to the defendant. 21 The garnishment procedure must be upon proper order of RTC-Makati, Branch 62, the court who had jurisdiction over the collection suit filed by BPI against Alegre. In effect, CIFC has not yet tendered a valid payment of its obligation to the private respondent. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the former's obligation and demanding that the latter accept the same. 22 Tender of payment cannot be presumed by a mere inference from surrounding circumstances. With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action, the following requisites must concur: (a) identity of parties or at least such as to represent the same interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same acts; and (c) the identity in the two cases should be such that the judgment which may be rendered in one would, regardless of which party is successful, amount to res judicata in the other.

3.

LOSS OF THE THING DUE WHEN IS A THING CONSIDERED LOST 1. 2. 3.

Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1178) Art. 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) VALID CONSIGNATION, EFFECTS OF: 1. 2. 3.

Debtor may ask the judge to cancel the obligation; The running of interest is suspended; It should be observed that before the creditor accepts or before the judge declares that consignation has been properly made, the obligation remains.

When it perishes; When it goes out of commerce; When it disappears in such a way that:  Its existence is unknown; or  It cannot be recovered.

Note: The term loss does not refer strictly to actual or physical loss but contemplates also impossibility of performance. WHAT IMPOSSIBILITY OF PERFORMANCE INCLUDES 1. 2.

The trial court's ruling as adopted by the respondent court states, thus: A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance Corporation vs. Bank of the Philippine Islands now pending before Branch 147 of this Court and the Third Party Complaint in the instant case would readily show that the parties are not only identical but also the cause of action being asserted, which is the recovery of the value of BPI Check No. 513397 is the same. In Civil Case No. 92-1940 and in the Third Party Complaint the rights asserted and relief prayed for, the reliefs being founded on the facts, are identical.

Co-debtors, guarantors and sureties are released (unless they consented)

3.

Physical impossibility; Legal impossibility;  Directly – prohibited by law;  Indirectly – e.g when debtor is required to enter a military draft. Moral impossibility

Art. 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) 2 Kinds of Obligation “to give” 1. to give a generic thing; 2. to give a specific thing EFFECT OF LOSS GEN. RULE: Obligation is extinguished EXCEPTIONS 1. If debtor is at fault; 2. When debtor is made liable for fortuitous event because of:  Provision of law;  Contractual stipulation;  Nature of obligation requires the assumption of risk (debtor)

IMPROPER CONSIGNATION; EFFECTS:

INSTANCES when Law requires Liability even in case of Fortuitous Event:

1. 2.

1. 2.

If improperly made, obligation remains; At the time of consignation, the debt already due; requisites are absent – DEBTOR is in default.

Art. 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 codebtors, guarantors and sureties shall be released. (1181a) Effects of Withdrawal 1. Obligation remains; 2. Creditor loses any preference over the thing;

3. 4. 5. 6.

Debtor is in default; When debtor has promised to deliver the same thing to 2 or more persons who do not have the same interest; Obligation arises from a crime; When borrower has lent the thing to another who is not a member of his own HH; When thing loaned has been delivered with appraisal of value unless stipulated exempting borrower from responsibility; When payee in solutio indebiti is in bad faith.

Q: What about partial loss? Will that extinguish the obligation? It depends. Why? Generally, if the partial loss is due to a fortuitous event, the obligor has to deliver the object at its deteriorated state. 45




But if the loss is such that led the parties to enter into the contract, then there is extinguishment of the obligation. For instance, you bought a lot at Royal Pines because of the view that it affords. And then a high rise hotel was constructed which obstructed the view. Is there total loss? No, but there is extinguishment of the obligation. CO vs. CA It must likewise be emphasized that pursuant to Articles 1174 and 1262 of the New Civil Code, liability attaches even if the loss was due to a fortuitous event if "the nature of the obligation requires the assumption of risk". 14Carnapping is a normal business risk for those engaged in the repair of motor vehicles. For just as the owner is exposed to that risk so is the repair shop since the car was entrusted to it. That is why, repair shops are required to first register with the Department of Trade and Industry (DTI) 15 and to secure an insurance policy for the "shop covering the property entrusted by its customer for repair, service or maintenance" as a pre-requisite for such registration/accreditation. 16 Violation of this statutory duty constitutes negligence per se. 17 Having taken custody of the vehicle private respondent is obliged not only to repair the vehicle but must also provide the customer with some form of security for his property over which he loses immediate control. An owner who cannot exercise the seven (7) juses or attributes of ownership the right to possess, to use and enjoy, to abuse or consume, to accessories, to dispose or alienate, to recover or vindicate and to the fruits . is a crippled owner. Failure of the repair shop to provide security to a motor vehicle owner would leave the latter at the mercy of the former. Moreover, on the assumption that private respondent's repair business is duly registered, it presupposes that its shop is covered by insurance from which it may recover the loss. If private respondent can recover from its insurer, then it would be unjustly enriched if it will not compensate petitioner to whom no fault can be attributed. Otherwise, if the shop is not registered, then the presumption of negligence applies. CIPRIANO vs. CA Petitioner contends that the fire which destroyed private respondent's car was a fortuitous event for which he cannot be held responsible. In support of his argument, he cites the following provisions of the Civil Code: Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. Art. 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. The contention is without merit. The issue in this case is whether petitioner was required to insure his business and the vehicles received by him in the course of his business and, if so, whether his failure to do so constituted negligence, rendering him liable for loss due to the risk required to be insured against. We hold that both questions must be answered in the affirmative.

We have already held that violation of a statutory duty is negligence per se. In F.F. Cruz and Co., Inc. v. Court of Appeals, 9 we held the owner of a furniture shop liable for the destruction of the plaintiff's house in a fire which started in his establishment in view of his failure to comply with an ordinance which required the construction of a firewall. InTeague v. Fernandez, 10 we stated that where the very injury which was intended to be prevented by the ordinance has happened, noncompliance with the ordinance was not only an act of negligence, but also the proximate cause of the death. Indeed, the existence of a contract between petitioner and private respondent does not bar a finding of negligence under the principles of quasi-delict, as we recently held inFabre v. Court of Appeals. 11 Petitioner's negligence is the source of his obligation. He is not being held liable for breach of his contractual obligation due to negligence but for his negligence in not complying with a duty imposed on him by law. It is therefore immaterial that the loss occasioned to private respondent was due to a fortuitous event, since it was petitioner's negligence in not insuring against the risk which was the proximate cause of the loss. Thus, P.D. No. 1572, 1 requires service and repair enterprises for motor vehicles, like that petitioner's, to register with Department of Trade and Industry. As condition for such registration or accreditation, Ministry Order No. 32 requires covered enterprises to secure insurance coverage. Rule III of this Order provides in pertinent parts: 12 REQUIREMENTS FOR ACCREDITATION 1) Enterprises applying for original accreditation shall submit the following: 1.1 List of machineries/equipment/tools in useful condition; 1.2 List of certified engineers/accredited technicians mechanics with their personal data; 1.3 Copy of Insurance Policy of the shop covering the property entrusted by its customer for repair, service or maintenance together with a copy of the official receipt covering the full payment of premium: 1.4 Copy of Bond referred to under Section 7, Rule III of this Rules and Regulations; 1.5 Written service warranty in the form prescribed by the Bureau; 1.6 Certificate issued by the Securities and Exchange Commission and Articles of Incorporation or Partnership in case of corporation or partnership; 1.7 Such other additional documents which the Director may require from time to time. 8 INSURANCE POLICY The insurance policy of the following risks like theft, pilferage, fire, flood and loss should cover exclusively the machines, motor vehicles, heavy equipment, engines, electronics, electrical airconditioners, refrigerators, office machines and data processing equipment, medical and dental equipment, other consumer mechanical and industrial equipment stored for repair and/or service in the premises of the applicant. There is thus a statutory duty imposed on petitioner and it is for his failure to comply with this duty that he was guilty or negligence rendering him liable for damages to private respondent. While the fire in this case may be considered a fortuitous event, 13 this circumstance cannot exempt petitioner from liability for loss. Art. 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) 46




GEN. RULE: Genus never perishes

contract. x x x

EXCEPTIONS 1. If the generic thing is delimited; 2. If generic thing has been segregated or set aside – it becomes specific now. e.g. MONEY

Petitioner failed to refute respondent's evidence.

CAGAYAN vs. INCA Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code. Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the CA, where the obligation consists in the payment of money, the failure of the debtor to make the payment even by reason of a fortuitous event shall not relieve him of his liability. The rationale for this is that the rule that an obligor should be held exempt from liability when the loss occurs thru a fortuitous event only holds true when the obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable even in case of fortuitous event. It does not apply when the obligation is pecuniary in nature. Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation." If the obligation is generic in the sense that the object thereof is designated merely by its class or genus without any particular designation or physical segregation from all others of the same class, the loss or destruction of anything of the same kind even without the debtor's fault and before he has incurred in delay will not have the effect of extinguishing the obligation. This rule is based on the principle that the genus of a thing can never perish. Genus nunquan perit. An obligation to pay money is generic; therefore, it is not excused by fortuitous loss of any specific property of the debtor.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary weight can be given to Exhibit "F Levi Strauss", a letter dated April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991. Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was offered in evidence. Thus, there is no evidence that respondent has been subrogated to any right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery of the amount ofP535,613.00. Art. 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) Art. 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) Art. 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) Article 1266 refers to impossibility in obligations to do when the prestation has become legally or physically impossible without the fault of the obligor. The impossibility must arise after the constitution of the obligation. Because if it were prior or at the time of the inception, the nullity of the contract. Legal/physical impossibility must be after the constitution of obligation.

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case. What is relevant here is whether it has been established that petitioner has outstanding accounts with IMC and LSPI.

Effect of Loss Thru Fortuitous Event in Reciprocal Obligation

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22" show that petitioner has an outstanding account with IMC in the amount ofP2,119,205.00. Exhibit "E" is the check voucher evidencing payment to IMC. Exhibit "F" is the subrogation receipt executed by IMC in favor of respondent upon receipt of the insurance proceeds. All these documents have been properly identified, presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as insurer and IMC as the insured, but also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim. Respondent's action against petitioner is squarely sanctioned by Article 2207 of the Civil Code which provides:

EXCEPTIONS: 1. In case of lease – if object is destroyed, both lease and rent are extinguished; 2. In contracts for a piece of work.

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the

GEN. RULE: The obligation that was not extinguished by the fortuitous event remains.

Note from transcription: what are the forms of impossibility? 1. It might be physical, when by reason of its nature the act cannot be performed. 2. Second, legal: a law is subsequently passed making the act illegal. 3. Objective when the act or service itself, without considering the person of the obligor, becomes impossible. It is the act itself. 4. The last is subjective which is the opposite of objective. The act or service cannot be done by the obligor, and the reason why you entered into the obligation is the person who would perform the act or the service. Q: What happens if there is temporary impossibility? 47




A: You merely wait for the impossibility but you still have to comply with the obligation. Exception is if the obligation is to be performed at a definite time, and that time is within the period of that impossibility, so the obligation is extinguished.

Does not cover highly speculative contracts or agreements such as stocks and aleatory contracts such as insurance contracts

Q: What happens if the debtor has complied with the obligation then here comes this temporary impossibility by reason of a circumstance or a situation. Is he entitled to the payment of his performance of what he has partially performed? A: Yes, of course, unless it is an indivisible obligation. If it turns out the impossibility has become permanent, and you have not yet paid, then you have to pay, unless there is extinguishment of the obligation (falling under 1234 and 1235),

REQUISITES:

ASIAN CONST. AND DEV’T CORP. vs. PHIL COM INT’L BANK The [petitioner] may have experienced financial difficulties because of the “1997 economic crisis” that ensued in Asia. However, the same does not constitute a valid justification for the [petitioner] to renege on its obligations to the [respondent]. The [petitioner] cannot even find solace in Articles 1266 and 1267 of the New Civil Code for, as declared by our Supreme Court: 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 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. xxx

xxx

xxx

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.” (Philippine National Construction Corporation versus Court of Appeals, et al.,272 SCRA 183, at pages 191-192, supra) The [petitioner] even failed to append any “Affidavit” to its “Opposition” showing how much it had received from its construction contracts and how and to whom the said collections had been appended. The [petitioner] had personal and sole knowledge of the aforesaid particulars while the [respondent] did not Art. 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) Refers to moral impossibility or impracticability due to change of certain conditions; Refers to personal obligation (or obligations to do) and not real ( to give)

Based on the doctrine of unforeseen events or rebus sic stantibus

1. 2. 3. 4.

Even or change of circumstances could not have been forseen at the time of the execution of the contract; Performance is extremely difficult but not impossible; The impossibility was not due to acts of any of the parties The prestation refers to a future one, not an immediate fulfillment; OSMENA vs. SSS

Under the law on obligations and contracts, the obligation to give a determinate thing is extinguished if the object is lost without the fault of the debtor. And per Art. 1192 (2) of the Civil Code, a thing is considered lost when it perishes or disappears in such a way that it cannot be recovered. In a very real sense, the interplay of the ensuing factors: a) the BDO-EPCIB merger; and b) the cancellation of subject Shares and their replacement by totally new common shares of BDO, has rendered the erstwhile 187.84 million EPCIB shares of SSS “unrecoverable” in the contemplation of the adverted Civil Code provision. With the above consideration, respondent SSS or SSC cannot, under any circumstance, cause the implementation of the assailed resolutions, let alone proceed with the planned disposition of the Shares, be it via the traditional competitive bidding or the challenged public bidding with a Swiss Challenge feature. At any rate, the moot-and-academic angle would still hold sway even if it were to be assumed hypothetically that the subject Shares are still existing. This is so, for the supervening BDO-EPCIB merger has so effected changes in the circumstances of SSS and BDO/BDO Capital as to render the fulfillment of any of the obligations that each may have agreed to undertake under either the Letter-Agreement, the SPA or the Swiss Challenge package legally impossible. When the service has become so difficult as to be manifestly beyond the contemplation of the parties total or partial release from a prestation and from the counter-prestation is allowed. Under the theory of rebus sic stantibus, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. Upon the facts obtaining in this case, it is abundantly clear that the conditions in which SSS and BDO Capital and/or BDO executed the LetterAgreement upon which the pricing component – at P43.50 per share – of the Invitation to Bid was predicated, have ceased to exist. Accordingly, the implementation of the Letter- Agreement or of the challenged Res. Nos. 428 and 485 cannot plausibly push through, even if the central figures in this case are so minded. Lest it be overlooked, BDO-EPCI, in a manner of speaking, stands now as the issuer of what were once the subject Shares. Consequently, should SSS opt to exit from BDO and BDO Capital, or BDO Capital, in turn, opt to pursue SSS’s shareholdings in EPCIB, as thus converted into BDO shares, the sale-purchase ought to be via an Issuer Tender Offer -- a phrase which means a publicly announced intention by an issuer to acquire any of its own class of equity securities or by an affiliate of such issuer to acquire such securities In that eventuality, BDO or BDO Capital cannot possibly exercise the “right to match” under the Swiss Challengeprocedure, a tender offer being wholly inconsistent with 48




public bidding. The offeror or buyer in an issue tender offer transaction proposes to buy or acquire, at the stated price and given terms, its own shares of stocks held by its own stockholder who in turn simply have to accept the tender to effect the sale. No bidding is involved in the process. While the Court ends up dismissing this petition because the facts and legal situation call for this kind of disposition, petitioners have to be commended for their efforts in initiating this proceeding. For, in the final analysis, it was their petition which initially blocked implementation of the assailed SSC resolutions, and, in the process, enabled the SSS and necessarily their members to realize very much more for their investments. NATELCO vs. CA Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind this provision, 9 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. According to Senator Arturo M. Tolentino, 10 Article 1267 states in our law the doctrine of unforseen events. This is said to be based on the discredited theory of rebus sic stantibus in public international law; 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. Considering 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. The ruling in the Occeña 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. However, our disposition of the present controversy does not end here. We have to take into account the possible consequences of merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent, resulting in disruption of their service to the public; while private respondent, in consonance with the contract 12 will return all the telephone units to petitioners, causing prejudice to its business. We shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the public beginning January, 1989. The peculiar circumstances of the present case, as distinguished further from the Occeña case, necessitates exercise of our equity jurisdiction. 13 By way of emphasis, we reiterate the rationalization of respondent court that: . . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered by both parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff . . . . irst, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to this case, we have changed its theory

and decided the same on an issue not invoked by plaintiff in the lower court. For basically, the main and pivotal issue in this case is whether the continued enforcement of the contract Exh. "A" between the parties has, through the years (since 1977), become too inequitous or disadvantageous to the plaintiff and too one-sided in favor of defendant-appellant, so that a solution must be found to relieve plaintiff from the continued operation of said agreement and to prevent defendant-appellant from further unjustly enriching itself at plaintiff's expense. It is indeed unfortunate that defendant had turned deaf ears to plaintiffs requests for renegotiation, constraining the latter to go to court. But although plaintiff cannot, as we have held, correctly invoke reformation of contract as a proper remedy (there having been no showing of a mistake or error in said contract on the part of any of the parties so as to result in its failure to express their true intent), this does not mean that plaintiff is absolutely without a remedy in order to relieve itself from a contract that has gone far beyond its contemplation and has become so highly inequitous and disadvantageous to it through the years because of the expansion of defendant-appellant's business and the increase in the volume of its subscribers. And as it is the duty of the Court to administer justice, it must do so in this case in the best way and manner it can in the light of the proven facts and the law or laws applicable thereto. We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267 of the New Civil Code to this case. Defendant-appellant stresses that the applicability of said provision is a question of fact, and that it should have been given the opportunity to present evidence on said question. But defendantappellant cannot honestly and truthfully claim that it (did) not (have) the opportunity to present evidence on the issue of whether the continued operation of the contract Exh. "A" has now become too one-sided in its favor and too inequitous, unfair, and disadvantageous to plaintiff. As held in our decision, the abundant and copious evidence presented by both parties in this case and summarized in said decision established the following essential and vital facts which led us to apply Art. 1267 of the New Civil Code to this case: RUSTAN vs. IAC In support of the second ground for allowance of the petition, petitioners are of the impression that the letter dated September 30, 1968 sent to private respondents is well within the right of stoppage guaranteed to them by paragraph 7 of the contract of sale which was construed by petitioners to be a temporary suspension of deliveries. There is no doubt that the contract speaks loudly about petitioners' prerogative but what diminishes the legal efficacy of such right is the condition attached to it which, as aforesaid, is dependent exclusively on their will for which reason, We have no alternative but to treat the controversial stipulation as inoperative (Article 1306, New Civil Code). It is for this same reason that We are not inclined to follow the interpretation of petitioners that the suspension of delivery was merely temporary since the nature of the suspension itself is again conditioned upon petitioner's determination of the sufficiency of supplies at the plant. Neither are We prepared to accept petitioners' exculpation grounded on frustration of the commercial object under Article 1267 of the New Civil Code, because petitioners continued accepting deliveries from the suppliers. This conduct will estop petitioners from claiming that the breakdown of the machinery line was an extraordinary obstacle to their compliance to the prestation. It was indeed incongruous for petitioners to have sent the letters calling for suspension and yet, they in effect disregarded their own advice by accepting the deliveries from the suppliers. The demeanor of petitioners along this line was sought to be justified as an act of 49




generous accommodation, which entailed greater loss to them and "was not motivated by the usual businessman's obsession with profit" (Page 34, Petition; Page 40, Rollo). Altruism may be a noble gesture but petitioners' stance in this respect hardly inspires belief for such an excuse is inconsistent with a normal business enterprise which takes ordinary care of its concern in cutting down on expenses (Section 3, (d), Rule 131, Revised Rules of Court). Knowing fully well that they will encounter difficulty in producing output because of the defective machinery line, petitioners opted to open the plant to greater loss, thus compounding the costs by accepting additional supply to the stockpile. Verily, the petitioner's action when they acknowledged that "if the plant could not be operated on a commercial scale, it would then be illogical for defendant Rustan to continue accepting deliveries of raw materials." (Page 202, Record on Appeal; Page 8, Decision; Page 55, Rollo). Art. 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 been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) Effect of Loss in Criminal Offenses – DOES NOT EXTINGUISH OBLIGATION, EVEN IF FORTUITOUS EVENT INTERVENES e.g theft. So this is one of the exceptions to the rule that if a determinate thing is lost through fortuitous events, the obligation is extinguished. Exception is when Creditor is in Mora Accipiendi (default); otherwise stated, if the thing was offered to the person who should receive it and the latter refused without just cause. CASES PEOPLE vs. DANIELA The trial court ordered the appellants to pay in solidum to the heirs of Ronito the amount of P50,000. However, although Maria Fe testified, the trial court did not award moral damages to said heirs. Neither did the trial court award exemplary damages. The trial court ordered the appellants to return to said heirs the pieces of jewelry taken by them but the trial court failed to specify or describe in its decision the said pieces of jewelry. Maria Fe testified that the appellants took her chinese gold necklace worth P7,000; two gold rings worth P3,000; chinese gold earring worth P1,000; wristwatch worth P900; and cash money in the amount of P30,000 and that the appellants took the gold ring of Ronito worth P900, and his wristwatch worth P1,800. However, the prosecution failed to adduce documentary evidence to prove the acquisition cost of the pieces of jewelry taken from Maria Fe and Ronito. Neither is there any documentary evidence to prove that Maria Fe had P30,000 inside her pouch. Nevertheless, the Court has to modify the decision of the trial court. Conformably with current jurisprudence, the heirs of Ronito Enero are entitled to moral damages in the amount of P50,00035 and exemplary damages in the amount ofP25,000.36 Under Article 105 of the Revised Penal Code,37 the appellants are obliged to return to Maria Fe the pieces of jewelry they stole from her and to the heirs of Ronito the wristwatch and ring the appellants took from Ronito, whenever possible, with allowance for any deterioration or diminution of value as determined by the trial court. Under Article 10638 of the Revised Penal Code, if the appellants can no longer return the articles, they are obliged to make reparation for the price of the pieces of jewelry if they can no longer return the same taking into account the price and the special sentimental value thereof to

the victims. Under Article 126839 of the New Civil Code, the appellants are not exempted from the payments of the price of the stolen articles even if the same are lost, whatever be the cause of the loss, unless the things having been offered to the owners thereof, the former refused to receive the same without any valid cause. Art. 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) CONDONATION/REMISSION OF A DEBT It is the gratuitous abandonment by the creditor of his right against the debtor. Condonation/remission is essentially a donation of the credit to the debtor. It is a bilateral act (not reciprocal), which requires the acceptance by the donor. It is therefore, subject to the rules on donations with respect to acceptance, amount and revocation. It may be made expressly or impliedly. Express condonation shall, furthermore, comply with the forms of donation. Art. 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) ESSENTIAL REQUISITES FOR REMISSION 1. 2. 3. 4. 5. 6. 7. 8. 9.

There must be an agreement; Parties must be capacitated and must consent; There must be subject matter (object/prestation); The cause or consideration must be liberality – essentially gratuitous; Obligation remitted must be demandable at the time of remission; The remission must not be inofficious – not excessive; Formalities of a donation are required in case of an express remission; Waivers/remissions are not to be presumed generally – it must be expressed or implied; The debtor must accept the remission.

CLASSES OF REMISSION A.

AS TO EFFECT/EXTENT 1. Total 2. Partial (upto the portion/ or may refer to accessory obligation)

B.

AS TO DATE OF EFFECTIVITY 1. Inter vivos (during lifetime) 2. Mortis Causa (after death)

C.

AS TO FORM 1. Implied (no formality) – conduct is enough 2. Express/formal

If debtor does not accept and creditor does not collect within the statute of limitations, the debt may be said to have been extinguished by Prescription. Note from transcription: Now, may the creditor waive interest but demand fulfillment of the principal? Yes. May the court waive 50




interest? No. Can the court lower interest? Yes, if unconscionable or inequitous. May the court lower penalty? Yes. Can it erase penalty? No. (Ligutan case, RCBC case) CASES YAM vs. CA The question in whether petitioners are liable for the payment of the penalties and service charges on their loan which, as of July 31, 1986, amounted to P266;246.88. The answer is in the affirmative. Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of donation. 12 Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of which exceeds P5,000,00, must be made in writing, otherwise the same shall be void. In this connection, under Art. 417, par. 1, obligations, actually referring to credits, l3 are considered movable property. In the case at bar, it is undisputed than the alleged agreement to condone P266,196.88 of the second IGLF loan was not reduced in writing. Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for P410,854.47, containing the notation that the amount is in "full payment of IGLF loan," constitutes documentary evidence of such oral agreement. This contention is without merit. The notation in "full payment of IGLF loan" merely states petitioners' intention in making the payment, but in no way does it bind private respondent. It would have been a different matter if the notation appeared in a receipt issued by respondent corporation, through its receiver, because then it would be an admission against interest. Indeed, if private respondent really condoned the amount in question, petitioners should have asked for a certificate of full payment from respondent corporation, as they did in the case of their first IGLF loan of P500,000.00. Petitioners, however, contend that the Central Bank examiner assigned to respondent corporation, Cristina Destajo, signed the voucher in question. Destajo claimed that, when she signed the voucher, she failed to notice the statement that the amount of P410,854.47 was being given in "full payment of IGLF Loan." She said she merely took note of the amount and the check number indicated therein. 16 In any event, Destajo, by countersigning the voucher, did no more than acknowledge receipt of the payment. She cannot be held to have ascented thereby to the payment in full of petitioners' indebtedness to private respondent. It was obvious she had no authority to condone any indebtedness, her "issuing official receipts, preparing check vouchers and documentation." Moreover, it is to be noted that the alleged agreement to condone the amount in question was supposedly entered into by the parties sometime in July 1986, that is, after respondent corporation had been placed under receivership on November 4, 1985. As held in Villanueva v. Court of Appeals "the appointment of a receiver operates to suspend the authority of a [corporation] and of its directors and officers over its property and effects, such authority being reposed in the receiver:" Thus, Sobrepeñas had no authority to condone the debt.

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) Art. 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) Presumption of remission prevails over presumption of payment. The private document must refer to the original of the original (because it may be issued in duplicate copies) Not true in case of public documents because there is always a copy in the archives to prove the credit. PRESUMPTION IN JOINT/SOLIDARY OBLIGATION  In Solidary, whole obligation is remitted;  In joint, only the share of the Debtor to whom creditor has granted remission. Art. 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) Art. 1274. It is presumed that the accessory 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) 

Only the accessory is remitted, the principal obligation remains in force.

CONFUSION OR MERGER OF RIGHTS Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a) MERGER/CONFUSION – the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. REQUISITES 1.

It should take place between principal debtor and creditor. No confusion if Debtor and Creditor represent different juridical entities even if both are the same.

2.

Merger must be clear and definite.

3.

The very obligation involved must be the same or identical

4.

The confusion must be total or as regards the entire obligation (exception Art. 1277)

Indeed, Mrs. Yam herself testified that when she and her husband sought the release of the chattel mortgage over their property, they were told that only the Central Bank would authorize the same "because [the CB] the receiver." Considering this, petitioners cannot feign ignorance and plead good faith.

If the reason for confusion ceases, the obligation is revived. (Example: when the merger takes place by a particular title, this may be set aside for causes of nullity or rescission of contract.

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the

Effect if mortgagee becomes owner --- mortgage is extinguished but principal obligation may remain. 51




Art. 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)

Capacity to dispose of the thing paid and capacity to receive payment are required

The extinguishment of the principal obligation through confusion releases the guarantors because the obligation of the latter is merely accessory. However, when the merger takes place in the person of a guarantor, the obligation is not extinguished.

COMPENSATION

MERGER

As to # of Persons

2 persons who are mutually creditor and debtor to each other;

one person in whom is merged the qualities of C and D;

As to # of Obligatio n

2 obligation

one obligation

Art. 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. COMPENSATION OR OFF SETTING It is a mode of extinguishing to the concurrent amount, the obligations of those persons who in their own right are reciprocally debtors and creditors of each other. It is the offsetting of 2 obligations which are reciprocally extinguished if they are of equal value, or extinguished to the concurrent amount if of different values. It is a simplified or abbreviated payment because the 2 debts are extinguished without requiring the transfer of money or property from one party to the other.

COMPENSATION

COUNTERCLAIM OR SET-OFF

Takes place by operation of law and extinguishes reciprocally the 2 debts as soon as they exist simultaneously to the amount of respective sums

Must be pleaded to be effectual

Works as a sort of judicial compensation, provided that requirements of ROC are observed.

KINDS/CLASSES OF COMPENSATION A.

AS TO ITS EXTENT 1. 2.

B.

No such capacity is necessary

TOTAL – obligation are completely extinguished because they are of the same amount. PARTIAL - when a balance remains.

AS TO ITS ORIGIN/CAUSE 1. 2.

LEGAL – takes place by operation of law. VOLUNTARY/CONVENTIONAL- agreed to by parties; Requisites: (1) each of the parties can dispose of the credit he seeks to compensate; (2) the parties agree to mutual extinguishment of their credits.

3. 4.

JUDICIAL (SET-OFF)- must be pleaded; effective upon order of the Court. (Two debts arising from final and executory judgment) FACULTATIVE – one party has the choice of claiming the compensation. This is compensation which can be set up only at the option of a creditor when legal compensation cannot take place because of want of some legal requisites for the benefit of the creditor.

DISTINCTIONS

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195) Art. 1279. In order that compensation may be proper, it is necessary: (although the parties may not be aware of it – CF Art. 1290) (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) NEGATIVE REQUISITES OF LEGAL COMPENSATION 1.

PAYMENT

COMPENSATION

Payment must be complete and indivisible;

Partial extinguishment is always allowed.

Involves action/delivery

True or legal compensation takes place by operation of law.

2. 3.

That over neither of the debts must there be any retention or controversy commenced by 3rd persons and communicated in due time to the debtor. There must have been no waiver of the compensation; The compensation of debts must not have been prohibited by law.

PROHIBITED COMPENSATION 1. 2. 3.

Debts arising from a depositum except bank deposits; Debts arising from the obligations of a depositary; Debts arising from the obligations of a bailee in commodatum; 52


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. 4. 5. 6.


Debts arising from a claim for future support due by gratuitous title; Debts consisting in civil liability arising from a penal offense; Damages suffered by a partnership through the fault of a partner cannot be compensated with profits and benefits w/c he may have earned for the partnership by his industry.

Note: There can be no compensation when the object of the obligation is specific or determinate because there is only one determinate or specific thing, you cannot duplicate that. Q: May there be compensation of obligations subject to conditions? A: It depends. If the conditions are resolutory, pwede. But if one is reciprocal and the other is suspensive, there can be no compensation. CASES FRANCIA vs. IAC A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant of his petition. We are constrained to dismiss it. Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977. There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other; xxx xxx xxx (3) that the two debts be due. xxx xxx xxx This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that: 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 a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that no set-off 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 party and party but grow out of 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. ..." We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the governmental body not included in the tax levy. IBC vs. IAC The crucial issue to be resolved in this case is whether or not there can be legal compensation in the case at bar. Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the amount of P6.81 million against which it has the right to apply or set off private respondent's money market claim of P1,062,063.83. The argument is without merit. As correctly pointed out by the respondent Court of Appeals: 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). Article 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 extend to unliquidated, disputed claim arising from breach of contract. (Compañia General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Herrero, 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). It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private respondent's property from which the alleged deficiency arose. (Annex "AA", Rollo, pp. 181189). Therefore, the validity of the extrajudicial foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it is evident, that the requirement of Article 1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot take place under Article 1290 of the Civil Code. Art. 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) Why is a guarantor allowed to set up compensation? Because it will be beneficial to him, he will be released from the debt. Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n)

53




True for all different kinds of compensation whether voluntary, legal, etc.

 

Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)

B owes A  80,000 due on Feb. 25, 06;  50,000 due on Aug. 15,05.  75, 000 due on Oct. 10,04.  A dining set worth 200,000 due on April 1, 03  A cow worth 15,000 eonverted into damages by reason of non performance.

Applies to conventional or voluntary compensation. 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. (n) JURISDICTION OF COURT RE: VALUE OF DEMAND GEN. RULE: Jurisdictionn depends upon the totality of the demand in all the causes of action, irrespective of whether the plural cases arose out of the same or different transactions. EXCEPTIONS 1. Where the claim joined under the same complainant are separately owed by, or due to, different parties in w/c cases each separate claim furnishes the jurisdictional test. 2.

Where not all the causes of action joined are demands or claims for money.

Art. 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) Note: The rescissible obligations here refer to Art. 1381. Art. 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) RULES: 

Assignment with consent of debtor -- Compensation cannot be set-up, it serves as a waiver except if the right to compensation is reserved



Assignment with knowledge but without consent of debtor --- compensation can be set-up re: debts before the cession, but not after the assignment.



Assignment made w/out knowledge of debtor -- debtor can set up compensation as a defense for all debts maturing prior to his knowledge of assignment.

B assigned his credit to C on Dec. 25, 2005. Q: What are the rights of A? What debts can he claim compensation? What debts can be the subject of compensation? A: It depends:  If with consent, wala. (unless there is reservation of right to claim.)  If with knowledge, without consent: all debts previous to the assignment. (#2, #3, #5) 3. Assign without knowledge: it would now depend when A acquired knowledge, because Dec. 25, 05 is not the reckoning point. Art. 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)   

Applies to compensation by operation of law; Indemnity for expenses of transportation (of goods/objects) Indemnity for expenses of exchange.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary 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 prejudice to the provisions of paragraph 2 of article 301. (1200a) Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n) WHEN LEGAL COMPENSATION CANNOT TAKE PLACE 1. 2. 3. 4. 5.

When one debt arises from a depositum; When one debt arises from the obligation of a depositary; When one debt arises from the obligation of a bailee in commodatum; When one debt arises because of a claim for support due to gratuitous title. When the debt arises from a criminal liability. But the offended party may claim compensation (this is an example of a facultative obligation)

OBLIGATIONS OF A DEPOSITARY 1.

From transcription: Situation: A owes B :  a bracelet worth 100,000 due on Jan 1, 2004;  75,00 due on June 1,2006,

100,000 due on Dec. 1, 05, 25,000 due on Aug. 1, 04

2.

The Depositary is obliged to keep the thing safely and to return it when required to the depositor, or to his heirs and successors or to person who may have been designated in the contract. Unless stipulated to contrary, the depositary cannot deposit the thing to 3rd persons. 54




If deposit to 3rd person is allowed, the depositary is liable for the loss if the person is careless or unfit. Depositary is responsible for the negligence of his employees. Depositary cannot make use of the thing deposited w/out express permission of depositor otherwise he shall be liable for damages – except preservation of thing requires its use.

REQUISITES OF NOVATION 1. 2.

The existence of a valid old obligation  If valid – nothing to novate  If voidable – possible novation before annulment Intent to extinguish or to modify the old obligation by substantial difference The capacity and consent of all the parties except in case of expromision – old debtor does not participate Validity of new obligation

Art. 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.

3.

Art. 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (1202a)

Is there novation if the amount in the new obligation is increased? No. But if the new obligation is increased but if separate from the old obligation? (There is an increase in the old but it is found in a separate document) There is because the prior promissory notes are extinguished and superceded by the new promissory notes. If the period is increased, is there novation or lengthened or shortened? No. Why? It merely affects the performance of the obligation. If the evidence of credit from promissory note payable to order to payable to bearer? There is no novation. Renunciation of security? None ha, it merely becomes a simple debt. From alternative to simple or simple to alternative? Yes. Surrender of the evidence of credit? No. (remission) There is no novation there because the obligation is extinguished. From contract of donation to contract of sale? Yes, anong change dun? The juridical tie. But there is no novation in a subsequent execution of a real estate mortgage as security, why? The mortgage being merely an accessory obligation to secure the loan or promissory note.

  

Legal compensation takes place automatically unless there has been valid waiver thereof. Compensation w/c extinguishes principal obligation carries with it the extinguishments of the accessory obligation. “to the Concurrent amount” means if one debt is bigger than the other, the balance subsists as debt.

Q: May it be possible for one claiming compensation despite the fact that the one claiming has a debt that already prescribed? A: Yes, for as long as the requisites have met at a certain point, even if one of the debts had already prescribed at the time of the claim for compensation. As long as at one point, all the requisites mentioned in 1279 are present before the debt actually prescribed, then there can be compensation. Q: May the benefit of compensation be renounced or waived? A: Yes. Example of which would be 1285 paragraph 1. NOVATION NOVATION – substitution or change of an obligation by another w/c extinguishes/modifies the 1st either by changing its object or principal condition or substituting another in place of debtor, or subrogating a 3rd person in the rights of creditor. Art. 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) KINDS OF NOVATION A.

According to its Object/Purpose 1. Real/objective – changing the object/principal conditions of obligation. 2. Personal/subjective – change of persons i. Substituting the person of debtor. ii. Subrogating a 3rd person in the rights of creditor (by agreement or by law) 3. Mixed (change of object and parties)

B.

According to Form of its Constitution 1. Express 2. Implied (incompatibility of 2 obligation)

C.

According to its Extent/Effect 1. Total or extinctive (old obligation is totally extinguished) 2. Partial or modificatory (imperfect or improper

4.

Obligations to pay a sum of money is not novated by a new instrument which merely changes the terms of payment. Novation however is proper in case of change of juridical relation, example would be from commodatum to lease of thing. Even if that is merely an implied novation, are there incompatible in all material points. Yes. In commodatum, it is a free use of thing while in lease, you have to pay. It also says from negotiorum gestio to contract of agency, because it is from a non-contractual relation to a contractual relation. From mortgage to antichrisis. Yes, there is a novation. There is a novation if there is a change in the nature of the prestation. Take note that novation is never presumed. In order that there is implied novation, the agreements must be incompatible with each other. Otherwise, if the change is merely accessory or accidental, it does not affect either the principal object, condition, person of the creditor or debtor, there is no novation. In order that there shall be novation, four requisites must be complied with: 1. There must be a previous valid obligation; 2. The consent of the parties to extinguish the prior obligation; 3. A valid new obligation. 4. The extinguishment of the old obligation. (Absent any, there is no novation) Art. 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) 1. 2.

Express Novation – declared in unequivocal terms Implied – complete/substantial incompatibility - substantial changes:  In object/subject matter of contract  In cause or consideration of contract  In principal terms or conditions of contract  If debt subject to condition is made an absolute one w/out a condition 55


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA.  


Reduction of term/period stipulated W/out consent of subscribers

INSTANCES NOVATION

WHEN

COURT

HELD:

NO

EXTINCTIVE

1.

Slight alterations or modifications in construction plans of buildings. 2. New contract merely contains supplementary agreement 3. When additional interest is agreed upon 4. When additional security is given 5. When after a final judgment, a contract was entered into precisely to provide a method of payment other than that stated in judgment. 6. When a guarantor enters into an agreement with creditor that he (guarantor) will also be a principal debtor. 7. When creditor in the meantime refrains from suing debtor or even when creditor merely extends the term of payment for here the period merely affects performance, not the creation of the obligation. 8. Place of payment is changed or there is variation in amount of partial payments. 9. When a public instrument is executed to confirm a valid contract. 10. When payment of purchase price for certain trucks is made by execution of promissory note for said price. CASES SUENO vs. LANDBANK OF THE PHILS The elements of novation clearly do not exist in the instant case. While it is true that there is a previous valid obligation (i.e., the obligation of LBP to honor Sueno’s right to redeem the subject property within a period of one year), such obligation expired at the same time as the redemption period on 6 March 2001. There is, however, no clear agreement between the parties to a new contract, again imposing upon LBP the obligation of honoring Sueno’s right to redeem the subject properties within an extended period of six months. Without a new contract, the old contract cannot be considered extinguished. The condition of LBP for the extension of the redemption period for the subject properties was plain and simple, that Sueno pay an initial amount of P115,000.00 for the extension of the redemption period. Sueno tendered a check for P50,000.00 in partial payment of the amount demanded by LBP. By accepting the check payment, LBP merely accepted partial compliance of Sueno with its demand, but it does not mean that LBP had conceded to the extension of the redemption period for such reduced amount. In fact, LBP promptly sent Sueno a letter dated 6 March 2001, which was duly received by the latter, explicitly and consistently requiring payment of the full amount of P115,000.00 for the extension of the redemption period. It is without doubt that LBP was still expecting Sueno to pay the balance ofP65,000.00. Hence, not until full payment of the amount it demanded, for LBP had not yet agreed to extend the period for redemption of the subject properties. The consent of LBP to an extension of the period to redeem is subject to the suspensive condition that Sueno shall pay the initial amount of P115,000.00 in full. With Sueno’s failure to remit the balance of P65,000.00 to LBP, then there is non-perfection of a new contract. As aptly declared by the Court of Appeals: The parties are bound to fulfill the stipulations in a contract only upon its perfection. At anytime prior to the perfection of a contract, unaccepted offers and proposals remain as such and cannot be

considered binding commitments, hence, not demandable. Since [Sueno] failed to perform what was incumbent upon her then, [LBP] cannot be faulted in not granting the extension sought. x x x. What further belies Sueno’s assertion that LBP consented to her request for extension is its letter dated 7 March 2006, again duly received by Sueno, categorically denying her request to lengthen the redemption period. The language and intent of the letter is too clear and simple to be misinterpreted, to wit: We wish to inform you that the management denied your request to extend the redemption period of your foreclosed property for six (6) months since you failed to comply with the Bank’s requirement, upfront payment of P115,000.00. Hence, the Bank is now consolidating the transfer of its ownership in the name of Land Bank. Enclosed is the P50,000.00 Manager’s Check re: your upfront payment refunded to you. (Emphasis supplied). Irrefragably, there is no mutual agreement to extend the original period for the redemption of the subject properties. There is no common intent by the parties to novate the old obligation by extending the period thereof. For this Court to sustain Sueno’s position - that the LBP agreed to extend the redemption period upon her payment of an amount substantially less than what it demanded - offends the elementary principle enunciated in our jurisdiction that novation can never be presumed. As elucidated by this Court in Philippine Savings Bank v. Mañalac, Jr. Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unmistakable. The extinguishment 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 other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between 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 incompatibility between the old and the new obligations. (Emphasis supplied.) GARCIA vs. LLAMAS Applying the foregoing to the instant case, we hold that no novation took place. The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it. Verily, the two can stand together. Neither could the payment of interests -- which, in petitioner’s view, also constitutes novation -- change the terms and conditions of the obligation. Such payment was already provided for in the promissory note and, like the check, was totally in accord with the 56




terms thereof. Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution of debtors. In order to change the person of the debtor, the old one must be expressly released from the obligation, and the third person or new debtor must assume the former’s place in the relation. Well-settled is the rule that novation is never presumed. Consequently, that which arises from a purported change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken place. In the present case, petitioner has not shown that he was expressly released from the obligation, that a third person was substituted in his place, or that the joint and solidaryobligation was cancelled and substituted by the solitary undertaking of De Jesus. The CA aptly held: “x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de Jesus either, the nature of the obligation being solidary due to the fact that the promissory note expressly declared that the liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may demand payment or performance from one of the solidary debtors or some or all of them simultaneously, and payment made by one of them extinguishes the obligation. It therefore follows that in case the creditor fails to collect from one of the solidary debtors, he may still proceed against the other or others. x x x” Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly consent to the substitution of a new debtor. Since novation implies a waiver of the right the creditor had before the novation, such waiver must be express. It cannot be supposed, without clear proof, that the present respondent has done away with his right to exact fulfillment from either of the solidary debtors. More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its extinguishment. Respondent’s acceptance of his check did not change the person of the debtor, because a joint and solidary obligor is required to pay the entirety of the obligation. It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the whole obligation from any or all of the debtors. It is up to the former to determine against whom to enforce collection. Having made himself jointly and severally liable with De Jesus, petitioner is therefore liable for the entire obligation. BERNABE vs. CA The document that spells out the nature of the transaction of the parties is the Deed of Conditional Sale. Stemming from the compromise agreement entered into by Titan and petitioners, the Deed of Conditional Sale has superseded the Deed of Sale of Real Estate which is the original contract. The whole essence of a compromise is that by making reciprocal concessions, the parties avoid litigation or put an end to one already commenced. A compromise agreement can be entered into without novating or supplanting existing contracts, but in this case, the irreconcilable incompatibility between the Deed of Sale of Real Estate and the Deed of Conditional Sale inevitably resulted in extinctive novation. The first contract or the Deed of Sale of Real Estate embodies a perfected contract of sale. There is no stipulation in the said deed that title to the properties would remain with defendants until full

payment of the consideration, or that the right to unilaterally resolve the contract upon Titan's failure to pay within a fixed period is given to defendants. Patently, the contract executed by the parties is a contract of sale and not a contract to sell. When the parties entered into a compromise, they executed new contracts involving the shares of Patricio, Cecilia and Antonio in the properties. These new contracts are the three deeds of conditional sale entered into by Titan with Patricio, Cecilia and Antonio, the last represented by his attorneys-in-fact. These contracts, all entitled Deed of Conditional Sale, are contracts to sell. The difference between contracts of sale and contracts to sell is relevant. In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price. Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot recover it until and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until full payment of the price. In the latter contract, payment of the price is a positive suspensive condition, failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. A careful reading of the stipulations in the Deed of Conditional Sale conveys the intent of the parties to enter into a contract to sell. The fourth paragraph of the contract explicitly states that only when full payment of the purchase price is made shall Antonio execute the deed of absolute sale transferring and conveying his shares in the subject properties. Clearly, the intent is to reserve ownership in the seller, Antonio, until the buyer, Titan, pays in full the purchase price. The full payment of the purchase price does not automatically vest ownership in Titan. A deed of absolute sale still has to be executed by Antonio. As earlier noted, the Deed of Sale of Real Estate is substituted by the subsequent deeds of conditional sale. The Deed of Sale of Real Estate and the deeds of conditional sale involve different parties and different amounts, and impose different obligations. The original deed, on one hand, and the latter three, on the other, are incompatible and cannot subsist all at the same time KWONG vs. GARGANTOS In Iloilo Traders Finance, Inc, v. Heirs of Soriano, Jr., the nature of novation was explained, thus: Novation may either be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first. (Emphasis supplied) The test of incompatibility between two obligations or contracts is whether or not they can stand together, each one having an independent existence. If they cannot, they are incompatible, and the later obligation novates the first. 57




In this case, an examination of the Deed of Absolute Sale and the Promissory Note, as well as the surrounding circumstances of this case, shows that it was meant to novate and replace the Deed of Conditional Sale. Logically, the Deed of Conditional Sale and the Deed of Absolute Sale cannot co-exist as these are of different nature and provide for separate and distinct obligations, to wit: A contract of sale is absolute when title to the property passes to the vendee upon delivery of the thing sold. A deed of sale is absolute when there is no stipulation in the contract that title to the property remains with the seller until full payment of the purchase price. The sale is also absolute if there is no stipulation giving the vendor the right to cancel unilaterally the contract the moment the vendee fails to pay within a fixed period. In a conditional sale, as in a contract to sell, ownership remains with the vendor and does not pass to the vendee until full payment of the purchase price. The full payment of the purchase price partakes of a suspensive condition, and non-fulfillment of the condition prevents the obligation to sell from arising. The fact that the Deed of Absolute Sale of the 11 lots was executed even without respondents having fully paid the purchase price for the entire 15 parcels of land covered by the Deed of Conditional Sale enforces the conclusion that the parties intended to enter into a new agreement and discard the old one; otherwise, petitioner could have enforced his right to rescind the contract by filing a complaint instead of dealing anew with respondents and entering into the succeeding agreements. What subsequently occurred was a segregated sale of the 11 lots, while the Promissory Note covered the remaining four lots. The Court notes that respondents had already paid a substantial amount for the subject lots. Petitioner admitted that a down payment of $10,000.00 was made upon the execution of the Deed of Conditional Sale, and respondents also made further payments in the amount of $20,000.00. Thereafter, Atty. Gargantos, in behalf of respondents, paid P1,776,200.00 on May 1, 1990. It was after such payment was made that the parties entered into the Deed of Absolute Sale and the Promissory Note. Obviously, the Deed of Absolute Sale was intended by the parties to close the transaction involving the 11 lots. What remained for enforcement is the Promissory Note, which covers the four remaining lots. The Court also notes that the Deed of Conditional Sale reflected the amount of $137,255.00 or its peso equivalent at the rate of P20.40 per US dollar (orP2,800,002.00), as purchase price for the entire 15 lots. On the other hand, the Deed of Absolute Sale provided that the 11 parcels of land were being sold forP500,000.00, while the Promissory Note reflects the intention of petitioner to sell the other four lots for an undisclosed amount the balance of which is P373,074.95. Apparently, these two subsequent agreements do not show the true value of the subject lots. Nevertheless, it is well-settled that 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; however, if the contract appears to be contrary to the evident intentions of the parties, the latter shall prevail over the former. Moreover, the agreement of the parties may be embodied in only one contract or in two or more separate writings. In such event, the writings of the parties should be read and interpreted together in such a way as to render their intention effective.

would result in the extinguishment of petitioners� liability to the bank. We agree with the CA that there was none. Novation is defined as the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the creditor. Article 1292 of the Civil Code on novation further provides: 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. The cancellation of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. While there is really no hard and fast rule to determine what might constitute sufficient change resulting in novation, the touchstone, however, is irreconcilable incompatibility between the old and the new obligations. In Garcia, Jr. v. Court of Appeals, we held that: 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. 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 incompatible with the old one. 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. 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 old one. Thus, the well-settled rule is that, with respect to obligations to pay a sum of money, the obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones, or the new contract merely supplements the old one. BPI-FSB and Transbuilders only extended the repayment term of the loan from one year to twenty quarterly installments at 18% interest per annum. There was absolutely no intention by the parties to supersede or abrogate the old loan contract secured by the real estate mortgage executed by petitioners in favor of BPI-FSB. In fact, the intention of the new agreement was precisely to revive the old obligation after the original period expired and the loan remained unpaid. The novation of a contract cannot be presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. REYES vs. CA

REYES vs. BPI The only issue for our consideration is whether there was a novation of the mortgage loan contract between petitioners and BPI-FSB that

Admittedly, in order that a novation can take place, the concurrence of the following requisites 7 is indispensable: 58




1. there must be a previous valid obligation, 2 there must be an agreement of the parties concerned to a new contract, 3. there must be the extinguishment of the old contract, and 4. there must be the validity of the new contract. Upon the facts shown in the record, there is no doubt that the last three essential requisites of novation are wanting in the instant case. No new agreement for substitution of creditor war forged among the parties concerned which would take the place of the preceding contract. The absence of a new contract extinguishing the old one destroys any possibility of novation by conventional subrogation, In concluding that a novation took place, the respondent court relied on the two letters dated March 19, 1991, 8 which, according to it, formalized petitioner's and respondent Eleazar's agreement that BERMIC would directly settle its obligation with the real owners of the funds - the AFP MBAI and DECS IMC. 9 Be that as it may, a cursory reading of these letters, however clearly and unmistakably shows that there was nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that the two letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only. There was no mention whatsoever of AFP-MBAI's consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAI's intention to be the substitute creditor in the loan contract. Well settled is the rule that novation by substitution of creditor requires an agreement among the three parties concerned the original creditor, the debtor and the new creditor. 10 It is a new contractual relation based on the mutual agreement among all the necessary parties, Hence, there is no novation if no new contract was executed by the parties. Just like in the first questioned resolution, no novation took place in this case. A thorough examination of the records shows that no hard evidence was presented which would expressly and unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to pay under the contract of sale of securities. It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. 19 Article 1293 of the Civil Code is explicit, thus: Novation which consists in substituting a new debtor in the place of the original one, may be made even without 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. The consent of the creditor to a novation by change of debtor is as indispensable as the creditor's consent in conventional subrogation in order that a novation shall legally take place. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to assume the obligation of petitioner under the contract of sale of securities, when there is clearly no agreement to release petitioner from her responsibility, does not constitute novation, at most, it only creates a juridical relation of codebtorship or suretyship on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and the latter can still enforce the obligation against the petitioner. In Ajax Marketing and Development Corporation vs. Court of Appeals. 20 which is relevant in the instant case, we stated that In the same vein, to effect 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. . . Novation arising from a purported change in the person of the debtor must be clear and express. . . In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law jurisprudence, the principle novatio non praesumitur that novation is never presumed. At bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito basically extinguishing the old obligation for the new one. YOUNG vs. CA Law and jurisprudence on the concept and effects of novation are well settled in this jurisdiction. In Caneda, Jr. v. Court of Appeals, 2 we held: Novation has been defined as the extinguishment of an obligation by a subsequent one which terminates it, either by changing its object or principal conditions, referred to as objective or real novation or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor, also called as subjective or personal novation. But as explained by this Court, novation is never presumed; it must be explicitly stated or there must be a manifest incompatibility between the old and the new obligations in every aspect. The test of incompatibility between two obligations or contracts, is whether or not they can stand together, each one having an independent existence. If they cannot, they are incompatible, and the later obligation novates the first. (Emphasis supplied.) A careful examination of the text of the two contracts will show that the only change introduced in the second contract was the substitution by Antolin A. Jariol of his wife Miguela as signatory for the estate of Humiliano Rodriguez. There was no express declaration in the second contract that it was novating the first. To determine if there was at least an implied novation because of a clear incompatibility between the old and new contracts, we apply the rule that— In order that there may be implied novation arising from incompatibility of the old and new obligations, the change must refer to the object, the cause, or the principal conditions of the obligation. In other words, there must be an essential change. There was clearly no implied novation for lack of an essential change in the object, cause, or principal conditions of the obligation. At most, the substitution of a signatory in the second contract can be considered only an accidental modification which, according to Tolentino, "does not extinguish an existing obligation. When the changes refer to secondary agreements, and not to the object or principal conditions of the contract, there is no novation; such changes will produce modifications of incidental facts, but will not extinguish the original obligation." Hence, he concludes, "it is not proper to consider an obligation novated by unimportant modifications which do not alter its essence." There being no novation, the lease is properly deemed to have commenced on November 7, 1961, and so ended 21 years later on November 7, 1982. It is significant that it was in fact from this first date that Victor Young effectively started as lessee. We do not agree with the respondent court that there was an extension of the period of lease in the second contract. As earlier 59




explained, the only reason for the execution of the second contract was to change the signatory. There is no clear showing from the language of that contract that the parties intended to extend the lease for one month. BAUTISTA vs. PILAR DEVT CORP The two promissory notes are identically entitled "Promissory Note with Authority to Assign Credit." The notes were prepared by Apex in standard form and consist of two (2) pages each. Except for one or two stipulations, they contain the same provisions and the same blanks for the amount of the loan and other pertinent data subject of each note. However, on the upper right portion of the second note, there appears a typewritten entry which reads: This cancels PN # A-387-78 dated December 22, 1978. Correspondingly, on the face of each page of the first promissory note, i.e., PN No. A-387-78 dated December 22, 1978, the word "Cancelled" is boldly stamped twice with the date "September 16, 1982" and a signature written in a space inside the letters of the word. The first promissory note was cancelled by the express terms of the second promissory note. To cancel is to strike out, to revoke, rescind or abandon, to terminate.16 In fine, the first note was revoked and terminated. Simply put, it was novated. The extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first is a novation.17 Novation is made either by changing the object or principal conditions, referred to as an objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, which is known as subjective or personal novation.18 In both objective and subjective novation, a dual purpose is achieved — an obligation is extinguished and a new one is created in lieu thereof.19 Novation may either be express, when the new obligation declares in unequivocal terms that the old obligation is extinguished; or implied, when the new obligation is on every point incompatible with the old one.20 Express novation takes place when the contracting parties expressly disclose that their object in making the new contract is to extinguish the old contract, otherwise the old contract remains in force and the new contract is merely added to it, and each gives rise to an obligation still in force. Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2) the agreement of all parties to the new contract; (3) the extinguishment of the old contract; and (4) the validity of the new one.22 In the instant case, all four requisites have been complied with. The first promissory note was a valid and subsisting contract when petitioner spouses and Apex executed the second promissory note. The second promissory note absorbed the unpaid principal and interest of P142,326.43 in the first note which amount became the principal debt therein, payable at a higher interest rate of 21% per annum. Thus, the terms of the second promissory note provided for a higher principal, a higher interest rate, and a higher monthly amortization, all to be paid within a shorter period of 16.33 years. These changes are substantial and constitute the principal conditions of the obligation.23 Both parties voluntarily accepted the terms of the second note; and also in the same note, they unequivocally stipulated to extinguish the first note. Clearly, there was animus novandi, an express intention to novate.24 The first promissory note was cancelled and replaced by the second note. This second note became the new contract governing the parties' obligations. Art. 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) 2 Kinds of Personal/Subjective Novation 1. Change of debtor (passive) 2. Change of Creditor (active) FORMS (Passive Novation) I.

Expromision – initiative comes from 3rd person; it is essential that old debtor be released from his obligation. Requisites 1. Initiative from 3rd person 2. New debtor and creditor must consent 3. Old debtor must be released from his obligations

II. Delegacion – initiative from debtor for it is he who delegates another to pay; 3 parties (old, new debtor and creditor) must agree. Requisites 1. Initiative from old debtor 2. All parties concerned must consent  Implied/express  Before/after new debtor has given consent  Maybe conditional – has to be fulfilled. 3 Parties   

Delegante – original debtor Delegatario – creditor Delegado – new debtor

1293: is expromission. In expromission, the original debtor's consent is not necessary. Now, what would be the effect: 1236 and 1237. What happens if the new debtor is insolvent? Is the old debtor liable for the new debtor? No, precisely because he did not consent or it was made without his knowledge. He cannot be held liable by reason of insolvency of the new debtor. Now, what about delegacion. Who proposes the new debtor? The old debtor. So in both cases the consent of the creditor is always necessary. Now what happens if the new debtor is insolvent. Will that revive the old obligation? It does not. Exception: If the insolvency of the new debtor is of public knowledge and existing and known to the (old) debtor, even if it is not of public knowledge, then there is revival of the original obligation. What happens if the obligation is one with an accessory obligation or contract and the principal obligation is extinguished? Would that carry the extinguishment of the accessory obligation? Yes. exception if there is a stipulation pour autrui. (an example is being named as a beneficiary of an insurance policy, review PNB vs. CA compensation case) CASES GAW We find the appellate court's findings to be more in accord with the evidence on record. In paying directly to PWCC, Tan only observed paragraph 2 of the marketing agreement aforequoted which specifically stated that he was to deposit with PWCC the amount of P250,000.00 in his name. Of course, Gaw capitalized on the 60




testimony of the former president of PWCC to the effect that while Tan tendered the said amount, there was no actual deposit. 25 Such an assertion, however, is belied by the circumstances surrounding the tender of payment, as well as the agreement of the parties explicitly expressed in the marketing agreement. Thus, after PWCC had refused to accept Tan's deposit of P250,000.00 and PWCC's auditor had advised Tan to deposit it in the name of Gaw which Tan accepted, the least that Gaw could have done was to act conformably with such proposal to show his sincerity and good faith. It is plain from the facts of this case that the agreement was regarded by Gaw as nothing more than a scrap of paper which he could choose to ignore at his pleasure. One cannot help but conclude that he had no intentions of abiding by its terms. But in an effort to conceal his real intention, he went to great lengths to prove to this Court that the agreement was prepared by Trazo, the former president of PWCC, who "induced" him to sign the agreement which had practically the same terms as the marketing agreement of PWCC with Perpetual Commercial. 26 Furthermore, Gaw asserts that "the operative provisions of the marketing agreement actually made respondent Tan a co-dealer of petitioner Gaw" because Tan's transactions with PWCC were "separate and independent." Under Section 9, Rule 130 of the Rules of Court, once the terms of an agreement have been reduced to writing, it is deemed to contain all the terms agreed upon by the parties and no evidence of such terms other than the contents of the written agreement shall be admissible. 28 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. 29 Thus, in the interpretation of the provisions of a written contract, the literal meaning of its stipulations must prevail. 30 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 the 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 contravene the terms and conditions of his exclusive dealership agreement with PWCC. 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 attempted novation" of the dealership agreement. 31 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 P250,000.00," Gaw cites Article 1293 of the Civil Code which provides that "(n)ovation 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 in compatibility between the old and the new obligation in every aspect. 32 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. Gaw's claim for damages, therefore, had no basis in fact and in law.

In the first place, as discussed above, he is partly to blame for the nonimplementation of the marketing agreement. Secondly, the claim for actual damages allegedly resulting from unrealized profits out of his agreement with Mandee Commercial appears to have been caused by factors other than the issuance of. the restraining order in Civil Case No. Q-27079. The records disclose that he entered into an agreement with Mandee Commercial on March 9, 1979, three days before he received a copy of the restraining order on March 12, 1979. Paragraph 14 of the complaint itself in Civil Case No. Q-28799, reveals that Mandee Commercial refused to honor the agreement with Gaw because "the price of building materials have gone so high that there are now very much less constructions than before and the need for white cement is limited. Art. 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 obligations shall not give rise to any liability on the part of the original debtor. (n) Refers to expromision Art. 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 the delegated his debt. (1206a) Refers to delegacion Requisites to Hold Old debtor Liable 1. Insolvency was already existing and of public knowledge at time of Delegation. 2. Or the insolvency was already existing and known to the debtor at the time of delegation. When Art. 1295 does not apply: 1. 3rd person is only an agent, messenger or employee of debtor 2. 3rd person action only as guarantor/ surety 3. New debtor merely agreed to make himself solidarily liable for the obligation. 4. New debtor merely agreed to make himself jointly or partly liable for the obligation Art. 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) Art. 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.

Now, what happens if the new oblilgation is void? Would that extinguish the old obligation? It does not. This is 1297. Now what if the old obligation is void, would that extinguish the new obligation? Yes. Art. 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)  

If old obligation is void – no valid novation; If old obligation is voidable and annulled – no more obligation; novation is also void. 61




1298: When can a debtor claim annulment? What would be an instance wherein a debtor can claim annulment? A very common defense would be prescription of debt. But can a prescribed debt be the subject of novation? Can a prescribed debt be an object of a contract? Yes. So a prescribed debt can be the subject of novation in as much as the prescribed debt can be the subject of a contract. But can it be a defense of the obligor? The prescription of the debt? Yes. Can minority be a defense? Yes. But can it also be subject to ratification? Yes. Art. 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) GEN. RULE: The conditions attached to the old obligation are also attached to the new obligation.

So, when is there conventional subrogation? It would require the consent of the original parties and of the third person. (Licaros vs. Gatmaitan case) Art. 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; (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. So, when is there legal subrogation? (1302) 1.

EXCEPTION: If there is a contrary stipulation.

when the creditor pays another creditor who is preferred, even without the debtor's knowledge; *Who is the creditor who is preferred? A, whose credit of 100,000 has an interest of 12% per annum, or B, whose credit of 100,000 is secured by a chattel mortgage? B is preferred, because in the event of default by the debtor, need not go to court to file an action for the collection of the 100,000. All he has to do is to foreclose the mortgage and his credit is extinguished by reason of the foreclosure. So, in this case, if A pays B, even without the knowledge of the debtor, A now steps into the shoes of creditor B and is entitled to the security of B.

Art. 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. Now what if the original obligation has a suspensive or resolutory condition? Would the new obligation that novates the old obligation carry with it the condition? Yes. 1299 says the new obligation shall be under the same condition, unless it is otherwise stipulated. SUBROGATION

2.

When a third person, not interested in the obligation, pays with the tacit or express approval of the debtor;

SUBROGATION – transfer to a 3rd person all the rights appertaining to creditor – right to proceed against guarantors, possessors of mortgages etc.

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.

ASSIGNMENT OF CREDIT

CONVENTIONAL SUBROGATION

So, those are the situations when legal subrogation takes place.

Mere transfer of same right or credit (transfer does not extinguish credit);

Extinguishes obligation creates a new one;

and

Does not require consent of debtor;

Requires debtor’s consent;

Defect in credit/right is not cured by assigning the same.

Defect in old obligation may be cured in such a way that the new obligation becomes entirely valid.

Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a) If transferred credit is subject to suspensive condition, new creditor cannot collect until after such condition is fulfilled.

Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. Subrogation is different from ex promission or delegacion because the latter involves a change in the person of the debtor, while subrogation involves change in the person of the creditor. But subrogation is classified into conventional (by agreement of the parties) or legal (1302). But may a legal subrogation be changed into conventional subrogation? Yes, diba? Autonomy of will.

1303: So despite the fact that there is legal subrogation, the parties may still enter into a conventional subrogation. Art. 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 been subrogated in his place in virtue of the partial payment of the same credit. 1304: Speaks of two creditor. The old creditor whose debt has been partially performed, and the new creditor whose debt has also been partially performed. As between the two, who is preferred? The old creditor. For as long as the original credit has not been fully satisfied, then he has a right of preference over the new creditor.

62




CONTRACTS

2.

Art. 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) CONTRACT – is a juridical convention manifested in legal form, by virtue of w/c, 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. ELEMENTS (Essential)  Consent  Subject matter  Cause/consideration NATURAL Elements – those found in certain contracts and presumed to exist, unless the contrary has been stipulated.

H.

Subject Matter 1. Contract involving things (eg. Sale) 2. Contract involving Rights/credits (usufruct, assignment of credits) 3. Contract involving services (carriage)

I.

Obligation Imposed and regarded by Law 1. Ordinary 2. Institutional

J.

Evidence Required for its Proof 1. Parol/oral 2. Required written proof

K.

No. of Persons actually and physically entering into Contracts 1. Ordinary (2) 2. Auto-contracts – one represents 2 opposite parties but in different capacities

L.

#of Persons participating in Drafting a Contract 1. Ordinary – e.g sale 2. Contract of Adhesion – buyer or person interested is insured, signifies his consent by signing the contract.

M.

Nature 1. Personal 2. Impersonal

ACCIDENTAL Elements – various particular stipulations that may be agreed upon by the contracting parties in a contract. CLASSIFICATION OF CONTRACTS A.

According to Formation 1. Consensual – perfected by consent 2. Real - perfected by delivery 3. Formal/solemn – those where special formalities are essential before contract may be perfected.

B.

According to Cause/Equivalence of Value of Prestations 1. Onerous – interchange of equivalent valuable considerations 2. Gratuitous/ lucrative – free, one party receives no equivalent prestation 3. Remunerative – one where one prestation is given for a benefit or service that had been rendered previously.

C.

According to Importance/ Dependence of One upon Another 1. Principal – contract stands alone by itself 2. Accessory – depends for its existence upon another contract. (eg. Mortgage; principal is Loan) 3. Preparatory – contract is not the end itself but as means through w/c future transactions or contracts may be made.

Executory – prestations are to be complied with at some future time (eg. Property not yet delivered and price not yet given)

STAGES OF CONTRACT 1. Preparation (conception) – negotiations between parties 2. Perfection (birth) – agreement; elements of subject matter and valid cause – accepted by mutual consent. 3. Consummation (termination) – terms of contract are perfected. Basic Principles/Characteristics of Contract 1. 2. 3. 4. 5.

Freedom to stipulate Obligatory force and compliance in good faith Perfection by mere consent Both parties are mutually bound Relativity

D.

Parties Delegated 1. Unilateral – one party has obligation 2. Bilateral – both parties are obliged to give or render reciprocal prestations

Contract: 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.

E.

Name/Designation 1. Nominate – contract has a name 2. Innominate – contract has no name

F.

Risk of Fulfillment 1. Commutative – parties contemplated a real fulfillment; equivalent value are given (lease) 2. Aleatory – fulfillment is dependent upon chance; values vary.

G.

Time of Performance 1. Executed – one contemplated at time the contract is entered into, that is, obligations are complied with at this time (eg. Contract of sale)

1305 says that a contract is the meeting of minds between two persons whereby one binds himself with respect to the other to give some thing or to render some service. It does not mean that the parties are only limited to only two persons. The appropriate term is to parties because there can be as many persons in a contract as they are interested in the contract. May a person enter into a contract with himself? Yes, but in different capacities. (contracts of adhesion) He can be a vendor and a vendee at the same time only that in one contract he might merely be an agent and the other the buyer. So different capacities in one person. Now, may any person just enter into a contract? Is that right absolute? No, because there are certain limitations. Such as: husbands and wives cannot enter into contracts involving properties, except if there is complete separation of property. Other limitations: in agency, if the agent is authorized to borrow money, can the agent also be the lender? Or if 63




he is authorized to lend, may he borrow money? But if he is authorized to lend, can he use his own money? The existence of a contract is not determined by the number of persons who intervene in it, but by the number of declarations of will. (Contracts of adhesion) What are contracts of adhesion? Example of which would be an insurance contract. Now, we learned before that in cases of contracts of adhesion, in case of doubt, the construction is construed strictly against that person who prepared that contract, and liberally in favor of the person who does nothing but merely affixes his signature to the already prepared contract. Because in that case, the parties do not stand on equal footing. The debtor, especially if he borrows money from the bank, cannot stipulate his term. He cannot say that this is onerous on my part. He cannot do that. The only option is to either to sign or not to sign. So in those cases in case of doubt, the interpretation would always be in favor of the person who merely affixed his signature thereto and who did not participate in the preparation of the contract. Now, what are the characteristics of a contract? Contracts have three characteristics: we have the obligatory force of contracts. Now, what is meant by obligatory force of contracts? Just like autonomy of will, what has been stipulated in the contract is the law between the parties to the contract. And one cannot be heard later on to say that the agreement is disadvantageous on his part. The presumption is that at the time of the negotiation, prior to the perfection of the contract, the parties freely stipulates the conditions, terms and stipulations that may have agreed which arrived at and belong to the perfection of the contract. The second is mutuality of contract. The validity and performance cannot be left to the performance of one of the contracting parties and leaving the other free from complying with what is stipulated in the contract. The third is the principle of relativity of contracts. That it only binds the parties to the contract and their successors in interest. One of the exceptions there is: if there is a stipulation in favor of a third person. Now, contracts have 3 elements. We have the essential elements. Consent, subject matter, and the cause. The cause is the why of the contract, the reason why parties entered into the contract. Then we have the natural elements, which are those elements that even if not agreed upon by the parties form part of the contract. An example of which would be the warranty against hidden defects. The third element would be the accidental elements. The accidental elements are the ones that must be agreed upon by the parties. That if it is not stipulated there, the presumption is that it is not part of the agreement. An example would be that if the parties agree that in case of breach, their liability would be solidary. Because, under the law, solidary liability is not presumed. To arrive at a consummated or perfected contract, there are three stages: when the parties bargain or negotiate, you call that preparation or generation. Ano ang kasama sa negotiation? The price. Then you have perfection, the birth and the perfection of the contract. And when you pay the price and he delivers what you have bought, then that is consummation or death of the contract. Because there is now fulfillment or performance of the terms agreed upon in the contract. Now, how are contracts classified? First is according to the degree of dependence, a contract may be preparatory in nature such as a contract of agency because this would lead to future transactions.

Why is it called preparatory? It is called such in as much as it looks forward to future transactions. Now what are those future transactions that will arise from a contract of agency? It would depend to the powers granted. If Y is authorized to lend money, what would be the future transaction that would arise? A contract of loan. This is what you call as future transactions. So, the contract of loan is the principal contract. A contract might also be considered accessory because its existence will depend on the principal contract. So if the loan is guaranteed by a mortgage, then this is the accessory contract. So the contract of loan is the principal contract, the contract of agency the prepratory contract and the contract of mortgage the accessory contract. So, how are contracts perfected? It might be perfected by mere consent and they are called as consensual, such as sale. Now, if a contract of sale does not have any document is that a valid contract? Yes, because it is perfected by mere consent. Is marriage a consensual contract? Yes. You don't have to have the contract or certificate of marriage. Hindi man yan kailangan. But there are certain contracts that will require delivery aside from consent, an example of which would be antichresis. Remember antichresis? You have to deliver the property in order that antichresis shall be perfected. Because there can be no antichresis if the debtor does not deliver the property. CASE ASIAN CONSTRUCTION AND DEVELOPMENT CORP. vs. NOEL T. TULABUT It should be noted that there existed a contract between the plaintiff-appellee and the defendant-appellant and the same was expressed in the purchase orders and final billings which bear the signatures of the officers of the appellant corporation. This fact is not disputed by the appellant corporation (Answer, par. 2, Records, p. 66). While defendant-appellant argues that the project has not been completed, it did not deny the aforesaid purchase orders and final billings as well as the authority of the persons whose signatures appeared thereon who made the approval thereto, to act and sign in behalf of the appellant corporation. It is also significant to note that the amount for which the appellant corporation is liable, is clearly stated therein which bears the signatures of the officers of the appellant corporation. Thus, it cannot escape its pecuniary obligation by merely denying the completion of the project because by signing the aforesaid purchase orders and progress billings, the appellant corporation manifested its approval to the matters stated therein and it is thereby precluded to deny it subsequently by principle of estoppel. Thus, the terms and conditions of the contract between the petitioner and the respondent unequivocally expressed in the purchase orders and progress billings must govern the contractual relation of the parties, for these serve as the terms of the agreement, which are binding and conclusive between them. As the Court ruled in Tuazon v. Court of Appeals: … When the words of the contract are clear and readily understandable, there is no room for construction. The contract is the law between the parties. Said this Court: “‘A contract,’ according to Article 1305 of the Civil Code, ‘is a meeting of the minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.’ Once, the minds of the contracting parties meet, a valid contract exists, whether it is reduced to writing or not. And, when the terms of an agreement have been reduced to writing, it is 64




considered as 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 ….” Indeed, the petitioner is estopped from evading its pecuniary obligation by merely asserting without proof that the respondent failed to complete the projects and the non-payment of its principal. With the signatures of its duly authorized representatives on the subject documents, the genuineness and due execution of which have not been contested, the petitioner, in effect, freely and voluntarily affirmed all the concurrent rights and obligations flowing therefrom. Viewed in this light, it is barred from claiming the contrary without transgressing the principle of estoppel and mutuality of contracts. Needless to state, contracts must bind both contracting parties; their validity or compliance cannot be left to the will of one of them. Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. 1306: Autonomy of contract = to autonomy of will; it is the obligatory force between the parties.

20K for 500sq. m.? Would the parties now be bound by that agreement in case there is a doubt? No, because while it might be true that the stipulation is the law between the parties, however, the rights and obligations which arise by reason of this contract is not governed by the stipulations. In fact, by looking at it, it would seem that the contract entered into is one of mortgage, only couched differently by the parties. For one, the consideration is very very low. Second, there is a period to repurchase within one year. So those are the considerations that must be taken together when the parties entered into the agreement. There would be no question if the consideration was 20million, that would really be a deed of sale with right to repurchase because the consideration given is really equivalent to the value of the property based on its location. So in that case, the SC said, in case of doubt, it is one of equitable mortgage, not of sale with right to repurchase. So, that is an example of the principle that while it may be true that parties are bound by their stipulations and it shall constitute the law between them, however, the juridical relations as well as the rights and obligations that will arise by reason of the contract is not governed by the stipulation but rather by law. Not absolute because there are limitations, such as husband and wives cannot enter into a contract subject to certain exceptions, an agent authorized to lend cannot borrow. CASES

1306 Autonomy of Contracts: But there are certain limitations. As I said, it must not be contrary to law, likewise even if the parties would say "this is valid between us ha, the promissory note of a gambling debt". So, if X and A played Tong-its and then their bet is 50K, natalo si A at umabot ang utang nya ng 300,000. So, sabi ni A, i don't have the money now, but i will furnish you a promissory note, this PN if suppose A would not pay what is stated on it, X will not have a cause of action against A. X cannot sue A by reason of the PN, because this is not a contractual debt. The cause of the issuance is an illegal cause, it is from gambling. (except those allowed). So in this case, A in fact can recover what he had lost from X kung nagbigay sya ng pera, of course he cannot recover under the circumstances of the promissory note, because as I've said, the PN cannot be the basis for X to file a case against A because the source is from a polluted source from one not allowed by law. (illegal gambling) But suppose X would negotiate the PN to Y, who received the PN in good faith and paid value for it. (like, sige discounted ko yan, 20K). Now, Y would demand from A the value of the PN. A cannot invoke as a defense that the PN is a void PN as against a 3rd person who acted in good faith and paid the PN with consideration. Between Y and A, Y can still collect the amount stated in the PN. he is not affected by the agreement between X and A. (because 3rd persons are always protected.) Now, parties are free to stipulate. Yes, but the juridical relations as well as the rights and obligations that would arise by reason of that contract that you have entered into is not governed by the stipulation of the parties, but rather by law. Such as what? Suppose A executed a deed of Sale with right to repurchase in favor of C. The deed of Sale with right to repurchase contains that A, for and in consideration of the sum of 20K hereby transfers, sells, conveys, disposes, alienates his parcel of land covered by TCT 123 located in Ecoland D.C. consisting of 500 sq. m. And if A will be unable to repurchase the property within the period of 1 year, then B's right over the property shall be absolute and unconditional. Now, looking at it, would you believe that that is a valid deed of sale taking into account that the land is located in Ecoland, and only for

EVELYN DE LUNA, ET. AL., vs. HON. SOFRONIO F. ABRIGO(G.R. No. L-57455 January 18, 1990) IN the light of the above, the rules on contracts and the general rules on prescription and not the rules on donations are applicable in the case at bar. Under Article 1306 of the New Civil Code, the parties to a contract have the right "to 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." Paragraph 11 of the "Revival of Donation Intervivos, has provided that "violation of any of the conditions (herein) shall cause the automatic reversion of the donated area to the donor, his heirs, . . ., without the need of executing any other document for that purpose and without obligation on the part of the DONOR". Said stipulation not being contrary to law, morals, good customs, public order or public policy, is valid and binding upon the foundation who voluntarily consented thereto. The validity of the stipulation in the contract providing for the automatic reversion of the donated property to the donor upon noncompliance cannot be doubted. It is in the nature of an agreement granting a party the right to rescind a contract unilaterally in case of breach, without need of going to court. Upon the happening of the resolutory condition of non-compliance with the conditions of the contract, the donation is automatically revoked without need of a judicial declaration to that effect. In the case of University of the Philippines v. de los Angeles, L-28602, September 29, 1970, 35 SCRA 102-107, it was held: . . . There is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof. even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract (Froilan v. Pan Oriental Shipping Co., et al.,L-11897, 31 October 1964, 12 SCRA 276). This was reiterated in the case of Angeles v. Calasanz, L-42283, March 18, 1985: 65




Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions (Lopez v. Commissioner of Customs, 37 SCRA 327, 334, and cases cited therein). Resort to judicial action for rescission is obviously not contemplated. The validity of the stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition which in many cases has been upheld, by this court. (Ponce Enrile v. Court of Appeals, 29 SCRA 504) However, in the University of the Philippines v. Angeles case, (supra), it was held that in cases where one of the parties contests or denies the rescission, "only the final award of the court of competent jurisdiction can conclusively settle whether the resolution is proper or not." It was held, thus: . . . since in every case, where the extrajudicial resolution is contested, only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. It is clear, however, that judicial intervention is necessary not for purposes of obtaining a judicial declaration 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 recession was proper. The case of Parks v. Province of Tarlac, supra, relied upon by the trial court, is not applicable in the case at bar. While the donation involved therein was also onerous, there was no agreement in the donation providing for automatic rescission, thus, the need for a judicial declaration revoking said donation. LEONIDES C. DIÑO VS. LINA JARDINES (G.R. No. 145871, January 31, 2006) The factual milieu of Carpo vs. Chua is closely analogous to the present case. In the Carpo case, petitioners therein contracted a loan in the amount of P175,000.00 from respondents therein, payable within six months with an interest rate of 6% per month. The loan was not paid upon demand. Therein petitioners claimed that following the Court’s ruling in Medel vs. Court of Appeals, the rate of interest of 6% per month or 72% per annum as stipulated in the principal loan agreement is null and void for being excessive, iniquitous, unconscionable and exorbitant. The Court then held thus: In a long line of cases, this Court has invalidated similar stipulations on interest rates for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v. Salazar, we annulled the stipulation of 6% per month or 72% per annum interest on a P60,000.00 loan. In Imperial v. Jaucian, we reduced the interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals, we equitably reduced the agreed 3% per month or 36% per annum interest to 1% per month or 12% per annum interest. The 10% and 8% interest rates per month on a P1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud. Recently, this Court, in Arrofo v. Quino, reduced the 7% interest per month on a P15,000.00 loan amounting to 84% interest per annum to 18% per annum. There is no need to unsettle the principle affirmed in Medel and like

cases. From that perspective, it is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code, 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. In the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest. In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the standards set in the above-cited cases, this stipulation is similarly invalid. x x x. Applying the afore-cited rulings to the instant case, the inescapable conclusion is that the agreed interest rate of 9% per month or 108% per annum, as claimed by respondent; or 10% per month or 120% per annum, as claimed by petitioner, is clearly excessive, iniquitous, unconscionable and exorbitant. Although respondent admitted that she agreed to the interest rate of 9%, which she believed was exorbitant, she explained that she was constrained to do so as she was badly in need of money at that time. As declared in the Medel case and Imperial vs. Jaucian, “[i]niquitous and unconscionable stipulations on interest rates, penalties and attorney’s fees are contrary to morals.” Thus, in the present case, the rate of interest being charged on the principal loan of P165,000.00, be it 9% or 10% per month, is void. The CA correctly reduced the exhorbitant rate to “legal interest.” INTRA-STRATA ASSURANCE CORPORATION AND PHILIPPINE HOME ASSURANCE CORPORATION VS. REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE BUREAU OF CUSTOMS, RESPONDENT [G.R. No. 156571, July 09, 2008] A feature of the petitioners' bonds, not stated expressly in the bonds themselves but one that is true in every contract, is that applicable laws form part of and are read into the contract without need for any express reference. This feature proceeds from Article 1306 of the Civil Code pursuant to which we had occasion to rule: It is to be recognized that a large degree of autonomy is accorded the contracting parties. Not that it is unfettered. They may, according to Article 1306 of the Civil Code "establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public policy." The law thus sets limits. It is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute. Its terms are embodied therein. The contracting parties need not repeat them. They do not even have to be referred to. Every contract thus contains not only what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter."[13] Two of the applicable laws, principally pertaining to the importer, are Sections 101 and 1204 of the Tariff and Customs Code which provide that: Sec 101. Imported Items Subject to Duty - All articles when imported from any foreign country into the Philippines shall be subject to duty upon such importation even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in clear laws. xxxx 66




Sec. 1204. Liability of Importer for Duties - Unless relieved by laws or regulations, the liability for duties, taxes, fees, and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees, and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced which such articles are in custody or subject to the control of the government. The obligation to pay, principally by the importer, is shared by the latter with a willing third party under a suretyship agreement under Section 1904 of the Code which itself provides: Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehousing Bond - After articles declared in the entry of warehousing shall have been examined and the duties, taxes, and other charges shall have been determined, the Collector shall require from the importer, an irrevocable domestic letter of credit, bank guarantee, or bond equivalent to the amount of such duties, taxes, and other charges conditioned upon the withdrawal of the articles within the period prescribed by Section 1908 of this Code and for payment of any duties, taxes, and other charges to which the articles shall then be subject and upon compliance with all legal requirements regarding their importation. We point these out to stress the legal basis for the submission of the petitioners' bonds and the conditions attaching to these bonds. As heretofore mentioned, there is, firstly, a principal obligation belonging to the importer-obligor as provided under Section 101; secondly, there is an accessory obligation, assumed by the sureties pursuant to Section 1904 which, by the nature of a surety agreement, directly, primarily, and equally bind them to the obligee to pay the obligor's obligation. J.R. BLANCO, as the Administrator of the Intestate Estate of MARY RUTH C. ELIZALDE vs. WILLIAM H. QUASHA, CIRILO ASPERILLA, JR., SYLVIA E. MARCOS, DELFIN A. MANUEL, JR., CIRILO E. DORONILA and PAREX REALTY CORPORATION, [G.R. No. 133148. November 17, 1999] Second, the vendee, Parex Realty Corporation obligated itself to pay a price certain for the property, that is to pay the amount of P625,000.00, payable in installments of P25,000.00 per annum for the next 25 years (Exhibit E, supra). And the vendee not only obligated itself to pay said amount in installments, but actually paid the annual P25,000.00 installments. Although no actual exchange of money was made, yet payment was effected between the vendee and the vendor by mutual arrangement whereby the monthly rentals of P2,083.34 which was due the vendor, the late Mary Ruth Elizalde, was paid from the annual installment of P25,000.00 due from the vendee pursuant to the lease contract executed between them (Exhibit I, supra). The Court finds nothing wrong with this arrangement for the same is not contrary to law, morals, good customs, public order, or public policy, but rather, for the convenience of both parties (Article 1306, New Civil Code). And the vendee continues to pay the installments on the property because of the continued use and possession of the same by the estate of the late Mary Ruth Elizalde. REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE SOCIAL SECURITY SYSTEM vs. JERRY V. DAVID G.R. No. 155634, August 16, 2004 Plainly, the primary intention behind the above-quoted stipulations is to restrict the sale, the use and the benefit of the housing units to SSS employees and their immediate families only. This objective is in line with that of the SSS housing loan program -- to aid its

employees in acquiring their own dwelling units at a low cost.[16] Such intent, draws life also from the social justice policy of RA 1161, as amended, otherwise known as the “Social Security System Law” granting direct housing loans to covered employees and giving priority to low-income groups. Indeed, the above goal is confirmed by the requirement that respondent-vendee and his heirs or assigns must actually occupy and possess the property at all times; by the proscription that he must not sell, assign, encumber, mortgage, lease, sublet or in any manner alter or dispose of the property for the first five (5) years; and by the further proviso that he may alienate or transfer his rights thereto at any time prior to full payment, but only to petitioner under its right of first refusal or to any other eligible SSS employee. These restrictive covenants are undeniably valid under Article 1306[18] of the Civil Code. Art. 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) 4 Kinds 1. 2. 3. 4.

of Innominate Contracts Do ut Des ( I give that you may give) Do ut Facias ( I give that you may do) Facio ut Des (I do that you may give) Facio ut Facias (I do that you may do)

Rules Governing Innominate  Stipulations of parties  Provisions of Title I and II  Rules governing most analogous nominate contract  Customs of place 1307: Innominate Contracts These are contracts that have no specific name. Unlike when you enter into a contract of sale, there is this deed of sale; when you rent, there is this contract of lease, or when you borrow money, and it is secured by a pledge, it is a loan with pledge. Here, the agreement has no specific name, like when a lawyer and a client enters into an agreement whereby the client hires the services of the lawyer, there is no specific name. There are four kinds of innominate contracts 1. Do ut des ( I give and you give) 2. Do ut facias ( I give and you do) 3. Facio ut des ( I do and you give) 4. Facio ut facias ( I do and you do) There was this very old case. There was this Spaniard who came to the Philippines and wanted to tour the Philippines. Unfortunately, he did not know how to speak the local dialect. When one of the Filipinos learned the dilemma of the Spaniard, the presented himself to do the interpretation. So he went around the island. After the tour, the Filipino now demanded payment for his services. The Spaniard countered that there was no contract between them because the Filipino presented himself, voluntarily entered into the request of the Spaniard. But the SC said that as soon as you have hired the services of the person and you made use of the talent of that person, he is therefore entitled for compensation. Regardless if there is a contract or not. Now, in one bar examination, the question goes like this: X called B, "can you go to the store to buy for me the following items?". Was there a contract entered into by the parties, and if there was what kind of a contract was it? Can the person demand payment for the 67




services he rendered, assumed that the person consented the request. There is a contract, because he rendered his services and he is entitled to compensation.

remuneration therefor because 'it is a well-known principle of law, that no one should be permitted to enrich himself to the damage of another (emphasis supplied).

Innominate contracts are, in the absence of stipulations and specific provisions of law on the matter, to be governed by rules applicable to the most analogous contract.

Likewise, under American law, the same rule obtains (7 CJS 1079; FL Still & Co. v. Powell, 114 So 375). III

CASES JUAN V. SABINOSA vs. COURT OF APPEALS, BIENVENIDO F. BUNYI, and MARIANITO P. BAUTISTA (G.R. No. 47981 July 24, 1989) Moreover, the payment of attorney's fees 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, by the rules governing the most analogous nominate 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 plaintiffs 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). xxxxxxxxx ... 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 the 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. xxxxxxxxx ... because it is a well-known principle of law that no one should permitted to enrich himself to the damage of another" (emphasis supplied; see also Tolentino, Civil Code of the Philippines, p. 388, Vol. IV 119621, citing Estate of Reguera vs. Tandra 81 Phil. 404 [1948]; Arroyo vs. Azur 76 Phil. 493119461; and Perez vs. Pomar. 2 Phil. 682 [1903]). WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety Co., Inc. (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus: Where one has rendered services to another, and these services are accepted by the latter, in the absence of proof that the service was rendered gratuitously, it is but just that he should pay a reasonable

There was no contract for contingent fee between Corpus and respondent David. Contingent fees depend on an express contract therefor. Thus, "an attorney is not entitled to a percentage of the amount recovered by his client in the absence of an express contract to that effect" (7 C.J.S. 1063 citing Thurston v. Travelers Ins. Co., 258 N.W. 66, 128 Neb. 141). Where services were rendered without any agreement whatever as to the amount or terms of compensation, the attorney is not acting under a contract for a contingent fee, and a letter by the attorney to the client stating that a certain sum would be a reasonable amount to charge for his services and adding that a rate of not less than five percent nor more than ten would be reasonable and customary does not convert the original agreement into a contract for a contingent fee (7 C.J.S. 1063 citing Fleming v. Phinizy 134 S.E. 814). While there was no express contract between the parties for the payment of attorney's fees, the fact remains that respondent David rendered legal services to petitioner Corpus and therefore as aforestated, is entitled to compensation under the innominate contract of facio lit des And such being the case, respondent David is entitled to a reasonable compensation. AURELIO K. LITONJUA, JR. vs. EDUARDO K. LITONJUA, SR., ET. AL. (G.R. NOS. 166299-300, December 13, 2005) Under the second assigned error, it is petitioner’s posture that Annex “A-1”, assuming its inefficacy or nullity as a partnership document, nevertheless created demandable rights in his favor. As petitioner succinctly puts it in this petition: 43. Contrariwise, this actionable document, especially its abovequoted provisions, established an actionable contract even though it may not be a partnership. This actionable contract is what is known as an innominate contract (Civil Code, Article 1307). 44. It may not be a contract of loan, or a mortgage or whatever, but surely the contract does create rights and obligations of the parties and which rights and obligations may be enforceable and demandable. Just because the relationship created by the agreement cannot be specifically labeled or pigeonholed into a category of nominate contract does not mean it is void or unenforceable. Petitioner has thus thrusted the notion of an innominate contract on this Court - and earlier on the CA after he experienced a reversal of fortune thereat - as an afterthought. The appellate court, however, cannot really be faulted for not yielding to petitioner’s dubious stratagem of altering his theory of joint venture/partnership to an innominate contract. For, at bottom, the appellate court’s certiorari jurisdiction was circumscribed by what was alleged to have been the order/s issued by the trial court in grave abuse of discretion. As respondent Yang pointedly observed,[28] since the parties’ basic position had been well-defined, that of petitioner being that the actionable document established a partnership/joint venture, it is on those positions that the appellate court exercised its certiorari jurisdiction. Petitioner’s act of changing 68




his original theory is an impermissible practice and constitutes, as the CA aptly declared, an admission of the untenability of such theory in the first place. [Petitioner] is now humming a different tune . . . . In a sudden twist of stance, he has now contended that the actionable instrument may be considered an innominate contract. xxx Verily, this now changes [petitioner’s] theory of the case which is not only prohibited by the Rules but also is an implied admission that the very theory he himself … has adopted, filed and prosecuted before the respondent court is erroneous. Be that as it may . …. We hold that this new theory contravenes [petitioner’s] theory of the actionable document being a partnership document. If anything, it is so obvious we do have to test the sufficiency of the cause of action on the basis of partnership law xxx.[29] (Emphasis in the original; Words in bracket added). Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a) Mutuality of contracts – both parties are bound. Consequences of Mutuality 1. A party cannot revoke or renounce a contract w/o the consent of the other, nor can have it set aside on the ground that he had made a bad bargain. 2. When the fulfillment of condition depends upon the sole will of debtor, the conditional obligation is void if the condition is suspensive; if it is resolutory it is valid. 1308: Speaks of mutuality of contracts that both parties must be bound by the agreements that they have entered into. Its validity and compliance cannot be left to the will of only one of them. So, in this case, the presumption is that both parties at the time of the negotiation, at the time of the bargaining stage, they stood on equal footing. Meaning each one of them participated during the negotiation stage, precisely which lead to the perfection of the contract. So, mutuality is that both parties must be bound to the contract, it cannot be left to one of the parties alone leaving the other party free from complying with what is incumbent upon him.   

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1308: The contract must bind both contracting parties; its validity cannot be left to the will of one of them. Mutuality of contract. The binding effect of the contract on both the parties is based on the principles that (1) obligations arising from contracts have the force of law between the contracting parties; and (2) there must be mutuality between the parties based on their essential equality. Just as nobody can be forced to enter into a contract, in the same manner once a contract is entered into, no party can renounce it unilaterally or without the consent of the other. The fact that a party may not have fully understood the legal effect of the contract is no ground for setting it aside. The unilateral act of one party in terminating the contract without legal cause makes it liable for damages. Allied Bank case: . It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the right is made to depend. The right of renewal constitutes a part of the lessee’s interest in the land and forms a substantial and integral part of the agreement. The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack

of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment. The questioned provision states that the lease "may be renewed for a like term at the option of the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes bound only when he exercises his option and the lessor cannot thereafter be excused from performing his part of the agreement CASES ARCO METAL PRODUCTS, CO., INC., AND MRS. SALVADOR UY, PETITIONERS, VS. SAMAHAN NG MGA MANGGAGAWA SA ARCO METAL-NAFLU (SAMARM-NAFLU) [G.R. No. 170734, May 14, 2008] II. The Honorable Court of Appeals erred in declaring that par. 9 of the contracts in question is not in violation of Art. 1308 of the New Civil Code. The second assignment of error is based on petitioners' contention that the questioned stipulations of the contracts are in violation of the provisions of Article 1308 of the New Civil Code, while the first and third are based on the claim that the respondent having previously accepted late payments of installments due on the contracts aforesaid, must be deemed to have waived its right to cancel said contracts on the ground of late payment of installments, and that, at any rate, after having tolerated and accepted said late payments, it was arbitrary on its part to cancel the contracts suddenly and without suitable warning. The fifth and last assignment of error is merely a consequence of the others. Article 1308 of the New Civil Code reads as follows: The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. 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 the parties based on their essential equality to which is repugnant to have one party bound by the contract leaving the other free therefrom (8 Manresa 556). Its ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties. Paragraph 6 of the contracts in question which is the one claimed to be violative of the legal provision above quoted reads as follows: SIXTH In case the party of the SECOND PART fails to satisfy any monthly installments, or any other payments herein agreed upon, he is granted a month of grace within which to make the retarded payment, together with the one corresponding to the said month of 69




grace; it is understood, however, that should the month of grace herein granted to the party of the SECOND PART expire, without the payments corresponding to both months having been satisfied, an interest of 10% per annum will be charged on the amounts he should have paid; it is understood further, that should a period of 90 days elapse, to begin from the expiration of the month of grace herein mentioned, and the party of the SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to that date, the party of the FIRST PART has the right to declare this contract cancelled and of no effect, and as consequence thereof, the party of the FIRST PART may dispose of the parcel or parcels of land covered by this contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of this contract, all the amounts paid in accordance with this agreement together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises, and as payment for the damages suffered by failure of the party of the SECOND PART to fulfill his part of this agreement; and the party of the SECOND PART hereby renounces all his right to demand or reclaim the return of the same and obliges himself to peacefully vacate the premises and deliver the same to the party of the FIRST PART. 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. Ky 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 therein 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 particular installment and its non-payment, the contract gave him not only a month grace but an additional period of 90 days.

an unbridled or unlimited license or sanctuary of the defendants to perpetuate its occupancy on the subject property. The basic intention of the law in any contract is mutuality and equality. In other words, the validity of a contract cannot be left at (sic) the will of one of the contracting parties. Otherwise, it infringes (upon) Article 1308 of the New Civil Code, which provides: The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them . . . Using the principle laid down in the case of Garcia v. Legarda as cornerstone, it is evident that the renewal of the lease in this case cannot be left at the sole option or will of the defendant notwithstanding provision no. 1 of their expired contract. For that would amount to a situation where the continuance and effectivity of a contract will depend only upon the sole will or power of the lessee, which is repugnant to the very spirit envisioned under Article 1308 of the New Civil Code . . . . the theory adopted by this Court in the case at bar finds ample affirmation from the principle echoed by the Supreme Court in the case of Lao Lim v. CA, 191 SCRA 150, 154, 155. We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of contracts. It provides that "the contract must bind both the contracting parties; its validity or compliance cannot be left to the will of one of them." This binding effect of a contract on both parties is based on the principle that the obligations arising from the contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties. An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of the consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of the lessor to act conditioned on the performance by the lessee. It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the rights is made to depend. The right of renewal constitutes a part of the lessee's interest in the land and forms a substantial and integral part of the agreement.

There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a contract of lease to the effect that the contract "may be renewed for a like term at the option of the lessee" is void for being potestative or violative of the principle of mutuality of contracts under Art. 1308 of the Civil Code and, corollarily, what is the meaning of the clause "may be renewed for a like term at the option of the lessee;"

The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment.

An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violative of Art. 1308 of the Civil Code thus . . . but such provision [in the lease contract], to the mind of the Court, does not add luster to defendant's cause nor constitutes as

The case of Lao Lim v. Court of Appeals 8 relied upon by the trial court is not applicable here. In that case, the stipulation in the disputed compromise agreement was to the effect that the lessee would be allowed to stay in the premises "as long as he needs it and can pay the rents." In the present case, the questioned provision states that the lease "may be renewed for a like term at

ALLIED BANKING CORPORATION vs. COURT OF APPEALS (G.R. No. 124290 January 16, 1998)

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the option of the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes bound only when he exercises his option and the lessor cannot thereafter be executed from performing his part of the agreement. Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., 9 is misplaced. In that case, what was involved was a contract to sell involving residential lots, which gave the vendor the right to declare the contract called and of no effect upon the failure of the vendee to fulfill any of the conditions therein set forth. In the instant case, we are dealing with a contract of lease which gives the lessee the right to renew the same. With respect to the meaning of the clause "may be renewed for a like term at the option of the lessee," we sustain petitioner's contention that its exercise of the option resulted in the automatic extension of the contract of lease under the same terms and conditions. The subject contract simply provides that "the term of this lease shall be fourteen (14) years and may be renewed for a like term at the option of the lessee." As we see it, the only term on which there has been a clear agreement is the period of the new contract, i.e., fourteen (14) years, which is evident from the clause "may be renewed for a like term at the option of the lessee," the phrase "for a like term" referring to the period. It is silent as to what the specific terms and conditions of the renewed lease shall be. Shall it be the same terms and conditions as in the original contract, or shall it be under the terms and conditions as may be mutually agreed upon by the parties after the expiration of the existing lease? In Ledesma v. Javellana 10 this Court was confronted with a similar problem. In the case the lessee was given the sole option to renew the lease, but the contract failed to specify the terms and conditions that would govern the new contract. When the lease expired, the lessee demanded an extension under the same terms and conditions. The lessor expressed conformity to the renewal of the contract but refused to accede to the claim of the lessee that the renewal should be under the same terms and conditions as the original contract. In sustaining the lessee, this Court made the following pronouncement: . . . in the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It was held that "such a clause relates to the very contract in which it is placed, and does not permit the defendant upon the renewal of the contract in which the clause is found, to insist upon different terms and those embraced in the contract to be renewed;" and that "a stipulation to renew always relates to the contract in which it is found and the rights granted thereunder, unless it expressly provides for variations in the terms of the contract to be renewed." The same principle is upheld in American Law regarding the renewal of lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: "The rule is well-established that a general covenant to renew or extend a lease which makes no provision as to the terms of a renewal or extension implies a renewal or extension upon the same terms as provided in the original lease." In the lease contract under consideration, there is no provision to indicate that the renewal will be subject to new terms and conditions that the parties may yet agree upon. It is to renewal provisions of lease contracts of the kind presently considered that the principles stated above squarely apply. We do not agree with the contention of the appellants that if it was intended by the parties to renew the contract under the same terms and conditions stipulated in the contract of lease, such should have expressly so stated in the contract itself. The same argument could easily be

interposed by the appellee who could likewise contend that if the intention was to renew the contract of lease under such new terms and conditions that the parties may agree upon, the contract should have so specified. Between the two assertions, there is more logic in the latter. The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to a contract of lease, the tenant is the one favored and not the landlord. "As a general rule, in construing provisions relating to renewals or extensions, where there is any uncertainty, the tenants is favored, and not the landlord, because the latter, having the power of stipulating in his own favor, has neglected to do so; and also upon the principle that every man's grant is to be taken most strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599). Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in the renewed contract were still subject to mutual agreement by and between the parties, then the option � which is an integral part of the consideration for the contract � would be rendered worthless. For then, the lessor could easily defeat the lessee's right of renewal by simply imposing unreasonable and onerous conditions to prevent the parties from reaching an agreement, as in the case at bar. As in a statute no word, clause, sentence, provision or part of a contract shall be considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if that can be reasonably avoided. To this end, a construction which will render every word operative is to be preferred over that which would make some words idle and nugatory. GF EQUITY, INC. vs. ARTURO VALENZONA [G.R. No. 156841. June 30, 2005] Before the trial court, Valenzona challenged the condition in paragraph 3 of the contract as lacking the element of mutuality of contract, a clear transgression of Article 1308 of the New Civil Code, and reliance thereon, he contended, did not warrant his unjustified and arbitrary dismissal. Central to the resolution of the instant controversy is the determination of whether the questioned last sentence of paragraph 3 is violative of the principle of mutuality of contracts. Mutuality is one of the characteristics of a contract, its validity or performance or compliance of which cannot be left to the will of only one of the parties.[10] This is enshrined in Article 1308 of the New Civil Code, whose underlying principle is explained in Garcia v. Rita Legarda, Inc.,[11] viz: Article 1308 of the New Civil Code reads as follows: “The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.” 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 the parties based on their essential equality to which is repugnant to have one party bound by the contract leaving the other free therefrom (8 Manresa 556). Its ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties. 71




x x x (Emphasis, italics and underscoring supplied) The ultimate purpose of the mutuality principle is thus to nullify a contract containing a condition which makes its fulfillment or pretermination dependent exclusively upon the uncontrolled will of one of the contracting parties. Not all contracts though which vest to one party their determination of validity or compliance or the right to terminate the same are void for being violative of the mutuality principle. Jurisprudence is replete with instances of cases[12] where this Court upheld the legality of contracts which left their fulfillment or implementation to the will of either of the parties. In these cases, however, there was a finding of the presence of essential equality of the parties to the contracts, thus preventing the perpetration of injustice on the weaker party. In the case at bar, the contract incorporates in paragraph 3 the right of GF Equity to pre-terminate the contract — that “if the coach, in the sole opinion of the corporation, fails to exhibit sufficient skill or competitive ability to coach the team, the corporation may terminate the contract.” The assailed condition clearly transgresses the principle of mutuality of contracts. It leaves the determination of whether Valenzona failed to exhibit sufficient skill or competitive ability to coach Alaska team solely to the opinion of GF Equity. Whether Valenzona indeed failed to exhibit the required skill or competitive ability depended exclusively on the judgment of GF Equity. In other words, GF Equity was given an unbridled prerogative to pre-terminate the contract irrespective of the soundness, fairness or reasonableness, or even lack of basis of its opinion. To sustain the validity of the assailed paragraph would open the gate for arbitrary and illegal dismissals, for void contractual stipulations would be used as justification therefor. The assailed stipulation being violative of the mutuality principle underlying Article 1308 of the Civil Code, it is null and void. The nullity of the stipulation notwithstanding, GF Equity was not precluded from the right to pre-terminate the contract. The pretermination must have legal basis, however, if it is to be declared justified. GF Equity failed, however, to advance any ground to justify the pretermination. It simply invoked the assailed provision which is null and void. While GF Equity’s act of pre-terminating Valenzona’s services cannot be considered willful as it was based on a stipulation, albeit declared void, it, in doing so, failed to consider the abuse of rights principle enshrined in Art. 19 of the Civil Code which provides: Art. 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. This provision of law sets standards which must be observed in the exercise of one’s rights as well as in the performance of its duties, to wit: to act with justice; give every one his due; and observe honesty and good faith. Since the pre-termination of the contract was anchored on an illegal ground, hence, contrary to law, and GF Equity negligently failed to provide legal basis for such pre-termination, e.g. that Valenzona breached the contract by failing to discharge his duties thereunder,

GF Equity failed to exercise in a legitimate manner its right to preterminate the contract, thereby abusing the right of Valenzona to thus entitle him to damages under Art. 19 in relation to Article 20 of the Civil Code the latter of which provides: Art. 20. Every person who, contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same. In De Guzman v. NLRC,[13] this Court quoted the following explanation of Tolentino why it is impermissible to abuse our rights to prejudice others. The exercise of a right ends when the right disappears, and it disappears when it is abused, especially to the prejudice of others. The mask of a right without the spirit of justice which gives it life is repugnant to the modern concept of social law. It cannot be said that a person exercises a right when he unnecessarily prejudices another or offends morals or good customs. Over and above the specific precepts of positive law are the supreme norms of justice which the law develops and which are expressed in three principles: honeste vivere,[14] alterum non laedere[15] and jus suum quique tribuere;[16] and he who violates them violates the law. For this reason, it is not permissible to abuse our rights to prejudice others. The disquisition in Globe Mackay Cable and Radio Corporation v. Court of Appeals[17] is just as relevant as it is illuminating on the present case. In that case, this Court declared that even granting that the therein petitioners might have had the right to dismiss the therein respondent from work, the abusive manner in which that right was exercised amounted to a legal wrong for which the petitioners must be held liable. One of the more notable innovations of the New Civil Code is the codification of "some basic principles that are to be observed for the rightful relationship between human beings and for the stability of the social order." [REPORT ON THE CODE COMMISSION ON THE PROPOSED CIVIL CODE OF THE PHILIPPINES, p. 39]. The framers of the Code, seeking to remedy the defect of the old Code which merely stated the effects of the law, but failed to draw out its spirit, incorporated certain fundamental precepts which were "designed to indicate certain norms that spring from the fountain of good conscience" and which were also meant to serve as "guides for human conduct [that] should run as golden threads through society, to the end that law may approach its supreme ideal, which is the sway and dominance of justice" (Id.) Foremost among these principles is that pronounced in Article 19 which provides: Art. 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. This article, known to contain what is commonly referred to as the principle of abuse of rights, sets certain standards which must be observed not only in the exercise of one's rights but also in the performance of one's duties. These standards are the following: to act with justice; to give everyone his due; and to observe honesty and good faith. The law, therefore, recognizes a primordial limitation on all rights; that in their exercise, the norms of human conduct set forth in Article 19 must be observed. A right, though by itself legal because recognized or granted by law as such, may nevertheless become the source of some illegality. When a right is exercised in a manner which does not conform with the norms enshrined in Article 19 and results in damage to another, a legal wrong is thereby committed for which the wrongdoer must be held responsible. But while Article 19 lays down a rule of conduct for 72




the government of human relations and for the maintenance of social order, it does not provide a remedy for its violation. Generally, an action for damages under either Article 20 or Article 21 would be proper.[18] Emphasis and underscoring supplied). JESPAJO REALTY CORPORATION vs. HON. COURT OF APPEALS, TAN TE GUTIERREZ and CO TONG [G.R. No. 113626. September 27, 2002] Petitioner cites Puahay Lao vs. Suarez where it said that “the Court in the earlier case of Singson v. Baldomar, rejected the theory that a lease could continue for an indefinite term so long as the lessee paid the rent, because then its continuance and fulfillment would depend solely on the free and uncontrolled choice of the tenant between continuing to pay rentals or not, thereby depriving the lessors of all say in the matter as it would be contrary to the spirit of Article 1256 of the Old Civil Code, now Article 1308 of the New Civil Code of the Philippines which provides that validity or compliance of contracts can not be left to the will of one of the parties.” A review of the Puahay and Singson cases shows that the factual backgrounds therein are not the same as in the case at bar. In those cases, the lessees were actually in arrears with their rental payments. The Court, in the Puahay case, ruled that the lessor had the right to terminate the lease under par. 3, Art. 1673 of the Civil Code, declaring that the lessor may judicially eject the lessee for violation of any of the conditions agreed upon in the contract. In the case of Singson, the lease contract was expressly on a month-tomonth basis. The contention of the petitioner that a provision in a contract that the lease period shall subsist for ‘an indefinite period provided the lessee is up-to-date in the payment of his monthly rentals’ is contrary to Art. 1308 of the Civil Code is not plausible. As expounded by the Court in the case of Philippine Banking Corporation vs. Lui She: “We have had occasion to delineate the scope and application of article 1308 in the early case of Taylor v. Uy Tieng Piao. We said in that case: ‘Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to the insertion in a contract for personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as much in the fulfillment of the contract as any other act which may have been the subject of agreement. xxx.’” Also held in the recent case of Allied Banking Corp. vs. CA where this Court upheld the validity of a contract provision in favor of the lessee: “xxx Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of contracts. xxx This binding effect of a contract on both parties is based on the principle that the obligations arising from contracts have the force of law between the contracting parties, and there must be mutuality between them based essentially on their equality under which it is repugnant to have one party bound by the contract while leaving the other free therefrom. The ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent solely upon the uncontrolled will of one of the contracting parties.

“An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of the consideration in the contract and is no different from any other provision of the lease carrying an undertaking on the part of the lessor to act conditioned on the performance by the lessee. Xxx “The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment. (Emphasis supplied) As correctly ruled by the MTC in its decision, the grant of benefit of the period in favor of the lessee was given in exchange for no less than an automatic 20% yearly increase in monthly rentals. This additional condition was not present in the Puahay and Singson cases. Moreover, the express provision in the lease agreement of the parties that violation of any of the terms and conditions of the contract shall be sufficient ground for termination thereof by the lessor, removes the contract from the application of Article 1308. REYNALDO P. FLOIRENDO, JR. vs. METROPOLITAN BANK and TRUST COMPANY (G.R. No. 148325, September 3, 2007 The fundamental issue for our resolution is whether the mortgage contract and the promissory note express the true agreement between the parties herein. Petitioner contends that the “escalation clause” in the promissory note imposing 15.446% interest on the loan “for the first 30 days subject to upward/downward adjustment every 30 days thereafter” is illegal, excessive and arbitrary. The determination to increase or decrease such interest rate is primarily left to the discretion of respondent bank. We agree. We hold that the increases of interest rate unilaterally imposed by respondent bank without petitioner’s assent are violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code which provides: Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. The binding effect of any agreement between the parties to a contract is premised on two settled principles: (1) that obligations arising from contracts have the force of law between the contracting parties; and (2) that there must be mutuality between the parties based on their essential equality to which is repugnant to have one party bound by the contract leaving the other free therefrom. Any contract which appears to be heavily weighed in favor of one of the 73




parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties is likewise invalid. The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the rate of interest and/or bank charges “without advance notice” to petitioner, “in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines,” does not give respondent bank unrestrained freedom to charge any rate other than that which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence of mutuality of the contract. In Philippine National Bank v. Court of Appeals, and in later cases, we held: 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 exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia v. 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 “to take it or leave it” (Qua v. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. In New Sampaguita Builders Construction, Inc. (NSBCI) v. Philippine National Bank, we ruled that while it is true that escalation clauses are valid in maintaining fiscal stability and retaining the value of money on long term contracts, however, giving respondent an unbridled right to adjust the interest independently and upwardly would completely take away from petitioner the right to assent to an important modification in their agreement, hence, would negate the element of mutuality in their contracts. Such escalation clause would make the fulfillment of the contracts dependent exclusively upon the uncontrolled will of respondent bank and is therefore void. In the present case, the promissory note gives respondent bank authority to increase the interest rate at will during the term of the loan. This stipulation violates the principle of mutuality between the parties. It would be converting the loan agreement into a contract of adhesion where the parties do not bargain on equal footing, the weaker party’s (petitioner’s) participation being reduced to the alternative “to take it or leave it. While the Usury Law ceiling on interest rate was lifted by Central Bank Circular No. 905, nothing therein could possibly be read as granting respondent bank carte blanche authority to raise interest rate to levels which would either enslave its borrower (petitioner herein) or lead to hemorrhaging of his assets. In Philippine National Bank v. Court of Appeals¸ we declared void the escalation clause in the Credit Agreement between petitioner bank and private respondents whereby the “Bank reserves the right to increase the interest rate within the limit allowed by law at any time depending on whatever policy it may adopt in the future xxx.” We held: It is basic that there can be no contract in the true sense in the

absence of the element of agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. We cannot countenance petitioner bank’s posturing that that escalation clause at bench gives it unbridled right to unilaterally upwardly adjust the interest on private respondents’ loan. That would completely take away from private respondents the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts. Under Article 1310 of the Civil Code, courts are granted authority to reduce/increase interest rates equitably, thus: 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. In the other Philippine National Bank v. Court of Appeals case, we disauthorized petitioner bank from unilaterally raising the interest rate on the loan of private respondent from 18% to 32%, 41% and 48%. In Almeda v. Court of Appeals, where the interest rate was increased from 21% to as high as 68% per annum, we declared arbitrary “the galloping increases in interest rate imposed by respondent bank on petitioners’ loan, over the latter’s vehement protests.” In Medel v. Court of Appeals, the stipulated interest of 5.5% per month or 66% per annum on a loan amounting to P500,000.00 was equitably reduced for being iniquitous, unconscionable and exorbitant. In Solangon v. Salazar, the stipulated interest rate of 6% per month or 72% per annum was found to be “definitely outrageous and inordinate” and was reduced to 12% per annum which we deemed fair and reasonable. In Imperial v. Jaucian, we ruled that the trial court was justified in reducing the stipulated interest rate from 16% to 1.167% or 14% per annum and the stipulated penalty charge from 5% to 1.167% per month or 14% per annum. In this case, respondent bank started to increase the agreed interest rate of 15.446% per annum to 24.5% on July 11, 1997 and every month thereafter; 27% on August 11, 1997; 26% on September 10, 1997; 33% on October 15, 1997; 26.5% on November 27, 1997; 27% on December 1997; 29% on January 13, 1998; 30.244% on February 7, 1998; 24.49% on March 9, 1998; 22.9% on April 18, 1998; and 18% on May 21, 1998. Obviously, the rate increases are excessive and arbitrary. It bears reiterating that respondent bank unilaterally increased the interest rate without petitioner’s knowledge and consent. Art. 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)

oE.g. in a contract of sale, the fixing of price and delivery date can be

left to a 3rd person; the decision binds the party only after it is made known to both.

74




CASE GUTIERREZ HERMANOS vs.ENGRACIO ORENSE (G.R. No. L9188 December 4, 1914) The sale of the said property made by Duran to Gutierrez Hermanos was indeed null and void in the beginning, but afterwards became perfectly valid and cured of the defect of nullity it bore at its execution by the confirmation solemnly made by the said owner upon his stating under oath to the judge that he himself consented to his nephew Jose Duran's making the said sale. Moreover, pursuant to article 1309 of the Code, the right of action for nullification that could have been brought became legally extinguished from the moment the contract was validly confirmed and ratified, and, in the present case, it is unquestionable that the defendant did confirm the said contract of sale and consent to its execution.

Art. 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) Principle of Relativity  Contracts are generally effective only between the parties, their assigns and their heirs.

On the testimony given by Engacio Orense at the trial of Duran for estafa, the latter was acquitted, and it would not be just that the said testimony, expressive of his consent to the sale of his property, which determined the acquittal of his nephew, Jose Duran, who then acted as his business manager, and which testimony wiped out the deception that in the beginning appeared to have been practiced by the said Duran, should not now serve in passing upon the conduct of Engracio Orense in relation to the firm of Gutierrez Hermanos in order to prove his consent to the sale of his property, for, had it not been for the consent admitted by the defendant Orense, the plaintiff would have been the victim of estafa.

Exceptions: 1. Where obligations arising from the contract are not transmissible by their nature, by stipulation in favor of a 3 rd party. 2. Where there is stipulation Pour Autri ( a stipulation in favor of 3rd person) 3. Where a third person induces another to violate his contract 4. Where in some cases, 3rd persons may be adversely affected by a contract where they did not participate.Where law authorizes the creditor to sue on a contract entered into by his debtor.

If the defendant Orense acknowledged and admitted under oath that he had consented to Jose Duran's selling the property in litigation to Gutierrez Hermanos, it is not just nor is it permissible for him afterward to deny that admission, to the prejudice of the purchaser, who gave P1,500 for the said property.

Requisites of Stipulation Pour Autri

The contract of sale of the said property contained in the notarial instrument of February 14, 1907, is alleged to be invalid, null and void under the provisions of paragraph 5 of section 335 of the Code of Civil Procedure, because the authority which Orense may have given to Duran to make the said contract of sale is not shown to have been in writing and signed by Orense, but the record discloses satisfactory and conclusive proof that the defendant Orense gave his consent to the contract of sale executed in a public instrument by his nephew Jose Duran. Such consent was proven in a criminal action by the sworn testimony of the principal and presented in this civil suit by other sworn testimony of the same principal and by other evidence to which the defendant made no objection. Therefore the principal is bound to abide by the consequences of his agency as though it had actually been given in writing (Conlu vs. Araneta and Guanko, 15 Phil. Rep., 387; Gallemit vs. Tabiliran, 20 Phil. Rep., 241; Kuenzle & Streiff vs. Jiongco, 22 Phil. Rep., 110.) The repeated and successive statements made by the defendant Orense in two actions, wherein he affirmed that he had given his consent to the sale of his property, meet the requirements of the law and legally excuse the lack of written authority, and, as they are a full ratification of the acts executed by his nephew Jose Duran, they produce the effects of an express power of agency. The judgment appealed from in harmony with the law and the merits of the case, and the errors assigned thereto have been duly refuted by the foregoing considerations, so it should be affirmed. Art. 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)

1. 2. 3. 4. 5. 6. 7.

There must be a stipulation in favor of a 3rd person; Contracting parties must have clearly and deliberately conferred a favor upon a 3rd person; A mere incidental benefit or interest of a person is not sufficient The stipulation must be part of contract and not the whole of the contract; 3rd person communicated his acceptance to obligor before its revocation; There must be no relation of agency between either of the parties and 3rd person. (Neither the contracting parties bears the representation or authorization of the 3rd party.) That the favorable condition should not be conditioned or compensated by any kind of obligation or whatsoever;

CASES DKC HOLDINGS CORPORATION vs. COURT OF APPEALS, VICTOR U. BARTOLOME and REGISTER OF DEEDS FOR METRO MANILA, DISTRICT III [G.R. No. 118248. April 5, 2000] The issue to be resolved in this case is whether or not the Contract of Lease with Option to Buy entered into by the late Encarnacion Bartolome with petitioner was terminated upon her death or whether it binds her sole heir, Victor, even after her demise. Both the lower court and the Court of Appeals held that the said contract was terminated upon the death of Encarnacion Bartolome and did not bind Victor because he was not a party thereto. Article 1311 of the Civil Code provides, as follows"ART. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations 75




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. brnado xxx

xxx

x x x."

The general rule, therefore, is that heirs are bound by contracts entered into by their predecessors-in-interest except when the rights and obligations arising therefrom are not transmissible by (1) their nature, (2) stipulation or (3) provision of law. In the case at bar, there is neither contractual stipulation nor legal provision making the rights and obligations under the contract intransmissible. More importantly, the nature of the rights and obligations therein are, by their nature, transmissible. The nature of intransmissible rights as explained by Arturo Tolentino, an eminent civilist, is as follows: "Among contracts which are intransmissible are those which are purely personal, either by provision of law, such as in cases of partnerships and agency, or by the very nature of the obligations arising therefrom, such as those requiring special personal qualifications of the obligor. It may also be stated that contracts for the payment of money debts are not transmitted to the heirs of a party, but constitute a charge against his estate. Thus, where the client in a contract for professional services of a lawyer died, leaving minor heirs, and the lawyer, instead of presenting his claim for professional services under the contract to the probate court, substituted the minors as parties for his client, it was held that the contract could not be enforced against the minors; the lawyer was limited to a recovery on the basis of quantum meruit." In American jurisprudence, "(W)here acts stipulated in a contract require the exercise of special knowledge, genius, skill, taste, ability, 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." Marinella It has also been held that a good measure for 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 promissor. 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 nonperformance. In the case at bar, there is no personal act required from the late Encarnacion Bartolome. Rather, the obligation of Encarnacion in the contract to deliver possession of the subject property to petitioner upon the exercise by the latter of its option to lease the same may very well be performed by her heir Victor. As early as 1903, it was held that "(H)e who contracts does so for himself and his heirs." 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 the legal consequence of a transaction entered into by their predecessor-in-interest because they have inherited the property subject to the liability affecting their common ancestor. 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 against her is also valid and binding as against him. This is clear from Parañaque Kings Enterprises vs. Court of Appeals, where this Court rejected a similar defense-alonzo With respect to the contention of respondent Raymundo that he is not privy to the lease contract, not being the lessor nor the lessee referred to therein, he could thus not have violated its provisions, but he is nevertheless a proper party. Clearly, he stepped into the shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed all the obligations of the lessor under the lease contract. Moreover, he received benefits in the form of rental payments. Furthermore, the complaint, as well as the petition, prayed for the annulment of the sale of the properties to him. Both pleadings also alleged collusion between him and respondent Santos which defeated the exercise by petitioner of its right of first refusal. In order then to accord complete relief to petitioner, respondent Raymundo was a necessary, if not indispensable, party to the case. A favorable judgment for the petitioner will necessarily affect the rights of respondent Raymundo as the buyer of the property over which petitioner would like to assert its right of first option to buy. 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 nonperformance 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, therefore, Victor is bound by the subject Contract of Lease with Option to Buy. LA VISTA ASSOCIATION, INC., vs. COURT OF APPEALS (G.R. No. 95252 September 5, 1997 That there is no contract between LA VISTA and Solid Homes, Inc., and thus the court could not have declared the existence of an easement created by the manifest will of the parties, is devoid of merit. The predecessors-in-interest of both LA VISTA and Solid Homes, Inc., i.e., the Tuasons and the Philippine Building Corporation, respectively, clearly established a contractual easement of right-of-way over Mangyan Road. When the Philippine Building Corporation transferred its rights and obligations to ATENEO the Tuasons expressly consented and agreed thereto. Meanwhile, the Tuasons themselves developed their property into what is now known as LA VISTA. On the other hand, ATENEO sold the hillside portions of its property to Solid Homes, Inc., including the right over the easement of right-of-way. In sum, when the easement in this case was established by contract, the parties unequivocally made provisions for its observance by all who in the future might succeed them in dominion. MANDARIN VILLA, INC. vs. COURT OF APPEALS and CLODUALDO DE JESUS [G.R. No. 119850. June 20, 1996 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 76




and/or services supplied by it provided that the card expiration date has not elapsed and the card number does not appear on the latest cancellation bulletin of lost, suspended and cancelled 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 a 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 autri 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 not only an acceptance of the said stipulation but also an explicit communication of his acceptance to the obligor. In addition, the record shows that petitioner posted a logo inside Mandarin Villa Seafood Village stating that "Bankard is accepted here." This representation is conclusive upon the petitioner which it cannot deny or disprove as against the private respondent, the party relying thereon. Petitioner, therefore, cannot disclaim its obligation to accept private respondent's BANKARD credit card without violating the equitable principle of estoppel. INTEGRATED PACKAGING CORP. vs. COURT OF APPEALS and FIL-ANCHOR PAPER CO., INC. [G.R. No. 115117. June 8, 2000] On the second assigned error, petitioner contends that private respondent should be held liable for petitioner’s breach of contract with Philacor. This claim is manifestly devoid of merit. 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 respondent 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. 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. Furthermore, 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 did not err in deleting the damages awarded by the trial court to petitioner.

GEORGE A. KAUFFMAN vs. THE PHILIPPINE NATIONAL BANK G.R. No. 16454, September 29, 1921 Stated in bare simplicity the admitted facts show that the defendant bank for a valuable consideration paid by the Philippine Fiber and Produce Company agreed on October 9, 1918, to cause a sum of money to be paid to the plaintiff in New York City; and the question is whether the plaintiff can maintain an action against the bank for the nonperformance of said undertaking. In other words, is the lack of privity with the contract on the part of the plaintiff fatal to the maintenance of an action by him? The only express provision of law that has been cited as bearing directly on this question is the second paragraph of article 1257 of the Civil Code; and unless the present action can be maintained under the provision, the plaintiff admittedly has no case. This provision states an exception to the more general rule expressed in the first paragraph of the same article to the effect that contracts are productive of effects only between the parties who execute them; and in harmony with this general rule are numerous decisions of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584; Manila Railroad Co. vs. Compañia Trasatlantica and Atlantic, Gulf and Pacific Co., 38 Phil., 873, 894.) The paragraph introducing the exception which we are now to consider is in these words: Should the contract contain any stipulation in favor of a third person, he may demand its fulfillment, provided he has given notice of his acceptance to the person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.) In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation upon the history and interpretation of the paragraph above quoted and so complete is the discussion contained in that opinion that it would be idle for us here to go over the same matter. Suffice it to say that Justice Trent, speaking for the court in that case, sums up its conclusions upon the conditions governing the right of the person for whose benefit a contract is made to maintain an action for the breach thereof in the following words: So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third person in a contract is a stipulation pour autrui, or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract. If a third person claims an enforcible interest in the contract, the question must be settled by determining whether the contracting parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of construction and interpretation of writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.) Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promise to the third person. That no such obligation exists may in some degree assist in determining whether the parties intended to benefit a third person, whether they stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.) In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is undeniable that 77




the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances under which that promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have the money upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it; and indeed if the provision in question were not applicable to the facts now before us, it would be difficult to conceive of a case arising under it. It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank by demanding payment; and although the Philippine National Bank had already directed its New York agency to withhold payment when this demand was made, the rights of the plaintiff cannot be considered to as there used, must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the party purchasing he exchange. In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of Appeals of the State of New York on March 1, 1921, wherein it is held that, by selling a cable transfer of funds on a foreign country in ordinary course, a bank incurs a simple contractual obligation, and cannot be considered as holding the money which was paid for the transfer in the character of a specific trust. Thus, it was said, "Cable transfers, therefore, mean a method of transmitting money by cable wherein the seller engages that he has the balance at the point on which the payment is ordered and that on receipt of the cable directing the transfer his correspondent at such point will make payment to the beneficiary described in the cable. All these transaction are matters of purchase and sale create no trust relationship." As we view it there is nothing in the decision referred to decisive of the question now before us, wish is merely that of the right of the beneficiary to maintain an action against the bank selling the transfer. ASSOCIATED BANK, vs. COURT OF APPEALS and LORENZO SARMIENTO JR. (G.R. No. 123793 June 29, 1998) No ContractPour Autrui Private respondent, while not denying that he executed the promissory note in the amount of P2,500,000 in favor of CBTC, offers the alternative defense that said note was a contract pour autrui. A stipulation pour autrui is one in favor of a third person who may demand its fulfillment, provided he communicated his acceptance to the obligor before its revocation. An incidental benefit or interest, which another person gains, is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. Florentino vs. Encarnacion Sr. 24 enumerates the requisites for such contract: (1) the stipulation in favor of a third person must be a part of the contract, and not the contract itself; (2) the favorable stipulation should not be conditioned or compensated by any kind of obligation; and (3) neither of the contracting parties bears the legal representation or authorization of the third party. The "fairest test" in determining whether the third person's interest in a contract is a

stipulation pour autrui or merely an incidental interest is to examine the intention of the parties as disclosed by their contract. We carefully and thoroughly perused the promissory note, but found no stipulation at all that would even resemble a provision in consideration of a third person. The instrument itself does not disclose the purpose of the loan contract. It merely lays down the terms of payment and the penalties incurred for failure to pay upon maturity. It is patently devoid of any indication that a benefit or interest was thereby created in favor of a person other than the contracting parties. In fact, in no part of the instrument is there any mention of a third party at all. Except for his barefaced statement, no evidence was proffered by private respondent to support his argument. Accordingly, his contention cannot be sustained. At any rate, if indeed the loan actually benefited a third person who undertook to repay the bank, private respondent could have availed himself of the legal remedy of a third-party complaint. 26 That he made no effort to implead such third person proves the hollowness of his arguments. MIGUEL FLORENTINO, ET. AL. vs. SALVADOR ENCARNACION, SR., ET. AL. (G.R. No. L-27696 September 30, 1977) We find the first and second assignments of error impressed with merit and, therefore, tenable. The stipulation embodied in Exhibit O1 on religious expenses is not revocable at the unilateral option of the co-owners and neither is it binding only on the petitionersappellants Miguel Florentino, Rosario Encarnacion de Florentino Manuel Arce, Jose Florentino, Victorino Florentino Antonio Florentino, Remedios Encarnacion and Severina E It is also binding on the oppositors-appellees Angel Encarnacion, The stipulation (Exhibit 411) in pan of an extrajudicial partition (Exh. O) duly agreed and signed by the parties, hence the sanie must bind the contracting parties thereto and its validity or compliance cannot be left to the with of one of them (Art. 1308, N.C.C.). Under Art 1311 of the New Civil Code, this stipulation takes effect between the parties, their assign and heirs. The article provides: Art. 1311. � Contracts take effect only between the parties, their assigns and heirs, except in cases 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 a 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. The second paragraph of Article 1311 above-quoted states the law on stipulations pour autrui. Consent the nature and purpose of the motion (Exh. O-1), We hold that said stipulation is a station pour autrui. A stipulation pour autrui is a stipulation in favor of a third person conferring a clear and deliberate favor upon him, and which stipulation is merely a part of a contract entered into by the parties, neither of whom acted as agent of the third person, and such third person and demand its fulfillment provoked that he communicates his to the obligor before it is revoked. 3 The requisites are: (1) that the stipulation in favor of a third person should be a part, not the whole, of the contract; (2) that the favorable stipulation should not be conditioned or compensated by any kind of obligation whatever; and (3) neither of the contracting bears the legal represented or authorization of third person. 78




To constitute a valid stipulation pour autrui it must be the purpose and intent of the stipulating parties to benefit the third and it is not sufficient that the third person may be incidentally benefited by the stipulation. The fairest test to determine whether the interest of third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract. In applying this test, it meters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promisee to the third person. That no such obsorption exists may in some degree assist in determining whether the parties intended to benefit a third person. In the case at bar, the determining point is whether the co-owners intended to benefit the Church when in their extrajudicial partition of several parcels of land inherited by them from Doña Encarnacion Florendo they agreed that with respect to the land situated in Barrio Lubong Dacquel Cabugao Ilocos Sur, the fruits thereof shall serve to defray the religious expenses specified in Exhibit O-1. The evidence on record shows that the true intent of the parties is to confer a direct and material benefit upon the Church. The fruits of the aforesaid land were used thenceforth to defray the expenses of the Church in the preparation and celebration of the Holy Week, an annual Church function. Suffice it to say that were it not for Exhibit O-1, the Church would have necessarily expended for this religious occasion, the annual relisgious procession during the Holy Wock and also for the repair and preservation of all the statutes, for the celebration of the Seven Last Word. We find that the trial court erred in holding that the stipulation, arrangement or grant (Exhibit O-1) is revocable at the option of the co-owners. While a stipulation in favor of a third person has no binding effect in itself before its acceptance by the party favored, the law does not provide when the third person must make his acceptance. As a rule, there is no time at such third person has after the time until the stipulation is revoked. Here, We find that the Church accepted the stipulation in its favor before it is sought to be revoked by some of the co-owners, namely the petitionersappellants herein. It is not disputed that from the time of the with of Doña Encarnacion Florentino in 1941, as had always been the case since time immemorial up to a year before the firing of their application in May 1964, the Church had been enjoying the benefits of the stipulation. The enjoyment of benefits flowing therefrom for almost seventeen years without question from any quarters can only be construed as an implied acceptance by the Church of the stipulation pour autrui before its revocation. The acceptance does not have to be in any particular form, even when the stipulation is for the third person an act of liberality or generosity on the part of the promisor or promise. It need not be made expressly and formally. Notification of acceptance, other than such as is involved in the making of demand, is unnecessary. A trust constituted between two contracting parties for the benefit of a third person is not subject to the rules governing donation of real property. The beneficiary of a trust may demand performance of the obligation without having formally accepted the benefit of the this in a public document, upon mere acquiescence in the formation of the trust and acceptance under the second paragraph of Art. 1257 of the Civil Code. Hence, the stipulation (Exhibit O-1) cannot now be revoked by any of the stipulators at their own option. This must be so because of Article 1257, Civil Code and the cardinal rule of contracts that it has the force of law between the parties. 8 Thus, this Court ruled in

Garcia v. Rita Legarda, Inc., 9 "Article 1309 is a virtual reproduction of Article 1256 of the Civil Code, so phrased to emphasize that the contract must bind both parties, based on the principles (1) that obligation arising from contracts have the force of law between the contracting parties; and (2) that there must be mutuality between the parties based on their principle equality, to which is repugnant to have one party bound by the contract leaving the other free therefrom." Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a signatory to the Deed of Extrajudicial Partition embodying such beneficial stipualtion. Likewise, with regards to Salvador, Jr. and Angel Encarnacion, they too are bound to the agreement. Being subsequent purchasers, they are privies or successors in interest; it is axiomatic that contracts are enforceable against the parties and their privies. 10 Furthermore, they are shown to have given their conformity to such agreement when they kept their peace in 1962 and 1963, having already bought their respective shares of the subject land but did not question the enforcement of the agreement as against them. They are also shown to have knowledge of Exhibit O-1 as they had admitted in a Deed of Real Mortgage executed by them on March 8, 1962 involving their shares of the subject land that, "This parcel of land is encumbered as evidenced by the document No. 420, page 94, Book 1, series 1947, executed by the heirs of the late Encarnacion Florentino, on August 26, 1947, before M. Francisco Ante, Notwy Public of Vigan, Ilocos Sur, in its page 10 of the said document of partition, and also by other documents." The annotation of Exhibit O-1 on the face of the title to be issued in this case is merely a guarantee of the continued enforcement and fulfillment of the beneficial stipulation. It is error for the lower court to rule that the petitioners-appellants are not the real parties in interest, but the Church. That one of the parties to a contract pour autrui is entitled to bring an action for its enforcement or to prevent its breach is too clear to need any extensive discussion. Upon the other hand, that the contract involved contained a stipulation pour autrui amplifies this settled rule only in the sense that the third person for whose benefit the contract was entered into may also demand its fulfillment provoked he had communicated his acceptance thereof to the obligor before the stipulation in his favor is revoked. LIMITLESS POTENTIALS, INC. vs. THE HON. REINATO G. QUILALA and The ROMAN CATHOLIC ARCHBISHOP OF MANILA [G.R. No. 157391. July 15, 2005] For its part, LPI avers that it should not be made to pay rentals from March 1995 because as early as February 1, 1995, it had not been able to use the areas/spaces previously sublet to ASTRO. Moreover, the rentals paid directly by ASTRO to RCAM in the total amount of P1,255,889.55 from 1990 to 1994 should be credited to it, since there was no intent to donate the said amount to RCAM. The amounts remitted by ASTRO to RCAM were made in payment of a debt or obligation. Furthermore, there was no stipulation pour autrui in favor of RCAM as it was already a party to the sublease agreement between LPI and ASTRO. The benefit conferred upon RCAM under the sublease agreement was merely incidental, because it was a creditor of ASTRO and as such entitled to the rentals, either directly from LPI or indirectly from ASTRO, as the sublessee. Even if Article 1311 of the New Civil Code were to apply, and assuming that the rental payments made by ASTRO were in the nature of donations, RCAM, as donee-beneficiary, was required by Article 748 of the New Civil Code to accept the donation in writing. Hence, RCAM must refund to LPI the amount of P798,421.96. LPI insists that the theory of donation was but a belated concoction of RCAM. Thus, the decision of the CA is erroneous and should be reversed, and the amended decision of the 79




RTC should be maintained. LPI asserts that it had the right to continue to possess the leased premises during the entire duration of the contract, that is, from October 31, 1995 when RCAM unilaterally rescinded the MOA. Since the unilateral rescission of the MOA was nullified, the possession of the leased spaces/areas must be restored to it for the unexpired period of the agreement. On March 30, 2005, the Court resolved to consolidate the three (3) cases in the Second Division. The Rulings of the Court On the first issue, the Court agrees with RCAM that LPI was obliged to continue paying the rentals for the leased premises (except those previously sublet to ASTRO) from March 1995 until October 1995 and up to its eviction therefrom on October 5, 1996. This is so because LPI continued to possess and use the same until October 6, 1996 despite the unilateral rescission of the MOA by RCAM. We note that LPI consigned the rentals for March 1995 to October 1995 to the RTC in Civil Case No. 95-1559. Hence, the rentals due for such period should be added to P1,239,645.00 which LPI was obliged to pay to RCAM. However, the Court rejects the contention of RCAM that LPI is obliged to pay rentals for the areas/spaces sublet to ASTRO after February 1995. It bears stressing that, after the expiration of the sublease agreement between LPI and ASTRO in February 1995, RCAM did not turn over the said areas/spaces to LPI; instead, it leased the said areas/spaces to MCIC, in violation of its MOA with LPI. RCAM even dismantled the billboards of LPI on October 6, 1996. Under Article 1054(3) of the New Civil Code, RCAM, as lessor, was obliged to maintain the LPI, as lessee, in the peaceful and adequate enjoyment of the areas/spaces for the entire duration of the contract. And since it failed to comply with its obligation, the LPI had the right to suspend the payments of rentals[32] until possession thereof had been delivered to it. It also had the right to ask for the rescission of the MOA and indemnification for damages, or only the latter, allowing the contract to remain in force.[33] It would be unjust enrichment on the part of RCAM to require LPI to pay rentals for the areas/spaces leased by RCAM to MCIC.[34] The MTC is mandated to ascertain, after hearing the parties, the reasonable rentals LPI is obliged to pay for the leased areas/spaces, (except those sublet to MCIC) and ascertain, based on its findings, the amount that RCAM is obliged to refund to LPI, if any. We agree with the ruling of the CA that the sublease contract between LPI and ASTRO contains a stipulation pour autrui in favor of RCAM, which the latter had accepted long before LPI filed its complaint in Civil Case No. 96-949. Central to the issue is Article 1311 of the New Civil Code, which provides: Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations arising from the contracts 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. The definition of a stipulation pour autrui is set forth in the second paragraph of the above provision. The requisites for such stipulation are the following: (a) the stipulation in favor of a third person, the third-party beneficiary which should be a part, not the whole, of the contract; (b) the contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest; (c) the favorable stipulations should not be conditioned or compensated by any kind of obligation whatsoever; (d) the third person must have communicated his acceptance to the obligor before its revocation; and (e) neither of the contracting parties bear the legal representation or authorization of the third party.[35] The third-party may be (a) a donee beneficiary; (b) a creditor beneficiary; or (c) an incidental beneficiary. A donee beneficiary is regarded as such only if it appears from the terms of the promisee, in view of the accompanying circumstances, that the purpose of the promisee in obtaining the promise of and/or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisee to secure performance neither due nor supposed or asserted to be due from the promisee to the beneficiary.[36] The intent of the promisee to benefit a third person as a primary party-in-interest is generally said to be controlling. It is not enough that the contract may operate to the benefit of a third-party. It must appear that the parties’ intent to recognize him as the primary party-in-interest and privy to the promise.[37] Such intent may be gleaned from the construction of the contract in the light of the surrounding circumstances. Intent, in a legal sense, is defined as the purpose to use a particular manner to effect a certain result.[38] Otherwise stated, if the performance of a promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary, he is a creditor beneficiary and may enforce the promise.[39] The right of recovery of a third-party beneficiary is upon the theory that the contracting parties intended to create a cause of action in his favor.[40] The right of the beneficiary is, however, limited by the terms of the promise.[41] Absent the intent to benefit a third-party, such party is merely an incidental beneficiary. Such party is one who benefits from the contract of another but whose benefit was not the intent of the contracting parties. An incidental beneficiary has no right or obligation under the contract.[42] If, indeed, there is an intent of the parties to a contract to benefit a third person, it matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promisee to the third person.[43] Contrary to the contention of LPI, the third-party beneficiary may accept the benefit in any form. Article 1311 of the New Civil Code does not require that the acceptance by the third-party beneficiary of the benefit be in writing. Indeed, in Florentino v. Encarnacion, Sr., the Court ruled that: The acceptance does not have to be in any particular form, even when the stipulation is for the third person an act of liberality or generosity on the part of the promisor or promisee. It need not be made expressly and formally. Notification of acceptance, other than such as is involved in the making of demand, is unnecessary. A trust constituted between two contracting parties for the benefit of a third person is not subject to the rules governing donation of 80




real property. The beneficiary of a trust may demand performance of the obligation without having formally accepted the benefit of the trust in a public document, upon mere acquiescence in the formation of the trust and acceptance under the second paragraph of Art. 1257 of the Civil Code.[44] In the present case, a careful study of the surrounding circumstances of the agreement has revealed that RCAM is a thirdparty beneficiary under the sublease agreement between LPI and ASTRO. The records show that ASTRO filed an application with RCAM for the installation of its own billboards on the spaces/areas leased by LPI; RCAM then referred the application to LPI. Without any solicitation therefor, LPI informed RCAM, through a letter, that it would earn more from monthly rentals from ASTRO, and that such rentals “shall go to the church.”[45] Indeed, under the sublease agreement between LPI and ASTRO, the latter is obliged to remit its rental payments directly to RCAM, and not to LPI. RCAM accepted the offer of LPI and indeed, received all the rentals of ASTRO from February 1990 to July 1993. RCAM did not credit the said rentals to LPI. For its part, LPI paid the rentals under its lease agreement with RCAM, without deducting therefrom the rental payments of ASTRO for the said period. LPI never demanded that RCAM credit it for the rental payments of ASTRO. It was only when LPI sued RCAM for consignation, and the latter filed a suit for ejectment that LPI claimed the crediting of ASTRO’s rental payments from February 1990 to July 1993 for the first time. Such claim, as correctly ruled by the MTC and the CA, was but an afterthought, thus: The Court does not agree with defendant that there were double payments made during the “first period”. It is apparent that the rentals being paid by defendant during the “first period” cover only the area/space actually used by defendant and does not cover the area/space used by Astro Advertising, although the portion occupied by the latter are within the area being leased by defendant from plaintiff. This observation finds support in the letter of Louise Belle Baterina, dated Nov. 28, 1998, addressed to RCAM, informing the latter that rental payments made by the sublessees “shall go to the church” in order for the latter to earn more. If rental payments shall be deducted from defendant’s monthly rentals or credited to the defendant, plaintiff will not earn more. Such was not the intention of Louse Belle Baterina when she wrote her letter dated Nov. 28, 1988. Beside, the action of defendant Belle that payments made by Astro Advertising during the “first period” were supposed to be credited to defendant, why then did it not bring the matter to the attention of plaintiff. Why is it that when defendant received from plaintiff the Statement of Account as of December 1944 (Exhibit 5 the defendant) showing that it has an outstanding obligation in the amount of P171,200.63, it did not raise in issue the matter of its overpayment and instead on March 8, 1995, defendant meekly paid the amount of P279,549.00 under official receipt no. 73991 and rentals from January to March 1995 in the total amount of P108,349.00.[46] The factual backdrop is similar to that in Florentino v. Encarnacion, Sr.[47] where the Court ruled – … While a stipulation in favor of a third person has no binding effect in itself before its acceptance by the party favored, the law does not provide when the third person must make his acceptance. As a rule, there is no time limit; such third person has all the time until the stipulation is revoked. Here, we find that the church accepted the stipulation in its favor before it is sought to be revoked by some of the co-owners, namely the petitioners-appellees herein. It is not disputed that from the time of the death of Doña Encarnacion Florentino in 1941, as had always been the case since time immemorial, up to a year before the filing of their application in May 1964, the Church had been enjoying the benefits of the stipulation.

The enjoyment of benefits flowing therefrom for almost seventeen years without question from any quarters can only be construed as an implied acceptance by the Church of the stipulation pour autrui before its revocation. It bears stressing that under the lease agreement between RCAM and LPI, the latter was obliged to pay a monthly rental of only P12,000.00 subject to an annual 10% increase. In contrast, under the sublease agreement between LPI and ASTRO, the latter was obliged to pay a monthly rental to LPI of P21,000.00, P23,000.00 and P25,410.00 covering the period of February 1, 1990 to February 1993. LPI remitted its rentals to RCAM periodically during the said period without any preconditions. Not only that - LPI likewise failed to demand from RCAM that it be credited for the rental payments of ASTRO. LPI continued to remit its rental payments to RCAM as provided for in no less than the lease agreement. It is true that, after the execution of the MOA, the rental payments of ASTRO during the second period (February 1995 to October 1995) were credited to the LPI; this does not mean, however, that the rental payments of ASTRO during the first period should, likewise, be similarly credited. Based on the pleadings of the parties, RCAM and LPI had agreed to revoke the stipulation pour autrui in the sublease agreement during the second period. The contention of LPI that RCAM is a party to the sublease agreement is belied by the records. As gleaned from the agreement, RCAM was merely a witness to the deed. It bears stressing that in a sublease agreement, there are two distinct leases involved: the principal lease and the sublease.[49] In a contract of sublease, the lessor is not a party. Except in those cases provided by the New Civil Code, the lessor is a stranger to the relationship between the lessee and sublessee. The latter has no right or authority to pay the sublease rentals to the lessor, the said rentals being due and payable to the lessee.[50] However, the lessor may demand the payment by the sublessee of the rentals due from the lessee if the latter fails to pay the same.[51] The contention of LPI is correct. As lessor, RCAM was obliged to maintain LPI’s peaceful and adequate possession and enjoyment of the lease for the entire duration of the contract.[56] Indeed, it is the duty of the lessor to place the lessee in the legal possession of the premises and to maintain the peaceful possession thereof during the entire term of the lease.[57] The lessee has the right to be respected in his possession and should he be disturbed therein, he shall be restored to said possession by the means established by the law or by the Rules of Court.[58] Every possessor, under the law, includes all kinds of possession, including that of a mere holder.[59] Possession is not protection against right but against the exercise of a right by one’s own authority.[60] If the owner/lessor forcibly dispossesses a lessee, the lessor would be acting illegally, and the lessee shall be entitled to be restored to his possession via an action for forcible entry with a plea for a writ of preliminary mandatory injunction within five (5) days from the filing of the complaint to restore him to his possession,[61] by an accion publiciana[62] or by an action to compel the lessor to comply with his obligation under the contract of lease.[63] The lessee may ask for the rescission of the lease contract and indemnification for damages, or only the latter, allowing the contract to remain in force. A lessee unlawfully evicted by the lessor is entitled to be restored to the possession of the property leased for the “unused” period of the lease contract, counted from his eviction; such “unexpired portion” of the contract cannot be affected by the lapse of the period pending the final resolution of the complaint for ejectment filed by 81




the lessor. It bears stressing that in a reciprocal contract, like a lease, the period of the lease must be deemed to have been agreed upon for the benefit of both parties, absent any language therein showing that the term was deliberately fixed for the benefit of either the lessor or the lessee alone. Its continuance, effectivity or fulfillment cannot be made to depend exclusively upon the free and uncontrolled choice of just one party to a lease contract.[65] In this case, RCAM unilaterally rescinded the contract; it had the billboards of LPI on the spaces/areas leased by the latter dismantled on October 5, 1996, without waiting for the final outcome of the ejectment case. The MTC, RTC and the CA found this unilateral rescission of the MOA unlawful. Indisputably, RCAM was obliged to deliver to LPI the premises which it forcibly took over on the said date. It bears stressing that LPI had occupied the leased property from August 1, 1993 to October 6, 1996, or only three (3) years, two months and two days. Thus, LPI is entitled to remain in the property, as lessee, for the unused portion of the four-year period provided for in the MOA. By so ruling, the Court would not be extending the period of the lease contrary to the MOA; the Court would thereby be merely enforcing the same. As covenanted, LPI must remain in possession of the property, as lessee, for a period of four (4) years - not a day less. For the Court to do otherwise would be to enrich RCAM at the expense of LPI, allowing the former to profit by its misdeeds. The Court of Appeals’ reliance on the rulings of the Court in Filoil Refinery Corporation v. Sayo and Tan v. Lim is misplaced. The factual backdrop and the issues in the two cases are markedly different. In Filoil Refinery Corporation, the issue was whether the action for unlawful detainer against the petitioner should be filed against the sublessee (which was in possession of the leased property) even if the lease period had expired. The Court ruled that any sublessee of Filoil or any other person or entity claiming any right under the petition cannot remain in possession of the property beyond the expiry date of the lease contract. On the other hand, the Court, in Tan, held that the petition for a writ of preliminary mandatory injunction had no merit because there was no evidence that the petitioner had an easement of right-of-way to the street by virtue of a title or prescription, or that the condition or a legal easement was properly made. Moreover, Tan filed his complaint with a plea for a mandatory injunction long after his lease contract had expired. As for the recovery of the possession of the areas/spaces now in possession of MCIC, this matter should be the subject of a separate action against the said corporation and RCAM, since the lease contract between MCIC and RCAM was executed before the latter filed its complaint for ejectment against LPI. The judgment of the MTC and this Court is not binding on MCIC; it must be given its day in court. LIMITLESS POTENTIALS, INC. v. HON. RENATO G. QUILALA [G.R. No. 157391. June 21, 2006] On July 15, 2005, the Court rendered the partly assailed decision. The Court settled that LPI must pay RCAM the rentals for the leased premises from March 1995 until LPI's eviction therefrom on October 5, 1996, with the exception of the rentals due from the spaces sublet to Astro after February 1995, inasmuch as RCAM did not turn over the said areas to LPI. In fact, RCAM even leased the spaces vacated by Astro to MCIC, in violation of its MOA with LPI. The Court added that the sublease contract between LPI and

Astro contains a stipulation pour autrui in favor of RCAM. Thereupon, LPI also filed a Motion for Partial Reconsideration dated September 15, 2005, praying that the decision be partially reconsidered by rectifying the supposed inaccurate findings of facts and law: (a) the sublease contract between LPI and Astro does not contain a stipulation pour autrui, and said matter may not be raised and entertained for the first time on appeal; (b) Meanwhile, LPI asseverates that there was no stipulation pour autrui in the sublease contract between Astro and LPI and that the matter was never raised in the trial court, hence, could not be raised and entertained for the first time on appeal. Again, we cannot sustain this restated issue for no new substantial arguments were presented to sanction a reversal of our decision, where we likewise stated: We agree with the ruling of the CA that the sublease contract between LPI and ASTRO contains a stipulation pour autrui in favor of RCAM, which the latter had accepted long before LPI filed its complaint in Civil Case No. 96-949. xxxx The definition of stipulation pour autrui is set forth in the second paragraph of the above provision. The requisites for such stipulation are the following: (a) the stipulation in favor of a third person, the third party beneficiary which should be a part, not the whole, of the contract; (b) the contracting parties must have clearly and deliberately conferred a favor upon the third person, not a mere incidental benefit or interest; (c) the favorable stipulations should not be conditioned or compensated by any kind of obligation whatsoever; (d) the third person must have communicated his acceptance to the obligor before its revocation; and (e) neither of the contracting parties bear the legal representation or authorization of the third party. The third party may be (a) a donee beneficiary; (b) a creditor beneficiary; or (c) an incidental beneficiary. A donee beneficiary is regarded as such only if it appears from the terms of the promisee, in view of the accompanying circumstances, that the purpose of the promisee in obtaining the promise of and/or part of the performance thereof is to make a gift to the beneficiary or to confer upon him a right against the promisee to secure performance neither due nor supposed or asserted to be due from the promisee to the beneficiary. The intent of the promisee to benefit a third person as a primary party-in-interest is generally said to be controlling. It is not enough that the contract may operate to the benefit of a third party. It must appear that the parties' intent to recognize him as the primary party-in-interest and privy to the promise. Such intent may be gleaned from the construction of the contract in the light of the surrounding circumstances. Intent, in the legal sense, is defined as the purpose to use a particular manner to effect a certain result. Otherwise stated, if the performance of a promise will satisfy an actual or supposed or asserted duty of the promisee to the beneficiary, he is creditor beneficiary and may enforce the promise. The right of recovery of a third-party beneficiary is upon the theory that the contracting parties intended to create a cause of action in his favor. The right of the beneficiary is, however, limited by the terms of the promise. Absent the intent to benefit a third party, such party is merely an incidental beneficiary. Such party is one who benefits from the contract of another but whose benefit was not the intent of the contracting parties. An incidental beneficiary has no right or obligation under the contract. If, indeed, there is an intent of the 82




parties to a contract to benefit a third person, it matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promisee to the third person. xxxx In the present case, a careful study of the surrounding circumstances of the agreement has revealed that RCAM is a third party beneficiary under the sublease agreement between LPI and ASTRO. x x x Moreover, the Court is not persuaded with LPl's contention that the issue was not raised in the trial court and therefore could not be entertained for the first time on appeal. As earlier stated in the impugned decision, RCAM never insisted that there was a stipulation pour autrui in its favor. Rather, it was the MTC which declared that the stipulation in the sublease agreement was a stipulation pour autrui under Article 1311 of the New Civil Code. SOUTH PACHEM DEVELOPMENT, INC. vs. HONORABLE COURT OF APPEALS AND MAKATI COMMERCIAL ESTATE ASSOCIATION, INC. [G.R. No. 126260. December 16, 2004] Second. Petitioner insists that since the parties had no deliberate intent to clothe private respondent with the authority to impose fees for a period of 47 years at the time the contract was executed, it cannot make such imposition which partakes of a stipulation pour autrui. The contention is untenable. The second paragraph of Article 1311 of the Civil Code explains that 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. Accordingly, to sustain the theory of the petitioner would result in a modification of what the parties had expressly agreed to be bound. The imposition of the association fees in the deed restrictions cannot be regarded as a stipulation pour autrui clearly and deliberately conferred upon private respondent. What was clearly stated in the contract of sale between them is that upon purchase by the petitioner of the two parcels of land (Lots Nos. 7 and 8, Block No. 5, located in Legaspi Village, Makati), it automatically becomes a member of private respondent and is thus bound to comply with the rules and regulations thereof. Additionally, the assessments collected by the private respondent would constitute a lien on the properties of the petitioner. Nowhere can it be inferred that there was a stipulation pour autrui in favor of private respondent. The case of Bel Air Village Association, Inc. v. Dionisio,[10] which had the same issues involved, explained that when therein private respondent voluntarily bought the subject parcel of land, it was understood that it took the same free from all encumbrances except the notations at the back of the certificate of title, among which was, that it automatically becomes a member of therein petitioner. The dues collected are intended for garbage collection, salary of security guards, cleaning and maintenance of streets and street lights, establishment of parks, and other community projects for the benefit of all residents within the Bel Air Village. These expenses are necessary, valid, and reasonable for the community. Simply put, the requisites of a stipulation pour autrui or a stipulation in favor of a third person 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) the third person must have communicated his acceptance to the obligor before its revocation, and (5) neither of the contracting parties bears the legal representation or authorization of the third party.[11] These requisites are not present in this case. INTERNATIONAL CONTAINER TERMINAL SERVICES, INC., PETITIONER, VS. FGU INSURANCE CORPORATION [G.R. No. 161539, June 27, 2008] Petitioner posits that its liability for the lost shipment should be limited to P3,500.00 per package as provided in Philippine Ports Authority Administrative Order No. 10-81 (PPA AO 10-81), under Article VI, Section 6.01 of which provides: Section 6.01. Responsibility and Liability for Losses and Damages; Exceptions - The CONTRACTOR shall at its own expense handle all merchandise in all work undertaken by it hereunder deligently [sic] and in a skillful, workman-like and efficient manner; that the CONTRACTOR shall be solely responsible as an independent CONTRACTOR, and hereby agrees to accept liability and to promptly pay to the shipping company consignees, consignors or other interested party or parties for the loss, damage, or non-delivery of cargoes to the extent of the actual invoice value of each package which in no case shall be more than THREE THOUSAND FIVE HUNDRED PESOS (P3,500.00) (for import cargo) x x x for each package unless the value of the cargo importation is otherwise specified or manifested or communicated in writing together with the declared bill of lading value and supported by a certified packing list to the CONTRACTOR by the interested party or parties before the discharge x x x of the goods, as well as all damage that may be suffered on account of loss, damage, or destruction of any merchandise while in custody or under the control of the CONTRACTOR in any pier, shed, warehouse facility or other designated place under the supervision of the AUTHORITY x x x.[7] (Emphasis supplied) The CA summarily ruled that PPA AO 10-81 is not applicable to this case without laying out the reasons therefor. PPA AO 10-81 is the management contract between by the Philippine Ports Authority and the cargo handling services providers. In Summa Insurance Corporation v. Court of Appeals,[8] the Court ruled that: In the performance of its job, an arrastre operator is bound by the management contract it had executed with the Bureau of Customs. However, a management contract, which is a sort of a stipulation pour autrui within the meaning of Article 1311 of the Civil Code, is also binding on a consignee because it is incorporated in the gate pass and delivery receipt which must be presented by the consignee before delivery can be effected to it. The insurer, as successor-ininterest of the consignee, is likewise bound by the management contract. Indeed, upon taking delivery of the cargo, a consignee (and necessarily its successor-ininterest) tacitly accepts the provisions of the management contract, including those which are intended to limit the liability of one of the contracting parties, the arrastre operator. However, a consignee who does not avail of the services of the arrastre operator is not bound by the management contract. Such an exception to the rule does not obtain here as the consignee did in fact accept delivery of the cargo from the arrastre operator.[9] While it appears in the present case that the RAGC availed itself of petitioner's services and therefore, PPA AO 10-81 should apply, the Court finds that the extent of petitioner's liability should cover the 83




actual value of the lost shipment and not the P3,500.00 limit per package as provided in said Order. It is borne by the records that when Desma Cargo Handlers was negotiating for the discharge of the shipment, it presented HapagLloyd's Bill of Lading,[10] Degussa's Commercial Invoice, which indicates that value of the shipment, including seafreight charges, was DM94.960,00 (CFR Manila),[11] and Degussa's Packing List, which likewise notes that the value of the shipment was DM94.960,00. [12] It is highly unlikely that petitioner was not made aware of the actual value of the shipment, since it had to examine the pertinent documents for stripping purposes and, later on, for the discharge of the shipment to the consignee or its representative. In fact, the NBI Report dated September 26, 1994 on the investigation conducted by it regarding the loss of the shipment shows that petitioner's Admeasurer Rosco Esquibal was shown the Bill of Lading by Desma Brokerage's representative, Rey Villanueva.[13] Esquibal also stated that another representative of Desma Brokerage, Joey Laurente, went to their office and furnished him a copy of the "processed papers of the fourteen cartons of Asahi Glass cargoes."[14] By its own act of not charging the corresponding arrastre fees based on the value of the shipment after it came to know of such declared value from the marine insurance policy, petitioner cannot escape liability for the actual value of the shipment. The value of the merchandise or shipment may be declared or stated not only in the bill of lading or shipping manifest, but also in other documents required by law before the shipment is cleared from the piers.[15] Art. 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 Laws. (n) Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n) Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n) REQUISITES: 1. Existence of a valid contract; 2. Knowledge by the 3rd person of the existence of the contract; 3. Interference of the 3rd person in the contractual relation without legal justification. CASES ARTICLE 1314 C. S. GILCHRIST vs. E. A. CUDDY, ET AL. (G.R. No. L-9356, February 18, 1915) The right on the part of Gilchrist to enter into a contract with Cuddy for the lease of the film must be fully recognized and admitted by all. That Cuddy was liable in an action for damages for the breach of that contract, there can be no doubt. Were the appellants likewise liable for interfering with the contract between Gilchrist and Cuddy, they not knowing at the time the identity of one of the contracting parties? The appellants claim that they had a right to do what they did. The ground upon which the appellants base this contention is, that there was no valid and binding contract between Cuddy and Gilchrist and that, therefore, they had a right to compete with Gilchrist for the lease of the film, the right to compete being a justification for their acts. If there had been no contract between

Cuddy and Gilchrist this defense would be tenable, but the mere right to compete could not justify the appellants in intentionally inducing Cuddy to take away the appellee's contractual rights. Chief Justice Wells in Walker vs. Cronin (107 Mass., 555), said: "Everyone has a right to enjoy the fruits and advantages of his own enterprise, industry, skill and credit. He has no right to be free from malicious and wanton interference, disturbance or annoyance. If disturbance or loss come as a result of competition, or the exercise of like rights by others, it is damnum absque injuria, unless some superior right by contract or otherwise is interfered with." In Read vs. Friendly Society of Operative Stonemasons ([1902] 2 K. B., 88), Darling, J., said: "I think the plaintiff has a cause of action against the defendants, unless the court is satisfied that, when they interfered with the contractual rights of plaintiff, the defendants had a sufficient justification for their interference; . . . for it is not a justification that `they acted bona fide in the best interests of the society of masons,' i. e., in their own interests. Nor is it enough that `they were not actuated by improper motives.' I think their sufficient justification for interference with plaintiff's right must be an equal or superior right in themselves, and that no one can legally excuse himself to a man, of whose contract he has procured the breach, on the ground that he acted on a wrong understanding of his own rights, or without malice, or bona fide, or in the best interests of himself, or even that he acted as an altruist, seeking only good of another and careless of his own advantage." (Quoted with approval in Beekman vs. Marsters, 195 Mass., 205.) It is said that the ground on which the liability of a third party for interfering with a contract between others rests, is that the interference was malicious. The contrary view, however, is taken by the Supreme Court of the United States in the case of Angle vs. Railway Co. (151 U. S., 1). The only motive for interference by the third party in that case was the desire to make a profit to the injury of one of the parties of the contract. There was no malice in the case beyond the desire to make an unlawful gain to the detriment of one of the contracting parties. In the case at bar the only motive for the interference with the Gilchrist � Cuddy contract on the part of the appellants was a desire to make a profit by exhibiting the film in their theater. There was no malice beyond this desire; but this fact does not relieve them of the legal liability for interfering with that contract and causing its breach. It is, therefore, clear, under the above authorities, that they were liable to Gilchrist for the damages caused by their acts, unless they are relieved from such liability by reason of the fact that they did not know at the time the identity of the original lessee (Gilchrist) of the film. The liability of the appellants arises from unlawful acts and not from contractual obligations, as they were under no such obligations to induce Cuddy to violate his contract with Gilchrist. So that if the action of Gilchrist had been one for damages, it would be governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of that code provides that a person who, by act or omission, causes damages to another when there is fault or negligence, shall be obliged to repair the damage do done. There is nothing in this article which requires as a condition precedent to the liability of a tort-feasor that he must know the identity of a person to whom he causes damages. In fact, the chapter wherein this article is found clearly shows that no such knowledge is required in order that the injured party may recover for the damage suffered.

84




JOSE V. LAGON vs. HONORABLE COURT OF APPEALS and MENANDRO V. LAPUZ [G.R. No. 119107. March 18, 2005] Article 1314 of the Civil Code provides that any third person who induces another to violate his contract shall be liable for damages to the other contracting party. The tort recognized in that provision is known as interference with contractual relations.[7] The interference is penalized because it violates the property rights of a party in a contract to reap the benefits that should result therefrom.[8] The core issue here is whether the purchase by petitioner of the subject property, during the supposed existence of private respondent’s lease contract with the late Bai Tonina Sepi, constituted tortuous interference for which petitioner should be held liable for damages. The Court, in the case of So Ping Bun v. Court of Appeals,[9] laid down the elements of tortuous interference with contractual relations: (a) existence of a valid contract; (b) knowledge on the part of the third person of the existence of the contract and (c) interference of the third person without legal justification or excuse. In that case, petitioner So Ping Bun occupied the premises which the corporation of his grandfather was leasing from private respondent, without the knowledge and permission of the corporation. The corporation, prevented from using the premises for its business, sued So Ping Bun for tortuous interference. As regards the first element, the existence of a valid contract must be duly established. To prove this, private respondent presented in court a notarized copy of the purported lease renewal.[10] While the contract appeared as duly notarized, the notarization thereof, however, only proved its due execution and delivery but not the veracity of its contents. Nonetheless, after undergoing the rigid scrutiny of petitioner’s counsel and after the trial court declared it to be valid and subsisting, the notarized copy of the lease contract presented in court appeared to be incontestable proof that private respondent and the late Bai Tonina Sepi actually renewed their lease contract. Settled is the rule that until overcome by clear, strong and convincing evidence, a notarized document continues to be prima facie evidence of the facts that gave rise to its execution and delivery.[11] The second element, on the other hand, requires that there be knowledge on the part of the interferer that the contract exists. Knowledge of the subsistence of the contract is an essential element to state a cause of action for tortuous interference.[12] A defendant in such a case cannot be made liable for interfering with a contract he is unaware of.[13] While it is not necessary to prove actual knowledge, he must nonetheless be aware of the facts which, if followed by a reasonable inquiry, will lead to a complete disclosure of the contractual relations and rights of the parties in the contract.[14] In this case, petitioner claims that he had no knowledge of the lease contract. His sellers (the heirs of Bai Tonina Sepi) likewise allegedly did not inform him of any existing lease contract. After a careful perusal of the records, we find the contention of petitioner meritorious. He conducted his own personal investigation and inquiry, and unearthed no suspicious circumstance that would have made a cautious man probe deeper and watch out for any conflicting claim over the property. An examination of the entire property’s title bore no indication of the leasehold interest of private respondent. Even the registry of property had no record of the same.[15] Assuming ex gratia argumenti that petitioner knew of the contract,

such knowledge alone was not sufficient to make him liable for tortuous interference. Which brings us to the third element. According to our ruling in So Ping Bun, petitioner may be held liable only when there was no legal justification or excuse for his action[16] or when his conduct was stirred by a wrongful motive. To sustain a case for tortuous interference, the defendant must have acted with malice[17] or must have been driven by purely impious reasons to injure the plaintiff. In other words, his act of interference cannot be justified. Furthermore, the records do not support the allegation of private respondent that petitioner induced the heirs of Bai Tonina Sepi to sell the property to him. The word “induce” refers to situations where a person causes another to choose one course of conduct by persuasion or intimidation.[19] The records show that the decision of the heirs of the late Bai Tonina Sepi to sell the property was completely of their own volition and that petitioner did absolutely nothing to influence their judgment. Private respondent himself did not proffer any evidence to support his claim. In short, even assuming that private respondent was able to prove the renewal of his lease contract with Bai Tonina Sepi, the fact was that he was unable to prove malice or bad faith on the part of petitioner in purchasing the property. Therefore, the claim of tortuous interference was never established. In So Ping Bun, the Court discussed whether interference can be justified at all if the interferer acts for the sole purpose of furthering a personal financial interest, but without malice or bad faith. As the Court explained it: x x x, 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 the actor’s 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 negatived, 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 the others. It is sufficient if the impetus of his conduct lies in a proper business interest rather than in wrongful motives.[20] The foregoing disquisition applies squarely to the case at bar. In our view, petitioner’s purchase of the subject property was merely an advancement of his financial or economic interests, absent any proof that he was enthused by improper motives. In the very early case of Gilchrist v. Cuddy,[21] the Court declared that a person is not a malicious interferer if his conduct is impelled by a proper business interest. In other words, a financial or profit motivation will not necessarily make a person an officious interferer liable for damages as long as there is no malice or bad faith involved. In sum, we rule that, inasmuch as not all three elements to hold petitioner liable for tortuous interference are present, petitioner cannot be made to answer for private respondent’s losses. This case is one of damnun absque injuria or damage without injury. “Injury” is the legal invasion of a legal right while “damage” is the hurt, loss or harm which results from the injury. [22] In BPI Express Card Corporation v. Court of Appeals,,[23] the Court turned down the claim for damages of a cardholder whose credit card had been cancelled by petitioner corporation after several defaults in payment. We held there that there can be damage without injury where the loss or harm is not the result of a violation of a legal duty. In that instance, the consequences must be borne by the 85




injured person alone since the law affords no remedy for damages resulting from an act which does not amount to legal injury or wrong.[24] Indeed, lack of malice in the conduct complained of precludes recovery of damages.[25]

a similar situation in Gilchrist, where it was difficult or impossible to determine the 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 conclusion applies in this case.

SO PING BUN vs. COURT OF APPEALS, TEK HUA ENTERPRISING CORP. and MANUEL C. TIONG [G.R. No. 120554. September 21, 1999]

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 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 appellate 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.

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. Authorities debate on whether interference may be justified where the defendant acts for the sole purpose of furthering his 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 negatived, 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 rather than in wrongful motives. As early as Gilchrist vs. Cuddy, 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. 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’s fees. 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

PHILIP S. YU, vs. THE HONORABLE COURT OF APPEALS, THE HONORABLE PRESIDING JUDGE, RTC OF MANILA, BRANCH XXXIV (34) and UNISIA MERCHANDISING CO., INC. (G.R. No. 86683 January 21, 1993) Another circumstance which respondent court overlooked was petitioner's suggestion, which was not disputed by herein private respondent in its comment, that the House of Mayfair in England was duped into believing that the goods ordered through the FNF Trading were to be shipped to Nigeria only, but the goods were actually sent to and sold in the Philippines. A ploy of this character is akin to the scenario of a third person who induces a party to renege on or violate his undertaking under a contract, thereby entitling the other contracting party to relief therefrom (Article 1314, New Civil Code). The breach caused by private respondent was even aggravated by the consequent diversion of trade from the business of to that of private respondent caused by the latter's species of unfair competition as demonstrated no less by the sales effected inspite of this Court's restraining order. This brings Us to the irreparable mischief which respondent court misappreciated when it refused to grant the relief simply because of the observation that petitioner can be fully compensated for the damage. A contrario, the injury is irreparable where it is continuous and repeated since from its constant and frequent recurrence, no fair and reasonable redress can be had therefor by petitioner insofar as his goodwill and business reputation as sole distributor are concerned. Withal, to expect petitioner to file a complaint for every sale effected by private respondent will certainly court multiplicity of suits (3 Francisco, Revised Rules of Court, 1985 Edition, p. 261). Art. 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) Consensual contracts are perfected from the moment there is agreement (consent) on the subject matter, and the Cause or consideration. Note: Contracts are not what the parties choose to call them, but what they really are as determined by the principles of laws. The validity of stipulations is one thing, and the juridical qualification of the contract resulting therefrom is another.

86




CASES TORRES vs. CA Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been expressly stipulated, but also to all necessary consequences thereof, as follows: Art. 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. It is undisputed that petitioners are educated and are thus presumed to have understood the terms of the contract they voluntarily signed. If it was not in consonance with their expectations, they should have objected to it and insisted on the provisions they wanted. 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 misunderstanding of its terms. Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. (n) Requires Delivery.

Consent,

Subject

matter,

Cause/consideration

and

Art. 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. (1259a)

required the construction of a commercial building and the transfer of the Rural Bank of Isulan, as part of the consideration of the sale to be incorporated in the said deed as part of the respondent�s obligation as vendee, thus: (a) To sell sixty four point three meters FRONTAGE and the full length of Lot 3, ALLAH VALLEY, Pls-208-D-13 described in TCT No. T-(19529) T-1902, somewhere in the 3rd and 4th lots of the 8 lots subdivision, located at Poblacion, Isulan, Sultan Kudarat, registered in my name, consisting of Four Thousand Ninety-Four (4,094) Square Meters; (b) To RECEIVE and SIGN documents and papers necessary in the CONTRACT OF SALE with Mr. JOSE LAGON, and to RECEIVE the full PRICE in CASH, to be determined by my son, CARLOS L. CARLOS, JR.; (c) To IMPOSE in the Contract that aside from the PRICE, another consideration would be for Mr. JOSE LAGON to transfer the RURAL BANK OF ISULAN to the above-mentioned lot and to put a commercial building, different from the building of the Rural Bank of Isulan on the same lot.59 Clearly, petitioner Carlos, Jr. acted beyond the scope of his authority when he executed the deed of absolute sale in contravention of petitioner Josefina�s express instructions. Worse, he falsely declared in the said deed that the purchase price was P80,000.00 and that he had already received the said amount, when, in fact, the property was sold for P40.00 per square meters, or a total of P163,760.00, and that as of May 9, 1979, he had not yet received the said amount. Under Article 1317 of the New Civil Code, contracts executed by agents who have acted beyond their powers are unenforceable unless ratified by the principal either expressly or impliedly: Art. 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.

Requisites for a Person to Contract in the Name of Another 1. He must be duly authorized (express/impliedly) 2. He must have by law a right to represent him (guardian/administrator) 3. Contract must be subsequently ratified (express/implied, by word or deed)

Thus, the effectivity of the contract of sale in the case at bar depends upon the ratification thereof by petitioner Josefina as principal. If she ratifies the deed, the sale is validated from the moment of its commencement, and not merely from the time of its ratification.60 In such case, she can no longer maintain an action to annul the same based upon defects relating to its original validity.61

Unenforceable contracts are valid contracts but they cannot be enforced through court actions. CF: Law on agency

We find that petitioner Josefina ratified the said deed when she received, through her son and attorney-in-fact petitioner Carlos, Jr., partial payments of the purchase price of the property from the respondent on April 21, 1981.62 Such ratification retroacted to May 9, 1979, the date when petitioner Josefina, through her attorney-infact, executed the deed of sale covering the subject property in favor of the respondent. Moreover, we rule that the respondent agreed on to transfer the Rural Bank of Isulan to the subject property, and to cause the construction of a commercial building within five (5) years reckoned from May 9, 1979 or until May 9, 1984, as evidenced by his affidavit.

CASES JOSEFINA L. VALDEZ and CARLOS L. VALDEZ, JR. vs.COURT OF APPEALS and JOSE LAGON (G.R. No. 140715, September 24, 2004) However, we rule that the deed of absolute sale was unenforceable as of the date of its execution, May 9, 1979. This is so, because under the Special Power of Attorney petitioner Josefina executed in favor of her son, petitioner Carlos, Jr., the latter was authorized to sell the property on cash basis only; petitioner Josefina likewise

We reject the findings of the RTC as affirmed by the CA that the affidavit signed by the respondent on April 27, 1981 was merely an afterthought contrived by petitioner Carlos, Jr., and their conclusion 87




that the said affidavit had no binding effect on petitioner Josefina. The affidavit of the respondent reads: 1. That I am the Vendee of a Deed of Absolute Sale where the Vendor is Mrs. Josefina L. Valdez, represented by CARLOS L. CARLOS, JR., through a Special Power of Attorney; 2. That the above-mentioned Deed of Absolute Sale is dated May 9, 1979 and the Special Power of Attorney also above-mentioned was dated May 1, 1979, both duly notarized by Notary Public Atty. Bienvenido Noveno under Doc. No. 77; Page No. 16; Book No. XIX; Series of 1979, and Doc. No. 73; Page No. 15; Book No. XIX; Series of 1979; respectively; 3. That the subject of the above-mentioned Deed of Absolute Sale is a lot consisting of 4,094 square meters, covered by Transfer Certificate of Title No. T-19529 of the Register of Deeds for the Province of Cotabato, facing the National Highway and the Isulan NGA Office going towards the Buencamino Movie House, starting from the corner; 4. That the consideration of the above-mentioned Deed of Absolute Sale is EIGHTY THOUSAND PESOS (P80,000.00) and in addition thereto, I hereby declare and manifest that the above-mentioned 4,094 square meters be commercialized by putting up at least one (1) bank and any other commercial building in the said 4,094 square meters within a period of five (5) years from the time of the execution of the above-mentioned Deed of Absolute Sale, in full operation; 5. That should I fail to commercialize the said 4,094 square meters in full operation within a period of five (5) years as stated above, I hereby declare and manifest that said Deed of Absolute Sale shall be declared null and void, without need of demand addressed to me; 6. That the purpose of this Affidavit is to make it clear that the consideration of the said Deed of Absolute Sale is not only P80,000.00 cash but also the fact that the said 4,094 square meters be commercialized.63 The respondent admitted in his complaint that he undertook to construct the said building and transfer the Rural Bank of Isulan to the property he had purchased from petitioner Josefina.64 The respondent affirmed the authenticity and due execution of his affidavit and his obligations therein, and testified, thus: ATTY. VALDEZ: Q Mr. Lagon, you testified that according to you the construction of the same, the PCIB Isulan was a compliance of your obligation under your contract with the Valdezes, do you recall having testified on that? A Yes, Sir. Q With in (sic) how many years, by the say (sic), were you supposed to comply with that condition by putting up a bank or a commercial building in that area? A Supposed to be five years, Sir. Q From when? A According to the affidavit, from the time I purchased the property up to or from May 9, 1979 to 1984, Sir.65 In his letter to petitioner Carlos, Jr., the respondent, through counsel, admitted the binding effect of his affidavit as follows: It is hereby submitted therefore that there is in effect substantial

compliance on the part of Mr. Lagon with regards to the additional condition laid down in his affidavit herein-referred to. If you deem it that Mr. Lagon has not satisfactorily complied with all the obligations you imposed upon him to do thereunder, it is made to reasons not of his own making but due to factors brought about by circumstances then prevailing, and elaboration on the same can only be properly stated on the proper to come.66 Far from being a mere affidavit, the document embodies the unequivocal undertaking of the respondent to construct a fully operational commercial building and to transfer the Rural Bank of Isulan to the subject property as part of the consideration of the sale within five (5) years from the execution of the deed of sale, or until May 9, 1984. The intractable refusal of the respondent to pay the balance of the purchase price of the property despite the petitioners’ demands had no legal basis. As such, petitioner Josefina’s refusal to deliver the torrens title over the subject property under the respondent’s name was justified, precisely because of the respondent’s refusal to comply with his obligation to pay the balance of the purchase price. Had the respondent paid the purchase price of the property, such failure on the part of petitioner Josefina to deliver the torrens title to and under the name of the respondent would have warranted the suspension of the five-year period agreed upon for the construction of a fully operational commercial building, as well as the transfer of the aforesaid bank to the property. This is so because absent such torrens title under the name of the respondent, no building permit for the construction of the buildings could be secured. We do not agree with the respondent’s contentions that petitioner Josefina, through her son and attorney-in-fact petitioner Carlos, Jr., had agreed to the sale of a portion of the property, the construction of the PCIB branch office thereon, and the crediting of the amount paid by the PCIB to the respondent’s account, and deducted from the balance of the purchase price. In the first place, the respondent failed to adduce a morsel of evidence that petitioner Josefina had knowledge of the said agreement and had agreed thereto. Furthermore, the respondent failed to adduce documentary evidence that petitioner Josefina authorized her son and attorney-infact to enter into such an agreement. It bears stressing that petitioner Josefina specifically and unequivocally required in the special power of attorney, as part of the consideration of the sale of the property to the respondent, the latter’s obligation to construct a new and fully operational commercial building and transfer the Rural Bank of Isulan to the property. Had she agreed to modify the Special Power of Attorney she executed in favor of her son, petitioner Carlos, Jr., for sure, she would have executed a document to that effect. She did not do so. Petitioner Carlos, Jr. could not lawfully bind petitioner Josefina thereon because he was not so authorized to enter into such an agreement with the respondent; neither can such authority be implied from the Special Power of Attorney petitioner Josefina executed in favor of her son, petitioner Carlos, Jr. In sum, then, the respondent had no cause for specific performance against the petitioners. However, the petitioners are obliged to refund to the respondent the latter’s partial payments for the subject property. JESUS M. GOZUN vs. JOSE TEOFILO T. MERCADO a.k.a. ‘DON PEPITO MERCADO (G.R. No. 167812, December 19, 2006) 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. Contracts 88




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 are classified as unauthorized contracts and are declared unenforceable, unless they are ratified. Generally, the agency may be oral, unless the law requires a specific form. However, a special power of attorney is necessary for an agent to, as in this case, borrow money, unless it be urgent and indispensable for the preservation of the things which are under administration. Since nothing in this case involves the preservation of things under administration, a determination of whether Soriano had the special authority to borrow money on behalf of respondent is in order. Lim Pin v. Liao Tian, et al. held that the requirement of a special power of attorney refers to the nature of the authorization and not to its form. . . . The requirements are met if there is a clear mandate from the principal specifically authorizing the performance of the act. As early as 1906, this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated that such a mandate may be either oral or written. The one thing vital being that it shall be express. And more recently, We stated that, if the special authority is not written, then it must be duly established by evidence: “…the Rules require, for attorneys to compromise the litigation of their clients, a special authority. And while the same does not state that the special authority be in writing the Court has every reason to expect that, if not in writing, the same be duly established by evidence other than the self-serving assertion of counsel himself that such authority was verbally given him.” (Emphasis and underscoring supplied) Petitioner submits that his following testimony suffices to establish that respondent had authorized Lilian to obtain a loan from him, viz: Q : Another caption appearing on Exhibit “A” is cash advance, it states given on 3-31-95 received by Mrs. Lilian Soriano in behalf of Mrs. Annie Mercado, amount P253,000.00, will you kindly tell the Court and explain what does that caption means? A : It is the amount representing the money borrowed from me by the defendant when one morning they came very early and talked to me and told me that they were not able to go to the bank to get money for the allowances of Poll Watchers who were having a seminar at the headquarters plus other election related expenses during that day, sir. Q : Considering that this is a substantial amount which according to you was taken by Lilian Soriano, did you happen to make her acknowledge the amount at that time? A : Yes, sir. (Emphasis supplied) Petitioner’s testimony failed to categorically state, however, whether the loan was made on behalf of respondent or of his wife. While petitioner claims that Lilian was authorized by respondent, the statement of account marked as Exhibit “A” states that the amount was received by Lilian “in behalf of Mrs. Annie Mercado.” Invoking Article 1873 of the Civil Code, petitioner submits that respondent informed him that he had authorized Lilian to obtain the loan, hence, following Macke v. Camps which holds that one who clothes another with apparent authority as his agent, and holds him out to the public as such, respondent cannot be permitted to deny the authority.

Petitioner’s submission does not persuade. As the appellate court observed: . . . Exhibit “B” [the receipt issued by petitioner] presented by plaintiff-appellee to support his claim unfortunately only indicates the Two Hundred Fifty Three Thousand Pesos (P253,0000.00) was received by one Lilian R. Soriano on 31 March 1995, but without specifying for what reason the said amount was delivered and in what capacity did Lilian R. Soriano received [sic] the money. The note reads: “3-31-95 261,120 ADVANCE MONEY FOR TRAINEE – RECEIVED BY RECEIVED FROM JMG THE AMOUNT OF 253,000 TWO HUNDRED FIFTY THREE THOUSAND PESOS (SIGNED) LILIAN R. SORIANO 3-31-95” Nowhere in the note can it be inferred that defendant-appellant was connected with the said transaction. Under Article 1317 of the New Civil Code, a person cannot be bound by contracts he did not authorize to be entered into his behalf. (Underscoring supplied) It bears noting that Lilian signed in the receipt in her name alone, without indicating therein that she was acting for and in behalf of respondent. She thus bound herself in her personal capacity and not as an agent of respondent or anyone for that matter. It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real property executed by an agent, it must upon its face purport to be made, signed and sealed in the name of the principal, otherwise, it will bind the agent only. It is not enough merely that the agent was in fact authorized to make the mortgage, if he has not acted in the name of the principal. x x x (Emphasis and underscoring supplied) On the amount due him and the other two printing presses, petitioner explains that he was the one who personally and directly contracted with respondent and he merely sub-contracted the two printing establishments in order to deliver on time the campaign materials ordered by respondent. Respondent counters that the claim of sub-contracting is a change in petitioner’s theory of the case which is not allowed on appeal. In Oco v. Limbaring, this Court ruled: The parties to a contract are the real parties in interest in an action upon it, as consistently held by the Court. Only the contracting parties are bound by the stipulations in the contract; they are the ones who would benefit from and could violate it. Thus, one who is not a party to a contract, and for whose benefit it was not expressly made, cannot maintain an action on it. One cannot do so, even if the contract performed by the contracting parties would incidentally inure to one's benefit. (Underscoring supplied) In light thereof, petitioner is the real party in interest in this case. The trial court’s findings on the matter were affirmed by the appellate court. It erred, however, in not declaring petitioner as a 89




real party in interest insofar as recovery of the cost of campaign materials made by petitioner’s mother and sister are concerned, upon the wrong notion that they should have been, but were not, impleaded as plaintiffs. In sum, respondent has the obligation to pay the total cost of printing his campaign materials delivered by petitioner in the total of P1,924,906, less the partial payment of P1,000,000, or P924,906. ESSENTIAL REQUISITES OF CONTRACTS Art. 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. Note:  Consent presupposes legal capacity, otherwise, contract is voidable.  Object certain means at the very least determinable I.

CONSENT

It is the meeting of the minds between parties on the subject matter and the cause of the contract, even if neither one has been delivered. Consent may be express or implied. Theories: 1.

Cognition Theory – Contracts are perfected only upon the knowledge of the offer of the acceptance of the offeree. (Used if consent is manifested through letter or telegram; adhered in the Phil.)

2.

Manifestation Theory – Contracts are perfected upon the moment acceptance is declared, regardless of whether the declaration has come to the knowledge of the offeror or not.

3.

Expedition Theory – Contracts are perfected the moment the offeree transmits the acceptance to the offeror, such as the letter or telegram of acceptance is placed in the mail box.

4.

Reception Theory – Contracts are perfected upon the time the acceptance is in the hand of the offeror (regardless of knowledge or if he read the same)

Note: Offer by telephone similar to face to face conversation. Note: In our law, according to ma’am G., silence does not authorize any definite conclusion. However, according to Tolentino, there are requisites in order that silence produces tacit acceptance, namely: (a) There is a duty or the possibility to express oneself; (b) The manifestation of the will cannot be interpreted in any other way; (c) There is a clear identity in the effect of the silence and the undisclosed will.

the sum of P38,000.00 trial a second mortgage lien in favor of the Philippine National Bank to cure his indebtedness to said bank in the amount of P93,831.91.Petitioner Dizon having defaulted in the payment of his debt, the Development Bank of the Philippines foreclosed the mortgage extrajudicially. Sometime prior to October 6, 1959 Alfredo G. Gaborro trial Jose P. Dizon met. Gaborro became interested in the lands of Dizon. Dizon originally intended to lease to Gaborro the property which had been lying idle for some time. But as the mortgage was already foreclosed by the DPB trial the bank in fact purchased the lands at the foreclosure sale on May 26, 1959, they abandoned the projected lease. Dizon and Alfredo Gaborro. on the same day, October 6, 1959, constitute in truth and in fact an absolute sale of the three parcels of land therein described or merely an equitable mortgage or conveyance thereof by way of security for reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which may have been paid to the Development Bank of the Philippines and the Philippine National Bank by Alfredo G. Gaborro Said documents were executed by the parties and the payments were made by Gaborro for the debt of Dizon to said banks after the Development Bank of the Philippines had foreclosed the mortgage executed by Dizon and during the period of redemption after the foreclosure sale of the mortgaged property to said creditor bank. Gaborros contention; Deed of Sale with Assumption of Mortgage trial Option to Purchase Real Estate Dizon’s contention: merely an equitable mortgage or conveyance thereof by way of security for reimbursement, refund or repayment by petitioner Jose P. Dizon ISSUE: WoN the deed was of a Deed of Sale with Assumption of Mortgage', trial Option to Purchase Real Estate or merely an equitable mortgage or conveyance thereof by way of security for reimbursement, refund or repayment by petitioner Jose P. Dizon? HELD: In the light of the foreclosure proceedings and sale of the properties, a legal point of primary importance here, as well as other relevant facts and circumstances, We agree with the findings of the trial and appellate courts that the true intention of the parties is that respondent Gaborro would assume and pay the indebtedness of petitioner Dizon to DBP and PNB, and in consideration therefor, respondent Gaborro was given the possession, the enjoyment and use of the lands until petitioner can reimburse fully the respondent the amounts paid by the latter to DBP and PNB, to accomplish the following ends: (a) payment of the bank obligations; (b) make the lands productive for the benefit of the possessor, respondent Gaborro, (c) assure the return of the land to the original owner, petitioner Dizon, thus rendering equity and fairness to all parties concerned. 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 inanimate contracts under Art. 1307 of the New Civil Code whereby petitioner and respondent agreed "to give and to do" certain rights and obligations respecting the lands and the mortgage debts of petitioner which would be acceptable to the bank. but partaking of the nature of the antichresis insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned. Art. 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 counteroffer.

CASES DIZON VS GABORRO (Guerrero, 1978) FACTS: Petitioner Jose P. Dizon was the owner of the three (3) parcels of land. He constituted a first mortgage lien in favor of the Develop. ment Bank of the Philippines in order to secure a loan in

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 90




where the offer was made. (1262a) REQUISITES OF CONSENT 1. 2. 3. 4. 5.

Plurality of subjects/parties; Parties must be capable or capacitated; There must be no vitiation of consent or consent must be made intelligently and freely; There must be no conflict between what was expressly declared and what was really intended; The intent must be declared properly (legal formalities must be complied with)

Note: Accdg. to Tolentino: (f) express or tacit manifestation of the will and (g) conformity of the internal will and its manifestation. REQUISITES FOR MEETING OF MINDS 1. An offer that must be certain An offer must be definite, complete and intentional. 2.

And an acceptance that must be Unqualified and absolute. If there are 2 contracts and they are independent of each other, acceptance of one does not imply acceptance of the other. A qualified acceptance constitutes a counter-offer.

Note: Offer and acceptance may be withdrawn before perfection of the contract. If a persons offers the same thing to two persons, at different times, and the second offeree accepts the offer before the first, the offeror becomes liable for damages to the 1 st offeree if he does not withdraw his offer prior to the acceptance of the 2 nd offeree. Q: Is there a perfected contract in a qualified acceptance? No, there is no contract if there is a qualified acceptance. What happens is a counter-offer. Note: Another type of acceptance is amplified acceptance. Here, there is acceptance but there is a qualification. So, there is no perfected contract. When we say amplified, "I'm selling you mangosteen at 5/kl but you have to get 100 kilos. I will buy another 100 for the same price." Is there a perfected contract there? Yes, with respect to the first but not to the 2nd. There is a perfected contract with respect to the first (sell at 5/kilo) but not to the second offer (buy 100 kilos). Note: Rule on public offers: A promise may be made publicly by way of advertising a reward, compensation, or prize for any person who performs of executes a particular act or obtains a particular result. This is a unilateral promise. A unilateral promise is not recognized by our Code as having obligatory effect. In order that such promise can be enforced, there must be an acceptance that shall convert it into a contract. So the performance of the act for which a reward or prize is promised can be considered as an acceptance. CASES ROSENSTOCK vs. BURKE LANDICO vs. ARIAS The Civil Code, in paragraph 2 of article 1262, has adopted the first theory and, according to its most eminent commentators, it means that, before the acceptance is known, the offer can be revoked, it

not being necessary, in order for the revocation to have the effect of impeding the perfection of the contract, that it be known by the acceptant. Q. Mucius Scaevola says apropros: "To our mind, the power to revoke is implied in the criterion that no contract exists until the acceptance is known. As the tie or bond springs from the meeting or concurrence of the minds, since up to that moment there exists only a unilateral act, it is evident that he who makes it must have the power to revoke it by withdrawing his proposition, although with the obligation to pay such damages as may have been sustained by the person or persons to whom the offer was made and by whom it was accepted, if he in turn failed to give them notice of the withdrawal of the offer. This view is confirmed by the provision of article 1257, paragraph 2, concerning the case where a stipulation is made in favor of a third person, which provision authorizes the contracting parties to revoke the stipulation before the notice of its acceptance. That case is quite similar to that under comment, as said stipulation in favor of a third person (who, for the very reason of being a third person, is not a contracting party) is tantamount to an offer made by the makers of the contract which may or may not be accepted by him, and which does not have any effect until the obligor is notified, and may, before it is accepted, be revoked by those who have made it; therefore, the case being similar, the same rule applies." Under the second theory, the doctrine invoked by the plaintiffs is sound, because if the sending of the letter of acceptance in itself really perfects the contract, the revocation of the offer, in order to prevent it, must be known to the acceptor. But this consideration has no place in the first theory under which the forwarding of the letter of acceptance, in itself, does not have any effect until the acceptance is known by the person who has made the offer. The judgment appealed from is reversed and the defendants are absolved from the complaint, without special finding as to costs. So ordered. Art. 1320. An acceptance may be express or implied. (n) Forms of Acceptance 1. Express 2. Implied 3. Presumed (by law) Art. 1321. The person making the offer may fix the time, place and manner of acceptance, all of which must be complied with. Note: When the offeror has not fixed a period and the offer is made to a person present, the acceptance must be made immediately. Article 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (n) Other instances when Offer becomes Ineffective 1. When the offeree expressly or impliedly rejects the offer; 2. When the offer is accepted with a qualification or condition; 3. When before acceptance is communicated, the subject matter has become illegal or impossible; 4. When the period of time given to the offeree w/in which he must signify his acceptance has already lapsed. 5. When the offer is revoked in due time (before the offeror has learned of its acceptance by the offeree) 91




Art. 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) GEN. RULE: If the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance (of thing being offered) by communicating such withdrawal. Exception: when the option is founded upon a consideration as something paid or promised. OPTION CONTRACT– contract granting a person the privilege to buy or not to buy certain objects at anytime w/in the agreed period at a fixed price.   

It must have its own cause/consideration because it is a distinct contract; and the grant must be exclusive The cause is not only price but something/anything of value; may also come in the form of a forfeiture. It binds the party who has given the option not to enter into the principal contract with any other person during the period designated and, within that period, to enter into such contract with the one to whom the option was granted if the latter should decide to use the option.

From Transcription: Suppose Y will say "give me 3 days to decide, but here is 10,000 as earnest money" and A says "okay, i will accept it. We will just execute the deed of sale as soon as you deliver the balance." Then that is removed from 1324 because it says part of the purchase price. Earnest money is actually part of the purchase price. there is no contract of option here but a perfected contract of sale. CASES Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n) Unless the object is determinate, the business advertisement is not an offer.

4. 5. 6.

In the form of savings account, provided that minor was at least 7 years old. They were contracts for necessities such as food, but here the people who are legally bound to give them support should pay therefore. They were contracts where the minor misrepresented his age and pretended to be one of major age and is thus in Estoppel.

INSANE/DEMENTED PERSONS– no proper declaration of insanity by the court is required, as long as it is shown that at the time of contracting, the person was really insane. Note: But if both are incapable of giving consent, the contract is unenforceable. Art. 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) Voidable Contracts: 1. Entered into by insane/demented persons (unless they acted during a lucid interval) 2. Those in state of drunkenness 3. Under hypnotic spell Art. 1329. The incapacity declared in article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws. (1264) Incompetents under Rules of Court 1. Under Civil interdiction 2. Hospitalized lepers 3. Prodigals 4. Deaf and dumb; unable to read and write 5. Unsound mind even though they have lucid intervals 6. Those who by reason of age, disease, weak mind, and other similar causes, cannot w/o aid, take care of themselves and manage their property. Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a)

Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n)

Vices/Causes of Vitiated Consent  Mistake (error)  Fraud (deceit)  Violence  Intimidation  Undue influence

Exceptions: Judicial advertisement

Note: Vitiated consent does not avoid the contract but merely renders it voidable.

sales

and

if

specifically

stated

in

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Art. 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) In General, Contracts w/c they enter into are Voidable, Unless: 1. 2. 3.

Upon reaching the age of majority, they ratify the same; They were entered into through a guardian and the court having jurisdiction had approved it; Contracts of life insurance in favor of their parents, spouse, children, brothers and sisters and provided furthermore that the minor is 18 years and above.

Mere preponderance of evidence is not sufficient. Art. 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. Mistake 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)

92




Requisites For Mistake to Vitiate Consent 1. The error must be substantial regarding:  Object of contract  The conditions w/c principally moved/induced one of the parties.  Identity or qualifications but only if such was the principal cause of the contract. 2.

The error must be excusable (not caused by negligence)

3.

The error must be a mistake of fact and not of law. (Mistake of law is not a ground for annulment of contracts) Error of law refers to a mistake as to the existence of a legal provision or as to its interpretation or application.



Note: If the error refers to the rights of the parties in the contract, the contract is not invalidated. Errors which do not affect the validity of the contract: 1. Error with respect to accidental qualifies of the object of the contract; 2. Error in the value of the thing; 3. Error which refers to accessory matters in the contract foreign to the determination of the object. 4. Error in the name of the person, but without error as to the person. Error as to the person will invalidate consent when the consideration of the person has been the principal cause of the contract. 5. Error as to the solvency of the party; 6. Error as to the motive of a party CASES

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." Tolentino explains that the concept of error in this article must include both 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. In both cases, there is a lack of full and correct knowledge about the thing. The mistake committed by the private respondent in selling parcel no. 4 to the petitioners falls within the second type. Verily, such mistake invalidated its consent and as such, annulment of the deed of sale is proper. The petitioners cannot be justified in their insistence that parcel no. 3, upon which private respondent constructed a two-storey house, be given to them in lieu of parcel no. 4. The cost of construction in 1985 for the said house (P1,500,000.00) far exceeds the amount paid by the petitioners to the private respondent (P486,000.00). Moreover, the trial court, in questioning private respondent's witness, Atty. Tarciso Calilung (who is also its authorized representative) clarified that parcel no. 4, the lot mistakenly sold, was a vacant lot: "COURT: What property did you point to them? A. I pointed to parcel No. 4, as appearing in the sketch. COURT: Parcel No. 4 is a vacant lot? A. Yes, your Honor. COURT: So, there was no house on that lot? A. There was no house. There were pineapple crops existing on the property.

DANDAN vs. ARFEL Viewed from a different standpoint, the Agreement was contemporaneously executed with the Deed of Absolute Sale thereby making the former a supplement to the latter. Therefore, the Agreement should be construed as a mere continuation of the Deed of Absolute Sale with the same consideration supporting both contracts, that is, Dandan's advantage of paying only the remaining balance due under the previous contract to sell to the Sauros. The naked claim that Dandan signed the Agreement without understanding its legal import will not exculpate him from its legal ramifications. Mistake may invalidate consent when it refers to the substance of the thing which is the object of the contract or to those conditions which have principally moved one or both parties to enter into the contract.[34] Mistake of law as a rule will not vitiate consent.[35] Without doubt, Dandan is bound by the terms of the Agreement, as well as by all the necessary consequences thereof. 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. THEIS vs. CA

COURT: So, you are telling the Court that the intended lot is vacant lot or Parcel 4? A. Yes, your Honor. Thus, to allow the petitioners to take parcel no. 3 would be to countenance unjust enrichment. Considering that petitioners intended at the outset to purchase a vacant lot, their refusal to accept the offer of the private respondent to give them two (2) other vacant lots in exchange, as well as their insistence on parcel no. 3, which is a house and lot, is manifestly unreasonable. As held by this Court in the case of Security Bank and Trust Company v. Court of Appeals: "Hence, to allow petitioner bank to acquire the constructed building at a price far below its actual construction cost would undoubtedly constitute unjust enrichment for the bank to the prejudice of the private respondent. Such unjust enrichment, as previously discussed, is not allowed by law." Art. 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)

"A contract may be annulled where the consent of one of the contracting parties was procured by mistake, fraud, intimidation, violence, or undue influence."

Presumption: One always acts with due care and signs with full knowledge of all the contents of a document even if the mind of the party signing was confused at the time of signing as long as he knew what he was doing.

Art. 1331 of the New Civil Code provides for the situations whereby mistake may invalidate consent. It states: "Art. 1331. In order that mistake may invalidate consent, it

When Presumption Cannot Apply 1. When one of the parties is unable to read 93


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. 2.


Or if contract is in a language not understood by one of the parties

In both cases, the person enforcing the contract must show that the terms thereof have been fully explained to the former. CASES BUNYI vs. REYES found that the deed of sale, Exhibit A, null and void, it follows that the present action may be treated as one for declaration of the inexistence of the contract which does not prescribe .... Petitioner in turn filed this appeal, which the Court finds meritorious. 1. The appellate court's error was in applying Article 1332 of the New Civil Code and declaring that thereunder petitioner had the burden which she failed to discharge as defendant � of showing that the Joaquin spouses fully understood the contents of the "Venta con Pacto de Retro", when the pertinent factual basis for application of said Article 1332 had not been duly established. Article 1332, which was designed for the protection of illiterates and of a party to a contract who "is a disadvantage on account of his ignorance, mental weakness or other handicap," provides that: Art. 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) For the proper application of said article to the case at bar, it has first to be established convincingly by respondents that Gil Joaquin could not read or that the contract was written in a language not understood by him. This factual basis was far from shown. On the contrary, the trial court duly found and the appellate court made in contrary finding that "Gil Joaquin, ... had been vice mayor of Muntinglupa; he spoke and understood Spanish; it is hard to believe that he signed the document Exhibit A-1 without understanding its contents." The appellate court still made mention of another relevant factor testified to by petitioner not mentioned by the trial court that "it was Gil Joaquin who 'asked the preparation of that document', Exhibit A, "by the notary public, who translated the contents into tagalog before the Joaquin spouses signed the same which completely relieved petitioner of any burden of proof, since the further presumption arose that the deed was prepared in accordance with Gil's understanding and instructions, since he caused its preparation. The trial court, therefore, properly ruled that it was respondents, as plaintiffs, who failed to overcome by clear, strong and convincing evidence the positive value and effect of the notary's certificate that the Joaquin spouses duly executed the "Venta con Pacto de Retro" and acknowledged the fact of its execution of their sworn and free will before him. 2. The appellate court merely concluded that petitioner had consolidated ownership of the land on July 7, 1941 in a "surreptitious manner" on the assumption, without reference to the evidence of record, that petitioner's ownership of the land was not reflected in the municipality's tax roll "until August 28, 1961, as per annotation on TD-947, Exhibit D-1, when plaintiffs' TD was cancelled and that petitioner "allowed plaintiffs to continue in Possession of the lot after 1941 despite said change of ownership." These assumptions of the appellate court are not supported by the

evidence of record cited 'in the trial court's decision that petitioner "had been paying the real estate taxes for the land as shown by her documents, Exhibits 3 and 4, and that the land had been registered in her name for taxation purposes since 1949 (Exh. 5);" and that on the other hand, "Plaintiff Sabina Reyes failed to produce any receipt tending to prove her claim that she had regularly paid the interests and the alleged `loan' since 1935 up to the filing of the complaint. She declared that she had religiously paid the taxes for the land, yet she failed to substantiate her testimony with the best evidence. The records show that she paid the real estate taxes for the years 1949 to 1959 on December 22, 1960 only (Exhs. C and C-1), that is, five months before the filing of the complaint." Petitioner's brief further cites as to the fact of possession that "it was admitted by Luz Joaquin herself (one of the respondents and daughter of Gil Joaquin) that after World War II, she removed her house from the same lot, (S. T. N. of August 1962 p. 8 and S. T. N. of February 27, 1963, p. 2) while one of the daughters of the petitioner, Fortunata Bunyi has a house on the same lot since 1959 (S. T. N. of October 26, 1962, pp. 3 & 7) which was not even denied by the respondents," which citation of the record is not denied in respondent's brief. MISENA vs. RONGAVILLA Finally, the presumption of fraud stands unrebutted and controlling. Herein petitioners failed, in our view, to prove that private respondent and his wife were duly informed and fully understood the contents and consequences of the disputed contract pursuant to Article 1332 of the New Civil Code, providing 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." Given the circumstances in this case, the respondent court could not be faulted for declaring that the assailed deed of absolute sale was an equitable mortgage and granting herein respondent the right to redeem the subject property. HEMEDES vs. CA Finally, public respondent was in error when it sustained the trial court’s decision to nullify the “Deed of Conveyance of Unregistered Real Property by Reversion” for failure of Maxima Hemedes to comply with article 1332 of the Civil Code, which states: 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. Article 1332 was intended for the protection of a party to a contract who is at a disadvantage due to his illiteracy, ignorance, mental weakness or other handicap. This article contemplates a situation wherein a contract has been entered into, but the consent of one of the parties is vitiated by mistake or fraud committed by the other contracting party. This is apparent from the ordering of the provisions under Book IV, Title II, Chapter 2, section 1 of the Civil Code, from which article 1332 is taken. Article 1330 states that A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. This is immediately followed by provisions explaining what constitutes mistake, violence, intimidation, undue influence, or fraud sufficient to vitiate consent. 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 94




moved one or both parties to enter into the contract. Fraud, on the other hand, is present 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. Clearly, article 1332 assumes that the consent of the contracting party imputing the mistake or fraud was given, although vitiated, and does not cover a situation where there is a complete absence of consent. In this case, Justa Kausapin disclaims any knowledge of the “Deed of Conveyance of Unregistered Real Property by Reversion” in favor of Maxima Hemedes. In fact, she asserts that it was only during the hearing conducted on December 7, 1981 before the trial court that she first caught a glimpse of the deed of conveyance and thus, she could not have possibly affixed her thumbmark thereto. It is private respondents’ own allegations which render article 1332 inapplicable for it is useless to determine whether or not Justa Kausapin was induced to execute said deed of conveyance by means of fraud employed by Maxima Hemedes, who allegedly took advantage of the fact that the former could not understand English, when Justa Kausapin denies even having seen the document before the present case was initiated in 1981. It has been held by this Court that “… mere preponderance of evidence is not sufficient to overthrow a certificate of a notary public to the effect that the grantor executed a certain document and acknowledged the fact of its execution before him. To accomplish this result, the evidence must be so clear, strong and convincing as to exclude all reasonable controversy as to the falsity of the certificate, and when the evidence is conflicting, the certificate will be upheld.” In the present case, we hold that private respondents have failed to produce clear, strong, and convincing evidence to overcome the positive value of the “Deed of Conveyance of Unregistered Real Property by Reversion” – a notarized document. The mere denial of its execution by the donor will not suffice for the purpose. In upholding the deed of conveyance in favor of Maxima Hemedes, we must concomitantly rule that Enrique D. Hemedes and his transferee, Dominium, did not acquire any rights over the subject property. Justa Kausapin sought to transfer to her stepson exactly what she had earlier transferred to Maxima Hemedes – the ownership of the subject property pursuant to the first condition stipulated in the deed of donation executed by her husband. Thus, the donation in favor of Enrique D. Hemedes is null and void for the purported object thereof did not exist at the time of the transfer, having already been transferred to his sister. Similarly, the sale of the subject property by Enrique D. Hemedes to Dominium is also a nullity for the latter cannot acquire more rights than its predecessorin-interest and is definitely not an innocent purchaser for value since Enrique D. Hemedes did not present any certificate of title upon which it relied. The declarations of real property by Enrique D. Hemedes, his payment of realty taxes, and his being designated as owner of the subject property in the cadastral survey of Cabuyao, Laguna and in the records of the Ministry of Agrarian Reform office in Calamba, Laguna cannot defeat a certificate of title, which is an absolute and indefeasible evidence of ownership of the property in favor of the person whose name appears therein. Particularly, with regard to tax declarations and tax receipts, this Court has held on several occasions that the same do not by themselves conclusively prove title to land.

FELICIANO vs. ZALDIVAR On this point, Article 1332 of the Civil Code is relevant: ART.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. The principle that a party is presumed to know the import of a document to which he affixes his signature is modified by the foregoing article. Where a party is unable to read or when the contract is in a language not understood by the party and mistake or fraud is alleged, the obligation to show that the terms of the contract had been fully explained to said party who is unable to read or understand the language of the contract devolves on the party seeking to enforce the contract to show that the other party fully understood the contents of the document. If he fails to discharge this burden, the presumption of mistake, if not, fraud, stands unrebutted and controlling. Applying the foregoing principles, the presumption is that Remegia, considering her limited educational attainment, did not understand the full import of the joint affidavit of confirmation of sale and, consequently, fraud or mistake attended its execution. The burden is on respondents, the spouses Zaldivar, to rebut this presumption. They tried to discharge this onus by presenting Atty. Francisco Velez (later RTC Judge) who notarized the said document. Atty. Velez testified that he "read and interpreted" the document to the affiants and he asked them whether the contents were correct before requiring them to affix their signatures thereon.[21] The bare statement of Atty. Velez that he "read and interpreted" the document to the affiants and that he asked them as to the correctness of its contents does not necessarily establish that Remegia actually comprehended or understood the import of the joint affidavit of confirmation of sale. Nowhere is it stated in the affidavit itself that its contents were fully explained to Remegia in the language that she understood before she signed the same. Thus, to the mind of the Court, the presumption of fraud or mistake attending the execution of the joint affidavit of confirmation of sale was not sufficiently overcome. Moreover, the purported joint affidavit of confirmation of sale failed to state certain important information. For example, it did not mention the consideration or price for the alleged sale by Remegia of the subject lot to Ignacio Gil. Also, while it stated that the subject lot was conveyed by Ignacio Gil to Pio Dalman, it did not say whether the conveyance was by sale, donation or any other mode of transfer. Finally, it did not also state how the ownership of the subject lot was transferred from Pio Dalman to respondent Aurelio or respondents. Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (n) Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. (n) Requisites for Mutual Error To Vitiate Consent 1. There must be mutual error 2. The error must refer to the legal effect of the agreement. 3. The real purpose of the parties is frustrated.  If there is no meeting of the mind and both parties erroneously that their acts is intended towards a particular contract but the 95




same was not met/frustrated – then the remedy is annulment, otherwise it is REFORMATION. 1334: The provision here refers to mistakes of doubtful questions of law. Legal effects. Doubtful questions of law, or the different interpretations or construction of the law. So in that case, you cannot agree to a certain provision, that might lead to frustration of the real intention of the parties that would warrant annulment. Art. 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 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) Requisites for Violence to Vitiate Consent 1. Employment of serious or irresistible force. 2. It must have been the efficient cause why the contract was entered into. Requisites for Intimidation to Vitiate Consent 1. Reasonable and well-grounded fear 2. Of an imminent and grave evil 3. Upon his person, property or upon the person or property of his spouse, descendants or ascendants; 4. Efficient cause of the execution of the contract; 5. The threat must be an unjust act, an actionable wrong. Now, when is there violence, when is there intimidation? The same definition that you have in your criminal law. (1335) Violence, in order to wrest consent, serious or irrisistible force is employed.

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 a contract. ... The preponderance of evidence leans in favor of intervenor who even utilized the statement of the divorce lawyer of petitioner Sylvia (Mr. Penrod) in support of the fact that intervenor was mistaken in having signed Exhibits 'E' to 'E-2' because when she signed said Exhibits she believed that fact that petitioner Sylvia would eliminate her inheritance rights and there is no showing that said intervenor was properly advised by any American lawyer on the fact whether petitioner Sylvia, being an American citizen, could rightfully do the same. Transcending, however, the issue of whether there was mistake of fact on the part of intervenor or not, this Court could not. see a valid cause or consideration in favor of intervenor Macaria De Leon having signed Exhibits 'E' to 'E-2.' For even if petitioner Sylvia had confirmed Mr. Penrod's statement during the divorce proceedings in the United States that she would undertake to eliminate her hereditary rights in the event of the property settlement, under Philippine laws, such contract would likewise be voidable, for under Art. 1347 of the New Civil Code 'no contract may be entered into upon future inheritance. We do not subscribe to the aforestated view of the trial court. Article 1335 of the Civil Code provides: xxx xxx xxx 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.

Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence or fraud is voidable.

In order that 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 be unjust or unlawful; (3) that the threat be real and serious, there being an evident disproportion between the evil and the resistance which all men can offer, leading to the choice of 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. Applying the foregoing to the present case, the claim of Macaria that Sylvia threatened her to bring Jose Vicente to court for support, to scandalize their family by baseless suits and that Sylvia would pardon Jose Vicente for possible crimes of adultery and/or concubinage subject to the transfer of certain properties to her, is obviously not the intimidation referred to by law. With respect to mistake as a vice of consent, neither is Macaria's alleged mistake in having signed the Letter-Agreement because of her belief that Sylvia will thereby eliminate inheritance rights from her and Jose Vicente, the mistake referred to in Article 1331 of the Civil Code, supra. It does not appear that the condition that Sylvia "will eliminate her inheritance rights" principally moved Macaria to enter into the contract. Rather, such condition was but an incident of the consideration thereof which, as discussed earlier, is the termination of marital relations.

Art. 1331. In order that mistake may invalidate consent, it should

In the ultimate analysis, therefore, both parties acted in violation of

Intimidation: compelled by a resonable and well-grounded fear of an imminent and grave evil upon the person or property of one of the contracting parties, or employed upon the spouse, descendants or ascendants, to give his consent. (or their properties). Take note of third paragraph, it is also found in your criminal law. The last paragraph is enforcement of one's claim through competent authority. Undue influence: when a person takes improper advantage of his powe over the will of another, depriving the latter of a reasonable freedom of choice. The following shall be considered: the confidential (the priest), family, spiritual and other relations between the parties, or that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. CASES DE LEON vs. CA

96




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 party to an illegal agreement and leaves them where they are, does not apply in this case. Contrary to the ruling of the respondent Court that (pp. 47-48, Rollo): ... [C]onsequently, intervenor appellees' obligation under the said agreement having been annulled, the contracting parties shall restore to each other that things which have been subject matter of the contract, their fruits and the price or its interest, except as provided by law (Art. 1398, Civil Code). Article 1414 of the Civil Code, which is an exception to the pari delicto rule, is the proper law to be applied. It provides: 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 wig thus be subserved, allow the party repudiating the contract to recover the money or property. CALLANTA vs. NLRC Moreover, it is a well-settled principle that for intimidation to vitiate consent, petitioner must have been 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 (Article 1335, par. 2 New Civil Code). In present case, what allegedly constituted the "intimidation" was the threat by private respondent company to file a case for estafa against petitioner unless the latter resigns. In asserting that the above-described circumstance constituted intimidation, petitioner missed altogether the essential ingredient that would qualify the act complained of as intimidation, i.e. that the threat must be of an unjust act. In the present case, the threat to prosecute for estafa not being an unjust act (P.P. Agustinos vs. Del Rey, 56 Phil. 512 [1932]), but rather a valid and legal act to enforce a claim, cannot at all be considered as intimidation. A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent. (Article 1335, par. 4 New Civil Code). Furthermore, and on top of the absence of evidence adduced by petitioner to the contrary, the Court also finds it unbelievable that petitioner was rattled and confused into signing a resignation letter on account of a mere "spot audit" report. It is highly unlikely and incredible for man of petitioner's position and educational attainment to so easily succumb to private respondent company's alleged pressures without even defending himself nor demanding a final audit report before signing any resignation letter. Assuming that pressure was indeed exerted against him, there was no urgency for petitioner to sign the resignation letter. He knew the nature of the letter that he was signing, for as argued by respondent company, petitioner being "a man of high educational attainment and qualification, . . . he is expected to know the import of everything that he executes, whether written or oral: (Rollo, p. 124). In view of foregoing factual setting, petitioner cannot now be allowed to withdraw the resignation which, in the absence of any evidence to the contrary, the Court believes was tendered voluntarily by him. Art. 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)

Art. 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) CARPO vs. CHUA AND NG It should be noted that had the Court declared the loan and mortgage agreements void for being contrary to public policy, no prescriptive period could have run. Such benefit is obviously not available to petitioners. Yet the RTC pronounced that the complaint was barred by the fouryear prescriptive period provided in Article 1391 of the Civil Code, which governs voidable contracts. This conclusion was derived from the allegation in the complaint that the consent of petitioners was vitiated through undue influence. While the RTC correctly acknowledged the rule of prescription for voidable contracts, it erred in applying the rule in this case. We are hard put to conclude in this case that there was any undue influence in the first place. There is ultimately no showing that petitioners’ consent to the loan and mortgage agreements was vitiated by undue influence. The financial condition of petitioners may have motivated them to contract with respondents, but undue influence cannot be attributed to respondents simply because they had lent money. Article 1391, in relation to Article 1390 of the Civil Code, grants the aggrieved party the right to obtain the annulment of contract on account of factors which vitiate consent. Article 1337 defines the concept of undue influence, as follows: 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. While petitioners were allegedly financially distressed, it must be proven that there is deprivation of their free agency. In other words, for undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party as to destroy his free agency, making him express the will of another rather than his own. The alleged lingering financial woes of petitioners per se cannot be equated with the presence of undue influence. The RTC had likewise concluded that petitioners were barred by laches from assailing the validity of the real estate mortgage. We wholeheartedly agree. If indeed petitioners unwillingly gave their consent to the agreement, they should have raised this issue as early as in the foreclosure proceedings. It was only when the writ of possession was issued did petitioners challenge the stipulations in the loan contract in their action for annulment of mortgage. Evidently, petitioners slept on their rights. The Court of Appeals succinctly made the following observations: In all these proceedings starting from the foreclosure, followed by the issuance of a provisional certificate of sale; then the definite 97




certificate of sale; then the issuance of TCT No. 29338 in favor of the defendants and finally the petition for the issuance of the writ of possession in favor of the defendants, there is no showing that plaintiffs questioned the validity of these proceedings. It was only after the issuance of the writ of possession in favor of the defendants, that plaintiffs allegedly tendered to the defendants the amount of P260,000.00 which the defendants refused. In all these proceedings, why did plaintiffs sleep on their rights? Clearly then, with the absence of undue influence, petitioners have no cause of action. Even assuming undue influence vitiated their consent to the loan contract, their action would already be barred by prescription when they filed it. Moreover, petitioners had clearly slept on their rights as they failed to timely assail the validity of the mortgage agreement. The denial of the petition in G.R. No. 150773 is warranted. Art. 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) KINDS OF FRAUD A.

B.

Fraud in the Celebration of Contract 1. Dolo Causante – were it not for the fraud, the other party would not have consented--the contract is voidable 2. Dolo Incidente – even w/o the fraud, the parties would have still agreed, fraud is incidental--Contract is valid but damages may be recovered. Fraud in Performance of Obligations stipulated in the Contract

Requisites of Dolo Causante 1. Fraud must be material and serious; induced the other to consent; 2. Fraud must have been employed by only one of the contracting parties, because if both committed fraud, the contract would remain valid. 3. There must be a deliberate intent to deceive or to induce therefore misrepresentation in good faith is not fraud. 4. The other party must have relied on the untrue statement and must himself not be guilty of negligence in ascertaining the truth. 1338: There is fraud when, through insidouse words or machinations, the other party was induced. And it must not be employed on a co-party. It must be employed against the other contracting parties. And if both parties employed fraud, the courts will leave them where they are. It is as if they were in good faith because of the fact that they are in pari delicto. Now, the fraud here is fraud at the time of the inception of the contract, not the fraud at the time of the fulfillment of the contract. Because if it were the latter, that belongs to 1171, and it cannot result to the nullity or annulment of the contract but will only be a ground for damages. But if it were fraud under 1338, it can be a ground for nullity or annulment of the contract plus damages. But the fraud here must be one that is causal. (dolo causante). Because if it were merely dolo incidente, no annulment, merely damages. And the fraud alleged by the other party seeking annulment must be clearly and convincingly established by sufficient and clear evidence, not by mere preponderance. So, requisites of fraud: 1. It must have been employed by one contracting party upon the other contracting party, not against a co-party.

2.

3.

It must have induced the other party to enter into the contract; example: when you apply for insurance policy and the amount is one that will not require you to undergo medical examination but only to fill up a certain form. You are a chain smoker, and there is a question there do you smoke and how many packs, you answer no, i don't smoke. And you were approved. This is an example of material misrepresentation. It must have been serious and must have resulted in damage or injury to the other party now seeking annulment of the contract.

CASES CARAM vs. LAURETA Anent the fourth error assigned, the petitioner contends that the second deed of sale, Exhibit "F", is a voidable contract. Being a voidable contract, the action for annulment of the same on the ground of fraud must be brought within four (4) years from the discovery of the fraud. In the case at bar, Laureta is deemed to have discovered that the land in question has been sold to Caram to his prejudice on December 9, 1947, when the Deed of Sale, Exhibit "F" was recorded and entered in the Original Certificate of Title by the Register of Deeds and a new Certificate of Title No. 140 was issued in the name of Caram. Therefore, when the present case was filed on June 29, 1959, plaintiff's cause of action had long prescribed. The petitioner's conclusion that the second deed of sale, "Exhibit F", is a voidable contract is not correct. I n order that fraud can be a ground for the annulment of a contract, it must be employed prior to or simultaneous to the, consent or creation of the contract. The fraud or dolo causante must be that which determines or is the essential cause of the contract. Dolo causante as a ground for the annulment of contract is specifically described in Article 1338 of the New Civil Code of the Philippines as "insidious words or machinations of one of the contracting parties" which induced the other to enter into a contract, and "without them, he would not have agreed to". The second deed of sale in favor of Caram is not a voidable contract. No evidence whatsoever was shown that through insidious words or machinations, the representatives of Caram, Irespe and Aportadera had induced Mata to enter into the contract. Since the second deed of sale is not a voidable contract, Article 1391, Civil Code of the Philippines which provides that the action for annulment shall be brought within four (4) years from the time of the discovery of fraud does not apply. Moreover, Laureta has been in continuous possession of the land since he bought it in June 1945. A more important reason why Laureta's action could not have prescribed is that the second contract of sale, having been registered in bad faith, is null and void. Article 1410 of the Civil Code of the Philippines provides that any action or defense for the declaration of the inexistence of a contract does not prescribe. In a Memorandum of Authorities 22 submitted to this Court on March 13, 1978, the petitioner insists that the action of Laureta against Caram has prescribed because the second contract of sale is not void under Article 1409 23 of the Civil Code of the Philippines which enumerates the kinds of contracts which are considered void. Moreover, Article 1544 of the New Civil Code of the Philippines does not declare void a second sale of immovable registered in bad faith. The fact that the second contract is not considered void under 98




Article 1409 and that Article 1544 does not declare void a deed of sale registered in bad faith does not mean that said contract is not void. Article 1544 specifically provides who shall be the owner in case of a double sale of an immovable property. To give full effect to this provision, the status of the two contracts must be declared valid so that one vendee may contract must be declared void to cut off all rights which may arise from said contract. Otherwise, Article 1544 win be meaningless. The first sale in favor of Laureta prevails over the sale in favor of Caram. ALCASID vs. CA 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 (Art. 1338, Civil Code). In order that fraud may vitiate consent and be a cause for annulment of contract, the following must concur: 1.) It must have been employed by one contracting party upon the other (Art. 1342 and 1344); 2.) It must have induced the other party to enter into the contract (Art. 1338); 3.) It must have been serious (Art. 1344); 4.) It must have resulted in damage and injury to the party seeking annulment (Tolentino, IV Commentaries on the Civil Code of the Philippines, 507 [1991 ed]). As to the alleged mistake, Article 1331 of the Civil Code of the Philippines provides: 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. To invalidate consent, the error must be real and not one that could have been avoided by the party alleging it. The error must arise from facts unknown to him. He cannot allege an error which refers to a fact known to him or which he should have known by ordinary diligent examination of the facts. An error so patent and obvious that nobody could have made it, or one which could have been avoided by ordinary prudence, cannot be invoked by the one who made it in order to annul his contract (Tolentino, supra at pp. 486487). Petitioner could have avoided the alleged mistake had she exerted efforts to verify from her co-owners if they really consented to sell their respective shares. As to undue influence, Article 1337 of the Civil Code of the Philippines provides: 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. Undue influence, therefore, is any means employed upon a party which, under the circumstances, he could not well resist and which controlled his volition and induced him to give his consent to the

contract, which otherwise he would not have entered into. It must in some measure destroy the free agency of a party and interfere with the exercise of that independent discretion which is necessary for determining the advantages or disadvantages of a proposed contract (Tolentino, supra at p. 501). If a competent person has once assented to a contract freely and fairly, he is bound thereby. The finding of the Court of Appeals that petitioner executed the contract of her own free will and choice and not from duress is fully supported by the evidence. Such finding should not be disturbed (Martinez v. Hongkong & Shanghai Bank, 15 Phil. 252 [1910]). Private respondent did not commit any wrongful act or omission which violated the primary right of petitioner. Hence, petitioner did not have a cause of action (State Investment House, Inc. v. Court of Appeals, 206 SCRA 348 [1992]). SAN MIGUEL vs. ETCUBAN In the present case, while respondents insist that their action is for the declaration of nullity of their “contract of termination,” what is inescapable is the fact that it is, in reality, an action for damages emanating form employer–employee relations. First, their claim for damages is grounded on their having been deceived into serving their employment due to SMC’s concocted financial distress and fraudulent retrenchment program – a clear case of illegal dismissal. Second, a comparison of respondents’ complaint for the declaration of nullity of the retrenchment program before the labor arbiter and the complaint for the declaration of nullity of their “contract of termination” before the RTC reveals that the allegations and prayer of the former are almost identical with those of the latter except that the prayer for reinstatement was no longer included and the claim for backwages and other benefits was replaced with a claim for actual damages. These are telltale signs that respondents’ claim for damages is intertwined with their having been separated from their employment without just cause and, consequently, has a reasonable causal connection with their employer-employee relations with SMC. Accordingly, it cannot be denied that respondents’ claim falls under the jurisdiction of the labor arbiter as provided in paragraph 4 of Article 217. Respondent’s assertion that their action is for the declaration of nullity of their “contract of termination” is merely an ingenious way of presenting their actual action, which is a claim for damages grounded on their having been illegal terminated. However, it would seem that respondents committed a Freudian slip when they captioned their claim against SMC as an action for damages. Even the term used for designating the contract, i.e. “contract of termination,” was formulated in a shrewd manner so as to avoid a semblance of employer-employee relations. This observation is bolstered by the fact that if respondents’ designation for the contract were to be made complete and reflective of its nature, its proper designation would be a “contract of termination of employment.” Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. 1339: Confidential relations: between the principal and the agent. Like if the principal authorizes the agent to sell the property at 100,000. The agent now was able to sell it at 200,000. Is the agent bound to disclose to the principal this fact? Yes, because of the confidential relation between them. Failure to do so constitutes fraud. Art. 1340. The usual exaggerations in trade, when the other party 99




had an opportunity to know the facts, are not in themselves fraudulent.

cannot avoid the contract on the ground that they were false or exaggerated." (Brown vs. Smith, 109 Fed., 26.)

1340: Dolos Bonus. Tolerated fraud. common victims are the women. For as long as the other party has the opportunity to know the facts. The rule is: let the buyer beware. According to authors, the reason for the loss is the stupidity of the person. Why will you immediately believe that this particular product is a miracle.

That the defendant knew that the area of the second parcel was only about 70 hectares is shown by the fact that she received the document Exhibit 4 before the execution of the contract Exhibit A, as also Exhibit E-3 on September 30, 1920; which is the notification of the day for the trial of the application for registratin of said parcel, wherein it appears that it had an area of 60 hectares more or less, and by the fact that she received from the plaintiff in the month of June 1924 the copy of the plans of the two parcels, wherein appear their respective areas; and yet, in spite of all this, she did not complain of the difference in the area of said second parcel until the year 1926. Moreover, the record contains several of the defendant's letters to the plaintiff in the years 1921 to 1925, in which said defendant acknowledges her debt, and confining herself to petitioning for extentions of time within which to make payment for the reasons given therein. But in none of these letters is there any allusion to such lack of area, nor did she complain to the plaintiff of the supposed deceit of which she believes she is a victim. All of which, in our opinion, shows that no such deceit was practised, as the trial court rightly found.

Basta what is required here is that you must have the opportunity to know the facts. And if it turns out that the facts are not true, you cannot sue. Because that what we call as tolerated fraud. And the rule is let the buyer beware, caveat emptor. CASES AZARRAGA vs. GAY If, notwithstanding the fact that it appeared in Exhibit 4 that the area of the second parcel was, approximately, 70 hectares, the defendant, however, stated in said document Exhibit A that said second parcel contained 98 hectares as was admitted by him in his interviews with the plaintiff in the months of April and June, 1924, then she has no right to claim from the plaintiff the shortage in area of the second parcel. Furthermore, there is no evidence of record that the plaintiff made representatin to the defendant as to the area of said second parcel, and even if he did make such false representations as are now imputed to him by the defendant, the latter accepted such representations at her own risk and she is the only one responsible for the consqunces of her inexcusable credulousness. In the case of Songco vs. Sellner (37 Phil., 254), the court said: The law allows considerable latitude to seller's statements, or dealer's talk; and experience teaches that it as exceedingly risky to accept it at its face value. Assertions concerning the property which is the subject of a contract of sale, or in regard to its qualities and characteristics, are the usual and ordinary means used by sellers to obtain a high price and are always understood as affording to buyers no grund from omitting to make inquires. A man who relies upon such an affirmation made by a person whose interest might so readily prompt him to exaggerate the value of his property does so at his peril, and must take the consequences of his own imprudence. The defendant had ample opportunity to appraise herself of the condition of the land which she purchased, and the plaintiff did nothing to prevent her from making such investigation as she deemed fit, and as was said in Songco vs. Sellner, supra, when the purchaser proceeds to make investigations by himself, and the vendor does nothing to prevent such investigation from being as complete as the former might wish, the purchaser cannot later allege that the vendor made false representations to him. (National Cash Register Co. vs. Townsend, 137 N. C., 652; 70 L. R. A., 349; Williamson vs. Holt, 147 N. C., 515.) The same doctrine has been sustained by the courts of the United States in the following cases, among others: Misrepresentation by a vendor of real property with reference to its area are not actionable, where a correct description of the property was given in the deed and recorded chain of title, which the purchaser's agent undertook to investigate and report upon, and the vendor made on effort to prevent a full investigation." (Shappirio vs. Goldberg, 48 Law. ed., 419.) "One who contracts for the purchase of real estate in reliance on the representations and statements of the vendor as to its character and value, but after he has visited and examined it for himself, and has had the means and opportunity of verifying such statements,

Art. 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. CASES SONGCO vs. SELLNER Notwithstanding the fact that Songco's statement as to the probable output of his crop was disingenuous and uncandid, we nevertheless think that Sellner was bound and that he must pay the price stipulated. The representation in question can only be considered matter of opinion as the cane was still standing in the field, and the quantity of the sugar it would produce could not be known with certainty until it should be harvested and milled. Undoubtedly Songco had better experience and better information on which to form an opinion on this question than Sellner. Nevertheless the latter could judge with his own eyes as to the character of the cane, and it is shown that he measured the fields and ascertained that they contained 96 1/2 hectares. It is of course elementary that a misinterpretation upon a mere matter of opinion is not an actionable deceit, nor is it a sufficient ground for avoiding a contract as fraudulent. We are aware that statements may be found in the books to the effect that there is a difference between giving an honest opinion and making a false representation as to what one's real opinion is. We do not think, however, that this is a case where any such distinction should be drawn. The law allows considerable latitude to seller's statements, or dealer's talk; and experience teaches that it is exceedingly risky to accept it at its face value. The refusal of the seller to warrant his estimate should have admonished the purchaser that that estimate was put forth as a mere opinion; and we will not now hold the seller to a liability equal to that which would have been created by a warranty, if one had been given. Assertions concerning the property which is the subject of a contract of sale, or in regard to its qualities and characteristics, are the usual and ordinary means used by sellers to obtain a high price and are always understood as affording to buyers no ground for omitting to make inquiries. A man who relies upon such an affirmation made by a person whose interest might so readily 100




prompt him to exaggerate the value of his property does so at his peril, and must take the consequences of his own imprudence. The principles enunciated above are fully supported by the weight of the judicial authority. In a case where the owners of a certain logs represented to their vendee that the logs would produce a greater per cent of superior lumber than was actually realized, but refused to warrant their quality and required the vendee to examine for himself before making the contract, it was held that the vendee could not avoid the contract. (Fauntleroy vs. Wilcox, 80 Ill., 477.) In Williamson vs. Holt (147 N. C., 515; 17 L. R. A. [N. S.], 240), it appeared that the defendant had bought an ice plant with the knowledge that its operation had been abandoned because the output did not equal its capacity. He had full opportunity to investigate its condition. It was held that he could not avoid paying the purchase price because the vendor stated that, with some repairs, it would turn out about a certain amount per day. In Poland vs. Brownell (131 Mass., 138), where a man who bought a stock of goods had ample opportunity to examine and investigate, it was held that he could not rely on the seller's misrepresentations as to the value of the goods or the extent of the business. It would have been different if the seller had fraudulently induced him to forbear inquiries or examination which he would otherwise have made. It is not every false representation relating to the subject matter of a contract which will render it void. It must be as to matters of fact substantially affecting the buyer's interest, not as to matters of opinion, judgment, probability, or expectation. (Long vs. Woodman, 58 Me., 52; Hazard vs. Irwin, 18 Pick. [Mass.], 95; Gordon vs. Parmelee, 2 Allen [Mass.],212; Williamson vs. McFadden, 23 Fla., 143, 11 Am. St. Rep., 345.) When the purchaser undertakes to make an investigation of his own, and the seller does nothing to prevent this investigation from being as full as he chooses to make it, the purchaser cannot afterwards allege that the seller made misrepresentations. (National Cash Register Co. vs. Townsend, 137 N. C., 652, 70 L. R. A., 349; Williamson vs. Holt, 147 N. C., 515.) We are aware that where one party to a contract, having special or expert knowledge, takes advantage of the ignorance of another to impose upon him, the false representation may afford ground for relief, though otherwise the injured party would be bound. But we do not think that the fact that Songco was an experienced farmer, while Sellner was, as he claims, a mere novice in the business, brings this case within that exception. 1341: So, you ask the opinion of a person if this is a true diamond, and the person says yes. Is there fraud? No, because that is merely an opinion. Exception, if you seek the opinion of an expert, an expert would be one that is knowledgeable in that specific area. Exception to the exception, if the expert is the employee of the person seeking the opinion of the expert. If it turns out the the opinion of the expert is false, then you cannot sue your own employee. Even if it is given by an expert, but the expert is your employee, then there can be no annulment of the contract based on fraud. Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. CASES HILL vs. VELOSO This is the only thing in the record which may be opposed to the truth and presumption of truly offered by the contents of a document freely and willingly signed.

This is not proof, much less preponderant proof, that can outweigh the contents of the promissory note that is the basis of the complaint; on the contrary, it is conclusive proof of the falsity of the other cause of debt alleged in the special defense. But even granted that no such proofs existed in the case; even granted that it was proven at trial that Domingo Franco acted in the manner stated in the answer and in the defendant Maximina Ch. Veloso's testimony, yet even so, the deceit and error alleged could not annul the consent of the contracting parties to the promissory note, nor exempt this defendant from the obligation incurred. The deceit, in order that it may annul the consent, must be that which the law defines as a cause. "There is deceit when by words or insidious machinations on the part of one of the contracting parties, the other is induced to execute a contract which without them he would not have made." (Civ. Code, art. 1269.) Domingo Franco is not one of the contracting parties who may have deceitfully induced the other contracting party, Michael & Co., to execute the contract. The one and the other contracting parties, to whom the law refers, are the active and the passive subjects of the obligation, the party of the first part and the part of the second part who execute the contract. The active subject and party of the first part of the promissory note in question is Michael & Co., and the passive subject and the party of the second part are Maximina Ch. Veloso and Domingo Franco; two, or be they more, who are one single subject, one single party. Domingo Franco is not one contracting party with regard to Maximina Ch. Veloso as the other contracting party. They both are but one single contracting party in contractual relation with, or as against, Michael & Co. Domingo Franco, like any other person who might have been able to to induce Maximina Ch. Veloso to act in the manner she is said to have done, under the influence of deceit, would be, for this purpose, but a third person. There would then not be deceit on the part of the one of the contracting parties exercised upon the other contracting party, but deceit practiced by a third person. "In accordance with the text of the Code, which coincides with that of other foreign codes, deceit by a third person does not in general annul consent, and in support of this opinion it is alleged that, in such a case, the two contracting parties act in good faith, (on the hypothesis set forth, Michael & Co., and Maximina Ch. Veloso); that there is no reason for making one of the parties suffer for the consequences of the act of a third person in whom the other contracting party may have reposed an imprudent confidence. Notwithstanding these reasons, the deceit caused by a third person may produce effects and, in some cases, bring about the nullification of the contract. This will happen when the third person causes the deceit in connivance with, or at least with the knowledge, without protest, of the favored contracting party: the most probable suppositions, in which the latter cannot be considered exempt from the responsibility. Moreover, and even without the attendance of that circumstance, the deceit caused by a third person might lead the contracting party upon whom it was practiced into error, and as such, though it be not deceit, may vitiate consent. In any case, this deceit may give rise to more or less extensive and serious responsibility on the part of the third person, and a corresponding right of action for the contracting party prejudiced" (in the present hypothesis, Maximina Ch. Veloso against Domingo Franco). (8 Manresa, 659, 2d Ed.) With respect to the true cause of the debt or cause of the contract, it is not necessary to set forth any consideration whatever, because, as the deceit and error alleged cannot be estimated, it is of no importance whether the La Cooperativa Filipina, whose goods were the cause of the debt, exclusively belonged to one or the other of the debtors, the obligation of debt and payment being joint. But if 101




any consideration with respect to this error alleged on appeal were necessary, it would be that the evidence against the finding contained in the judgment appealed from is very conclusive. Isabelo Alburo, a witness for the defense and manager of La Cooperativa Filipina, testified that the goods furnished by Michael were received in the store La Cooperativa Filipina; that he signed the bills for collection; that the bill-heads bore the printed legend "La Cooperativa Filipina de Maximina Ch. Veloso;" and that all the forms, books and accounts were printed in the same manner. The municipal treasurer exhibited the registry books and testified that the license for that establishment was issued in the name of Maximina Ch. Veloso, and the appellee herself testified that she was aware that it was conducted in her name. 1342: There was this case Diaz vs. CA whereby the mistake was committed by a surveyor with respect to the particular location of a particular lot. So in that case, the mistake was not committed by both parties but by a third person, committed by the surveyor and there was mutual mistake by both parties and the SC said that annulment is proper because of the mistake. Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. (1270) Fraud should not be employed by a party against a co-party, i.e. between two partners. This will not annul the contract. Requisites for Fraud to Vitiate Consent 1. Fraud must be serious 2. The parties must not be in pari delicto; otherwise there can be no annulment.

CASES BLANCO vs. QUASHA Considering that the parties have exhaustively discussed their argu ments and counterarguments on the issues herein, this Court resolv es to dispense with the submission by the parties of memoranda an dforthwith decides the same on the basis of the pleadings thus filed. Hub of petitioner’s grievance is the alleged simulated or fictitious na ture of the sale-lease back agreement between Mary Ruth Elizalde, on the one hand, and Parex Realty Corporation, on the other hand. Simulation of a contract may be absolute or relative. The former ta kes place when the parties do not intend to be bound at all; the latt er, when the parties conceal their true agreement.[18] 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 purpos e contrary to law, morals, good customs, public order or public polic ybinds the parties to their real agreement.[19] The characteristic of simulation is the fact that the apparent contrac t is not really desired nor intended to produce legal effects nor in an y way alter the juridical situation of the parties. Thus, where a pers on, inorder to place his property beyond the reach of his creditors, s imulates a transfer of it to another, he does not really intend to dive st himself of his title and control of the property; hence, the deed of transfer isbut a sham. This characteristic of simulation was defined by this Court in the case of Rodriguez vs. Rodriguez, No. L23002, Ju ly 31, 1967, 20 SCRA 908. Art. 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) Kinds of Simulated Contracts A.

Incidental Fraud – not a cause for annulment, only damages can be recovered.

Absolutely Simulated (simulados) fictitious contracts:  Parties do not intend to be bound;  EFFECT: Contract is Void.

B.

Relatively Simulated (disimulados) disguised contracts:  Parties conceal their true agreement  EFFECT: Parties are bound to the real or true contract/agreement except:

Simulation of Contract – process of intentionally deceiving others by producing the appearance of a contract that really does not exist (absolute) or w/c is different from the true agreement (relative).

 

If contract should prejudice a 3rd person; or If the purpose is contrary to law, morals, good customs, public order or public policy.

Requisites of Simulation 1. Outward declaration of will different from the will of the parties; 2. False appearance must have been intended by mutual agreement; 3. The purpose is to deceive 3rd persons.

Accdg. to Tolentino: If the absolute simulation does not have an illicit purpose, the parties to the contract ma prove the simulation in order to recover whatever may have been given under such simulated act. But if the simulated contract has an illegal object, the provisions of Art. 1411 and 1412 will apply.

Effect: If Absolute simulation, the contract is void. The parties did not intend to be bound by the agreement. But if it were relative simulation, then it shall bind the parties provided that no third person shall be prejudiced by such relative simulation.

ABSOLUTE SIMULATION

FRAUDULENT ALIENATION

1. Implies that there is no existing contract; no real act executed;

1. Means there is a true and existing transfer or contract;

Art. 1345. 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. (n)

102




2. Can be attacked by any creditor, including one subsequent to the contract

2. Can be assailed only by the creditors before the alienation;

3. The insolvency of the debtor making the simulated transfer is not a pre-requisite to the nullity of the contract;

3. The action to rescind (accion pauliana) requires that the creditor cannot recover in any other manner what is due to him;

4. The action to declare a contract absolutely simulated does not prescribe

4. Accion pauliana to rescind a fraudulent alienaction prescribes in 4 years.

Note: The impossibility must exist at the time of the constitution of the contract. Art. 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) 

Object must be determinate determinable (w/out need of a new agreement); otherwise the contract is void for want of an essential requisite – the object of contract.



Difficulty of performance – A showing of mere inconvenience, unexpected impediments, or increased expenses is not enough to relieve a debtor from the obligation Equity cannot relieve from bad bargains simply because they are such. The debtor who does not perform in such cases must be held liable for damages.

OBJECTS OF CONTRACTS Art. 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.

CAUSE OF CONTRACTS

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

It is the essential and impelling reason why a party assumes, an obligation. It is the prestation to be performed by the other contracting party.

All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. (1271a) Requisites of Object of a Contract 1. 2. 3. 4. 5.

The thing or service must be w/in the commerce of man; Must be transmissible; Must not be contrary to law, morals, good customs, public order or policy; Must not be impossible; Must be determinate as to its kind or determinable w/o need of a new contract or agreement.

Art. 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) Classification of Contracts As to Cause 1. 2. 3.

Notes: 1.

2.

There can be sale of future things or objects having potential existence. Also there can be sale of hope, but no of vain hope (CF: Sales) No contract may be entered upon future inheritance, exceptions: (1) marriage settlements. Spouses are allowed to donate to each other future properties provided that they comply with the forms of will; (2)partition of the property during the lifetime of the testator. (3) When one’s right over the property is not as an heir but as a creditor. Your rights to the credit are subordinated to the death of the debtor. So, in that case that is not within the meaning of future inheritance. Ex: X borrows money from Y, and Y says I will pay you when I die. So in that case, X can enter into a contract involving that credit but subordinated to the death of Y.

  

Onerous – the cause is for each contracting party, the prestation/promise of thing/service. Remuneratory – the past service/benefit w/c by itself is a recoverable debt. Gratuitous or contracts of pure beneficence– the cause is the mere liberality of the benefactor. Contract of guaranty is gratuitous unless there is stipulation to the contrary. Cause in Accessory Contracts Like Mortgage & Pledge – the same as the cause for principal contract of loan. Moral obligation may be the cause of civil obligation – if it does not exist , no valid cause.

CASES ONG vs. ONG

Art. 1348. Impossible things or services cannot be the object of contracts. (1272)

A careful perusal of the subject deed reveals that the conveyance of the one- half (�) undivided portion of the above-described property was for and in consideration of the One (P 1.00) Peso and the other valuable considerations(emphasis supplied) paid by private respondent Sandra Maruzzo through her representative, Alfredo Ong, to petitioner Imelda Ong. Stated differently, the cause or consideration is not the One (P1.00) Peso alone but also the other valuable considerations. As aptly stated by the Appellate Court-

Nature of Impossibility 1. Nature of transaction or because of law 2. Absolute (objectively impossible) – “nobody can do it” 3. Relative (subjectively impossible) – “particular debtor cannot comply”

... although the cause is not stated in the contract it is presumed that it is existing unless the debtor proves the contrary (Article 1354 of the Civil Code). One of the disputable presumptions is that there is a sufficient cause of the contract (Section 5, (r), Rule 131, Rules of Court). It is a legal presumption of sufficient cause or 103




consideration supporting a contract even if such cause is not stated therein (Article 1354, New Civil Code of the Philippines.) This presumption cannot be overcome by a simple assertion of lack of consideration especially when the contract itself states that consideration was given, and the same has been reduced into a public instrument with all due formalities and solemnities. To overcome the presumption of consideration the alleged lack of consideration must be shown by preponderance of evidence in a proper action. (Samanilla vs, Cajucom, et al., 107 Phil. 432). The execution of a deed purporting to convey ownership of a realty is in itself prima facie evidence of the existence of a valuable consideration, the party alleging lack of consideration has the burden of proving such allegation. (Caballero, et al. vs. Caballero, et al., (CA), 45 O.G. 2536). Moreover, even granting that the Quitclaim deed in question is a donation, Article 741 of the Civil Code provides that the requirement of the acceptance of the donation in favor of minor by parents of legal representatives applies only to onerous and conditional donations where the donation may have to assume certain charges or burdens (Article 726, Civil Code). The acceptance by a legal guardian of a simple or pure donation does not seem to be necessary (Perez vs. Calingo, CA-40 O.G. 53). Thus, Supreme Court ruled in Kapunan vs. Casilan and Court of Appeals, (109 Phil. 889) that the donation to an incapacitated donee does not need the acceptance by the lawful representative if said donation does not contain any condition. In simple and pure donation, the formal acceptance is not important for the donor requires no right to be protected and the donee neither undertakes to do anything nor assumes any obligation. The Quitclaim now in question does not impose any condition. The above pronouncement of respondent Appellate Court finds support in the ruling of this Court in Morales Development Co., Inc. vs. CA, 27 SCRA 484, which states that "the major premise thereof is based upon the fact that the consideration stated in the deeds of sale in favor of Reyes and the Abellas is P1.00. It is not unusual, however, in deeds of conveyance adhering to the Anglo-Saxon practice of stating that the consideration given is the sum of P1.00, although the actual consideration may have been much more. Moreover, assuming that said consideration of P1.00 is suspicious, this circumstance, alone, does not necessarily justify the inference that Reyes and the Abellas were not purchasers in good faith and for value. Neither does this inference warrant the conclusion that the sales were null and void ab initio. Indeed, bad faith and inadequacy of the monetary consideration do not render a conveyance inexistent, for the assignor's liberality may be sufficient cause for a valid contract (Article 1350, Civil Code), whereas fraud or bad faith may render either rescissible or voidable, although valid until annulled, a contract concerning an object certain entered into with a cause and with the consent of the contracting parties, as in the case at bar." Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n) Q: Is the cause the same as the motive of the contract? No. No matter how illegal the motive is for as long as the cause is legal and lawful, it does not affect the validity of the contract. Exception: if the motive predetermines the purpose of the contract then the motive becomes the cause of the contract. Case: Lopez fell in love with Conchita, a 15 year old girl. Because of Lopez' desire and lust for the body of Conchita, he told the parents and Conchita that he will be donating a parcel of coconut land if you agree to cohabit with me. The parents and Conchita consented and

they lived and had sexual intercourse. Then Lopez died. Conchita now demanded for the delivery of the parcel of land. The heirs of Lopez now said that the motive predetermined the purpose of the contract. And while it may be true that the cause is the liberality, however the real cause is the motive and the motive is to have sexual intercourse. Conchita said the cause is the liberality. The SC said the contract is void. While it is true that motive differs from the cause, still a contract conditioned upon the attainment of an immoral motive should be considered void. For here, it may be regarded as cause when it predetermines the purpose of the contract. It cannot be said that the donation is a contract of pure benifecence or a contract designed solely and exclusively for the benefit of the donee. The donation was designed both for the benefit of the donee and satisfy the sexual desire of Mr. Lopez. But because the donor cannot invoke his own immorality, then the more reasons that the heirs are barred in questioning the validity of the donation. Therefore Conchita is entitled to the land. In the MFR filed by the heirs, according to JBL Reyes, the pari delicto rule cannot apply in the case. Remember that Conchita is a minor, the guilt of the minor cannot be judged with equal severity with the guilt of an adult. Minors occupy a privilege position before the law. MOTIVE

CAUSE



May vary although he enters into same contract;



The same





Always known

the other;

Maybe unknown to



Its presence cannot cure the absence of cause ILLEGAL CAUSE makes a contract void, ILLEGAL MOTIVE not necessarily renders the contract void. CASES LIGUEZ vs. CA Appellant seeks to differentiate between the alleged liberality of Lopez, as causa for the donation in her favor, and his desire for cohabiting with appellant, as motives that impelled him to make the donation, and quotes from Manresa and the jurisprudence of this Court on the distinction that must be maintained between causa and motives (De Jesus vs. Urrutia and Co., 33 Phil. 171). It is well to note, however that Manresa himself (Vol. 8, pp. 641-642), while maintaining the distinction and upholding the inoperativeness of the motives of the parties to determine the validity of the contract, expressly excepts from the rule those contracts that are conditioned upon the attainment of the motives of either party. . . . distincion importantisima, que impide anular el contrato por la sola influencia de los motivos a no ser que se hubiera subordinando al cumplimiento de estos como condiciones la eficacia de aquel. The same view is held by the Supreme Court of Spain, in its decisions of February 4, 1941, and December 4, 1946, holding that the motive may be regarded as causa when it predetermines the purpose of the contract. In the present case, it is scarcely disputable that Lopez would not 104




have conveyed the property in question had he known that appellant would refuse to cohabit with him; so that the cohabitation was an implied condition to the donation, and being unlawful, necessarily tainted the donation itself. The Court of Appeals rejected the appellant's claim on the basis of the well- known rule "in pari delicto non oritur actio" as embodied in Article 1306 of 1889 (reproduced in Article 1412 of the new Civil Code): ART. 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 contract, or ask for 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. In our opinion, the Court of Appeals erred in applying to the present case the pari delicto rule. First, because it can not be said that both parties here had equal guilt when we consider that as against the deceased Salvador P. Lopez, who was a man advanced in years and mature experience, the appellant was a mere minor, 16 years of age, when the donation was made; that there is no finding made by the Court of Appeals that she was fully aware of the terms of the bargain entered into by and Lopez and her parents; that, her acceptance in the deed of donation (which was authorized by Article 626 of the Old Civil Code) did not necessarily imply knowledge of conditions and terms not set forth therein; and that the substance of the testimony of the instrumental witnesses is that it was the appellant's parents who insisted on the donation before allowing her to live with Lopez. These facts are more suggestive of seduction than of immoral bargaining on the part of appellant. It must not be forgotten that illegality is not presumed, but must be duly and adequately proved. In the second place, the rule that parties to an illegal contract, if equally guilty, will not be aided by the law but will both be left where it finds them, has been interpreted by this Court as barring the party from pleading the illegality of the bargain either as a cause of action or as a defense. Memo auditor propriam turpitudinem allegans. Said this Court in Perez vs. Herranz, 7 Phil. 695-696: It is unnecessary to determine whether a vessel for which a certificate and license have been fraudulently obtained incurs forfeiture under these or any other provisions of this act. It is enough for this case that the statute prohibits such an arrangement as that between the plaintiff and defendant so as to render illegal both the arrangement itself and all contracts between the parties growing out of it. It does not, however, follow that the plaintiff can succeed in this action. There are two answers to his claim as urged in his brief. It is a familiar principle that the courts will not aid either party to enforce an illegal contract, but will leave them both where it finds them; but where the plaintiff can establish a cause of action without exposing its illegality, the vice does not affect his right to recover. The American authorities cited by the plaintiff fully sustain this doctrine. The principle applies equally to a defense. The law in those islands applicable to the case is found in article 1305 of the Civil Code,

shutting out from relief either of the two guilty parties to an illegal or vicious contract. In the case at bar the plaintiff could establish prima facie his sole ownership by the bill of sale from Smith, Bell and Co. and the official registration. The defendant, on his part, might overthrow this title by proof through a certain subsequent agreement between him and the plaintiff, dated March 16, 1902, that they had become owners in common of the vessel, 'the agreement not disclosing the illegal motive for placing the formal title in the plaintiff. Such an ownership is not in itself prohibited, for the United States courts recognize the equitable ownership of a vessel as against the holder of a legal title, where the arrangement is not one in fraud of the law. (Weston vs. Penniman, Federal Case 17455; Scudder vs. Calais Steamboat Company, Federal Case 12566.). On this proof, the defendant being a part owner of the vessel, would have defeated the action for its exclusive possession by the plaintiff. The burden would then be cast upon the plaintiff to show the illegality of the arrangement, which the cases cited he would not be allowed to do. Art. 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) Requisites for Cause 1. It must be present – no cause, contract is void 2. It must be true – if cause is false, contract is void unless some other cause w/c is lawfully really exists. 3. It must be lawful From transcription: There was this case: X is an employee of a business establishment, and it was found out that she was stealing money from the business establishment. When she was about to be prosecuted for what she did, the father and the husband of X executed a PN covering the value of what has been lost by reason of X's stealing. But X was not made a signatory to the PN. Now, the PN remained as a PN, so the employer was not able to collect. So the employer filed an action to collect the amount stated in the PN. The case was dismissed because accdg. to the court, the cause was the stifling of the criminal prosecution of X. Cause is void. But in another case, there was A who was given money by B to buy palay within a certain period or if unable to secure the palay by that time, to return the money to B. No palay was bought, no money was returned. So what B did was file a case against A for estafa. Now, before the hearing, a friend entered before and in behalf of A, with B seeking consideration that the case would be dismissed because he will try to convince A to issue a promissory note to cover the amount that was not returned. A executed a PN, but the amount was not paid. So what B did was to file an action to recover the amount. A moved for the dismissal of the case, stating that the cause for the action was illegal because it was to stifle a criminal prosecution. But the SC said that motion should be denied because there was an admission on the part of A that he really owed B money. This is different from the first case. Art. 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) False cause does not necessarily mean that contract is void; the parties are given a chance to show that a cause really exists and is lawful and true. 105




Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (1277) Cause must exist but is not necessary to state the cause; Under Statute of Frauds – certain agreement must be in writing, 1354: So, no matter how inadequate the consideration is, the presumption is that the contract is valid. The exception there is when fraud is employed, or there is mistake or there is undue influence. Like the actual value is 1M and he's only selling it for 100K, and the buyer is the son or daughter, then that is not an absolutely simulated contract but only a relatively simulated one, and the parties bound to it unless third persons are prejudiced by such simulation. Art. 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) LESION – inadequacy of cause – (eg. Insufficient price of a thing sold) RULES ON LESION Gen. Rule: Lesion/inadequacy of price does not invalidate a contract. Exceptions: i. When together with lesion there has been ii. Fraud iii. Mistake; or iv. Undue Influence In cases expressly provided by law. FORMS OF CONTRACTS The general principle is that the law looks more into the spirit, rather than in form. Underlying principle that in the interpretation and/or construction of the law, we must interpret not by the letter that killeth, but by the spirit that giveth life. That is how one should construct or interpret the law. But in contracts, there are certain exceptions. Because if you were the one who prepared the contract, then the contract should be construed strictly against the person who prepared it, and liberally in favor of the person who merely affixed his signature and did not participate in the making of the contract. But with respect to form, contracts are obligatory, in whatever form they may have been entered into, provided that all the essential requisites for the validity are present. And what are the essential requisites? Consent, cause or consideration and object/subject matter. So, for as long as the three are found, then the contract is presumed valid, regardless of the form. When we say form, it may refer to the manner in which the contract is executed, which may be written or oral. So, a sale of a parcel of land orally made is valid. So a sale involving real property is valid in whatever form it is entered into. Even if it is orally made between the parties. For what purpose then is the form? It is not for validity, but rather to transfer ownership over the property in favor of the vendee. The register of deeds will not transfer the title of the property from the vendor to the vendee unless it is in a public document. So that is the purpose of the form. And to inform third

person that the property has already been bought. But for validity, no. It is valid. Even if there is no (written) contract, for as long as there has been payment (vendee) and there has been delivery on the part of the vendor. But there are certain contracts which would require that they be in a certain form. One is for validity, and the other for enforceability. A contract may be valid, but it is unenforceable. When we say enforceable, it cannot be enforced through court action. You cannot maintain an action in court because there is a lack in that particular document. But there are certain documents which will require a certain form in order that it be valid. An example of which would be a donation of a real property which must be in a public document in order to be valid. And not only that, the acceptance of the donee must also be in a public document to be valid. Absent one makes the donation void. Another example of a contract which would require a certain form is donation involving movable property and the value exceeds 5K. The law require that it must be in writing, but it need not be in a public document to be valid. Now, what else? Contracts involving antichresis. That must be in writing otherwise void. And another is when you are into lending money, agreements for the payment of interests must be in writing otherwise one cannot collect. The authority of the agent to sell property must be in writing, if not, then the sale is void. Now, another exception is for purposes of enforceability. Now what would be required, under 1403, paragraph 2, it must be in writing or in some memorandum or note, subscribed by the parties. (Statute of Fraud). So those are only the exceptions for purposes of validity or enforceability. So that a contract may prove in a certain way, that requirement is absolute and indispensable. So, if it is absolute and indispensable, noncompliance with it means the contract is void. In such cases, the right of the parties stated in the following article cannot be exercised. 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. 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. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a) GEN. RULE: NO FORM IS REQUIRED IN CONSENSUAL CONTRACTS  

Formal Contracts – requires form ( eg. Donation) Real Contracts – requires delivery

WHEN FORM IS IMPORTANT 1. For validity 2. Enforceability (Statute of Frauds); may be waived by acceptance of benefits (partial) or by failure to object to presentation of oral or parol evidence. 3. For convenience 1356 is the spiritual system of a contract, which means that, contracts are obligatory in whatever form they may have been entered into, provided that all the essential requisites for its validity are present. But the spiritual system of contract cannot be adopted in unqualified manner. Otherwise, oral agreements would often lead to fraud in the fulfillment of the obligation. Because the faintest ink is better than the sharpest memory.

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Because if worse comes to worst, you file a case in court and what is your proof? It was orally admitted. Who were there when you entered into the agreement? There were only two of us, then that is highly debatable. So, whether a certain form is required or not, better put it into writing. Now, there is this case of Hernaez vs. Delos Angeles. Hernaez was a star of Philippine Cinema. And her services were engaged by one of the producers. She was paid but there was a balance. So after rendering service, Ms. Hernaez now demanded for the payment of the balance. The movie company refused to honor the agreement stating that the agreement is deemed void because it was not in writing, and the balance exceeds 500 pesos. So, they went to court. Delos Angeles is the judge, he sided with the movie company. The SC said that the dismissal was not proper. Under 1356, all contracts are valid regardless of form, there are only two exceptions. One is when the contractual form is needed for validity. As in a case of a donation of real property which needs to be in a public document. Second when form is needed for enforceability, under the Statute of Fraud. The contract covered by Art. 1358 are binding and enforceable by action despite the absence of writing because the Article nowhere provides that the absence of written form will make the agreement invalid or unenforceable. Art. 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. 1357: If the law requires that a document or other special form, as in the acts and contracts enumerated in 1358, 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. Art. 1358. The following must appear in a public document: 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 a 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. 1358: Is the requirement that it must be in a public document for the purpose of validity? No. Only for purposes of affecting third persons, or for efficacy against third persons. So, those enumerated under 1358, even if not in a public docu are valid. The reason why there is this requirement that it must be in a public document, is that it is to enforce against third person. Because by itself, it is already valid. Now what are those contracts? 1.

Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property.

An example of this is waiver of a right, assignment, barter, mortgage (modification of one's proprietarial rights), when you enter into a contract of usufruct because there is a transfer of ownership. [Take note that sale involving real properties is already removed from par. 1 of 1358] 2.

The cession, repudiation, or renuncitation of hereditary rights, or of those if the conjugal partnership of gains. You renounce your right over the inheritance that has already become vested in favor of your siblings;

3.

The powers 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 In your family code, when one spouse desires to transfer administration over his communal or paraphernal property to the other spouse, the transfer must be in a public document. The reason is to inform 3rd persons that the administration has been transferred.

4.

The cession of actions or rights proceeding from an act appearing in a public document [example Claim of ownership]

All other contracts where the amount involved exceeds 500 must appear in writing, even a private one. But sales of goods, chattels, or things in action are governed by Art. 1403. Nowhere does it say that if it is not in writing, the contract is void. That's the essence of the Hernaez case. REFORMATION REFORMATION OF INSTRUMENTS (n) Remedy in equity by means of w/c a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. Art. 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. Requisites for Action for Reformation 1. There must be meeting of the minds 2. True intention is not expressed in the instrument 3. There must be clear and convincing proof thereof 4. It must be brought w/in the proper prescriptive period. 5. Document must not refer to a simple unconditional donation inter vivos or to wills or to a contract where real agreement is void. Art. 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.

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Why is there a need to reform instruments? Instruments are reformed in order that the true intention of the parties is expressed. But all the essential requisites are present. Only that when the parties reduced the agreement into writing, the writing failed to keep the true intention. By reason of what? Fraud, mistake, 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. But if any of the vices of consent have prevented the meeting of the minds of the parties, then there is no reformation but rather annulment. So here is there was failure on the part of the parties to express their true intention. By reason of Fraud, mistake, inequitable conduct or accident. But if it prevented the meeting of the minds, then no reformation but annulment. What are the requisites in order that reformation is proper? 1. 2. 3.

There must have been a meeting of the minds upon the contract; The instrument or document evidencing the contract does not express the true agreement between the parties; The failure of the instrument to express the agreement must be due to mistake, fraud, inequitable conduct or accident.

clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed. 1364: This is very common in law firms, because lawyers trust their secretaries. (typographical error) Art. 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. 1365: Now there are money lenders who would, instead of having executed a deed of real estate mortgage, would say that let's just execute a deed of sale with a right to repurchase. That is under a different guise. Very common is equitable mortgage although the document is denominated as deed of sale with a right to repurchase. It has the following indicators: 1. 2. 3.

The seller remains in possession of the property; The buyer retains a portion of the purchase price. That portion represent actually the interest. The seller, aside from he remains in possession of the property, continues to pay the taxes on the property.

Art. 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed.

[Because if it were sale, then definitely the seller has to vacate the property and why should he continue to pay the taxes. Moreover, why should the buyer retain a portion of the purchase price. ] Now read 1502

Requisites: 1. Mistake must be mutual 2. Mistake may be unilateral under the conditions set forth in Art. 1362 and 1363. 3. Mistake must be of fact.

Art. 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.

1361: The error is thru mistake but all the essential requisites are present

1366: #1 and 2 are contracts based purely on the liberality of the testator, and being gratuitous you cannot question the intention of the person giving or donating the thing/property.

Art. 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: Now, there was this case of Ong vs. Car (?), involving a Spaniard and a Chinese. Now the Chinese does not know how to read or speak English. So the Spaniard was interested to buy the property of the Chinese. Now the Chinese said the agreement should be a pacto de retro. The Spaniard said, ok. When the document was already prepared, the Chinese aske if he included the condition that the sale should be one with a right to repurchase. The Spanish said yes when in truth the Spaniard omitted that it was a sale of pacto de retro because he intended to mortgage the property.

#3, being void, how can you reform it. No legal effect shall come from a void contract. There is no force or effect that arise from a void contract. In fact, in a void contract, parties do not intend to be bound by their agreement. Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. (estoppel, waiver or ratification) 1367: You cannot ask for reformation and at the same time ask for enforcement. One is inconsistent with the other. If you say that it does not express the true intention of the parties, yet at the same time you are asking for performance. So, those are contrary to each other.

Now in that case, there has been an agreement. There was already a meeting of the mind with respect to object and the cause, and the parties have consented. What was only omitted was the right of the buyer to repurchase, through the fraudulent acts of the other.

Art. 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.

Art. 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.

Prescriptive period for reformation of contracts is 10 years Art. 1369. The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court.

Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the 108




INTERPRETATION OF CONTRACTS: Art. 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. So, how do you interpret contracts? If the stipulations of the contract are clear and leave no room for doubt, literal interpretation. Now, the important task of contract interpretation is to always ascertain the intention of the contracting parties. And guided by the principle again that we should interpret not by the letter that killeth, but by the spirit that giveth life. However, that will not find any application if the stipulation of the parties are clear and unambiguous which leaves no room for interpretation. Then we must interpret the law as it is written. Ita Scripta Lex. So, if the words appear contrary to the intention of the parties, then the intention shall prevail. (1370) If the written instrument is different from what has been verbally agreed upon? Reformation because it does not express the true agreement. So, if you say the sale of land with all the improvements thereon, what are included? Everything that is incorporated with the land. Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. 1371: So going back to the example of equitable mortgage, if the buyer is not yet in possession after several years, so what is the presumption? The presumption is that what was entered into by the parties is not one of sale but mortgage. And the determination is based on their subsequent acts. Art. 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. 1372: Example is your best friend executed an SPA for you to encumber her property. So you used it as a collateral in your loan. It does not follow that even if your property was used as a surety, you would also be liable for the debt of your friend. Because those are different and distinct from the agreement. Art. 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) Art. 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. 1374: (Allied Bank) Harmoninize the provisions. If it cannot be harmonized, remove those which are incompatible. Then you ascertain the intention of the parties. 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. So for instance it is a pacto de retro sale. But upon demand, the price varies. Anong presumption dyan? The difference in the payment actually refers to the payment of interest.

Art. 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. 1375: If you are appointed as an administrator, it does not involve acts of dominion or acts of ownership. Art. 1376. The usage or custom 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) Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 1377: Very common in contracts of adhesion. CASES FIELMAN’S INSURANCE vs. VDA. DE SONGCO That is all that needs be said insofar as the first alleged error of respondent Court of Appeals is concerned, petitioner being adamant in its far-from-reasonable plea that estoppel could not be invoked by the heirs of the insured as a bar to the alleged breach of warranty and condition in the policy. lt would now rely on the fact that the insured owned a private vehicle, not a common carrier, something which it knew all along when not once but twice its agent, no doubt without any objection in its part, exerted the utmost pressure on the insured, a man of scant education, to enter into such a contract. Nor is there any merit to the second alleged error of respondent Court that no legal liability was incurred under the policy by petitioner. Why liability under the terms of the policy 5 was inescapable was set forth in the decision of respondent Court of Appeals. Thus: "Since some of the conditions contained in the policy issued by the defendant-appellant were impossible to comply with under the existing conditions at the time and 'inconsistent with the known facts,' the insurer 'is estopped from asserting breach of such conditions.' From this jurisprudence, we find no valid reason to deviate and consequently hold that the decision appealed from should be affirmed. The injured parties, to wit, Carlos Songco, Angelito Songco and Jose Manuel, for whose hospital and medical expenses the defendant company was being made liable, were passengers of the jeepney at the time of the occurrence, and Rodolfo Songco, for whose burial expenses the defendant company was also being made liable was the driver of the vehicle in question. Except for the fact, that they were not fare paying passengers, their status as beneficiaries under the policy is recognized therein." 6 Even if it be assumed that there was an ambiguity, an excerpt from the Qua Chee Gan decision would reveal anew the weakness of petitioner's contention. Thus: "Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly interpreted against the party that caused them, the 'memo of warranty' invoked by appellant bars the latter from questioning the existence of the appliances called for in the insured premises, since its initial expression, 'the undernoted appliances for the extinction of fire being kept on the premises insured hereby, ... it is hereby warranted ...,' admits of interpretation as an admission of the existence of such appliances which appellant cannot now contradict, should the parol evidence rule apply." 7 To the same effect is the following citation from the same leading case: "This rigid application of the rule on ambiguities has become necessary in view of current business practices. The courts cannot ignore that nowadays monopolies, cartels and concentration of 109




capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared 'agreements' that the weaker party may not change one whit, his participation in the 'agreement' being reduced to the alternative to 'take it or leave it' labelled since Raymond Saleilles 'contracts by adherence' (contrats d'adhesion), in contrast to those entered into by parties bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are prime examples) obviously call for greater strictness and vigilance on the part of courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwary (New Civil Code. Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942)." Art. 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. 1378: So between a commodatum and donation, which has the least transmission of rights? Commodatum, why? Because there is no transfer of ownership in commodatum. Whereas if it were a donation, the property has left the patrimony of the donor forever. Usufruct or the donation? Usufruct, because the usufructuary is under obligation to return the property. (2nd sentence) Now, what if the contract is onerous? The doubt shall be resolved in favor of the greatest reciprocity of interest. So a person giving a ring to the other person, and the other person gives money. What is the presumption? Pledge, because that would fall under the greatest reciprocity of interest. Between pledge or mortgage? If there is doubt, mortgage. Why? Because there is no transfer of possession, but the creditor still enjoys the interest on the money that was loaned. Between antichresis and mortgage? Mortgage parin. (Last paragraph) Lack of object which makes the contract void because the intention of the parties cannot be ascertained. Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. RESCISSIBLE CONTRACTS 3 Kinds of Defective Contracts 1. 2.

Rescissible – contract w/c is valid until rescinded; extrinsic defect consists of economic lesion or damage. Voidable – valid until annulled except if ratified – intrinsic defect as in vitiated consent. (a) Unenforceable – cannot be sue upon or enforced unless ratified; no effect now but it may be upon ratification. (b) Void (inexistent or illegal) – no effect at all; nor can be ratified or validated.

Rescissible Contracts are valid contracts. Of the four of defective kinds of contracts, rescissible contracts occupy the highest lesion. The contracts are valid but by reason of economic injury caused either to one of the parties, or to a third person, the contract has to be rescinded. And unlike 1191, when we speak of rescission, there is no breach of faith in the performance but rather the ground of rescission is more on the economic injury suffered by the parties or a third person. Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) Requisites for Rescission 1. There must be at the beginning either a valid or a voidable contract. 2. There is an economic or financial prejudice to someone ( a party or a third person) 3. Requires mutual restitution. RESCISSION (1380)

RESCISSION (1191)



Based on lesion or fraud upon creditors;





The action is instituted by either of the parties or by third parties;





Courts cannot grant a period or term w/in w/c to comply







Non-performance by other party is immaterial.

Based on nonperformance or non-fulfillment of the obligation. Action may be instituted only by the injured party to the contract; In some cases, the courts may grant a term.

Non-performance the party is important.

of

Fictitious contract cannot be rescinded since it is null and void. What rescission presupposes is a valid contract. Rescission under 1381 is a subsidiary remedy, especially if it is found in number 3 of 1381. You have to prove before the court that you have exhausted all the remedies available to you as a creditor before you are given a right to institute an action for rescission 1380: What are those cases? 1381 provides those cases. Art. 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 claims 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. LESION – disparity between price and the value.  mere inadequacy of price, unless shocking to the conscience is not a sufficient ground for setting aside a sale, if there is no 110




showing that, in the event of a resale, a better price can be obtained. EFFECT OF CONTRACTS ENTERED IN BEHALF OF WARD 1.

If an act ownership, Court approval is required otherwise it is unenforceable whether there is lesion or not. 2. If act of administration i. With Court approval – valid regardless of lesion ii. W/out Court approval – rescissible, if lesion is more than ¼ 

contract may be rescinded on the ground of lesion is a partition of inheritance.

3.

Accion Pauliana – action to rescind made in fraud of creditors.

REQUISITES 1. There must be a creditor who became such Prior to the contract sought to be rescinded – (a person asking for a rescission is a judgment creditor – immaterial) 2. There must be an alienation made subsequent to such credit. 3. The party alienating must be in bad faith (he knew that damages would be caused) 4. There must be no other remedy for the prejudiced creditor – “inability to collect to the claims due them.”

And normally the spouse is given priority. So the spouse' authority only includes powers of administration, it does not include acts of ownership. Because if you co-relate that with the provisions of the Family Code and there is a need to encumber or dispose a portion of the property of the absentee, what will you do? For purposes of supporting the family? You gain judicial authority in a summary proceeding, otherwise that act of the other spouse is void but it is a continuing offer between the spouse who did not give consent and the offeree unless earlier revoked. Pag third person ang magbenta, ano? Unenforceable. If the representative is a third person, unenforceable. But if it were the spouse, void yan. Summary: -This only refers to acts of administration, and not acts of ownership - if the guardian or representative would exercise acts of ownership beyond what is authorize, the act will not be rescissible but rather unenforceable. That is acted without or in excess of the authority granted to him. But if the representative is the spouse, the act is void. But such act prior to the effectivity of the family code is not void, but voidable. So this would only refer to in excess of the authority granted to the present spouse and the encumbrance/alienation refers to the paraphernal property and the capital(?) property of the absentee. -But if it were acts of administration, to fall whether in number one or number two 1381, it must exceed 1/4 of the value of the object of the contract.

Action to rescind may be brought even if debtor has not been judicially declared insolvent and even if the creditor has not yet brought an action to collect.

- But even if it exceeds more than one fourth of the value, but there is court approval or judicial authorization, then there can be no rescission.

4.

-The exception in #1 and 2 is judicial authorization, no rescission if with court approval, even if the wife or the absentee suffers lesion by more than one fourth.

THINGS IN LITIGATION (eg. A sues B for recovery of ring – pendente ite, B sells ring to C – sale to C is rescissible) Property is in litigation after defendant received service of summons.

1381: #1 and 2: The guardian with respect to the ward, and the representative with respect to the absentee are only given the powers of administration. The powers mentioned in 1381 are powers of administration and the representative or the guardian entered into a contract and the object of the contract resulted to the economic injury of either the ward or the absentee. By more than 1/4 of value of the object thereof. So example, you wanted to enhance the development of the farm, so what you did was to buy an equipment, a tractor. But you also have other motives in mind. And you tell now the dealer, "can you increase the price by 30%? You get 5%, I get 25%", so in that case the contract entered into by the administrator can be rescinded because it will result to the economic injury of the ward by more than 1/4 of the value of the object which is the tractor. But, even if it exceeds more than 1/4, but the administrator obtained judicial authorization, then there can be no rescission. Only in cases where there has been no judicial authorization obtained by the representative or the guardian. But what if the guardian or the representative speaks of getting money in order to develop the property. He now mortgaged the property. What kind of a contract is that? Unenforceable contract, beyond his authority. Now, if you remember in your Family Code, when can you consider a person an absentee for purposes of administration? 2 years if without administrator, and 5 years if there is an administrator. In those cases there is a need for judicial declaration as an absentee.

3.) Those undertaken in fraud of creditors when teh latter cannot in any other manner collect the claim due them. Now the creditor cannot ask for annulment precisely because he is not a party to the contract. He can only ask for rescission. The court cannot just grant rescission since there are certain requisites that must be complied with. In order that rescission will lie. It will be found in the cases that i've assigned. Now if the transfer is onerous, we have to take into account the good faith or bad faith of the transferee. So the exception in number three would now depend on the kind of transfer. If suppose it is an onerous transfer, meaning there is an equivalent consideration given. So if it is onerous and ther is good faith from the first transferor to the first transferee (meaning the transferee acted in good faith), then the creditor who is prejudiced by the transfer could no longer ask for the rescission of the transfer because of the good faith. His only recourse is to ask damages from the transferor. Exception: even if the first transferee acted in GF, subsequent transferee acted in bad faith, and there is collusion between the transferor and the second transfeee, to cleanse the transfer of any defect, they would now use the first transferee as an intermediary or a bridge, then there can be rescission. But if there was no collusion between the transferor and the 2nd transferee, the good faith of the first transferee will cleanse the transfer, hence there can no longer be rescission, even if the subsequent transfer is in bad faith. The good faith of the first transfer cures the bad faith of the second transfer.

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Now, if there is bad faith from the first to the 2nd then definitely there can be rescission. OR suppose there are several transfer. From the 1st transferee who acted in bad faith, to the second transferee who acted in bad faith, to the third transferee who still acted in bad faith and the fourth transferee who acted in good faith. Then it ends now to the fourth transferee regardless of the bad faith of the subsequent transferee because it ended with the person who acted in good faith, when he received the thing transferred. Then there can be damages, not rescission because there has been good faith of the last transferee. So all the of the transferee will be liable, from the first transferee to the third transferee. Now what if the transfer is gratuitous? Do we also follow the same principle? No. The good faith or bad faith of the transferee is immaterial. Regardless of the good faith or bad faith of the receiver, the contract has to be rescinded. Why? There is no consideration given by the transferee, so he cannot be prejudiced by the rescission. Now, In Oria vs. Manikil (?), there are also what we call as the badges of fraud with respect to alienation in order to defraud creditors. Now what are the badges of fraud: 1.

the fact that the consideration of the conveyance is inadequate

2.

a transfer made by the debtor after suit has been begun and while it is pending against him. Meaning there is already a case filed against him involving collection or money claim, then the debtor now would start to dispose or encumber the properties that might answer for the judgment award that may be rendered by the court against him.

3.

a sale upon credity by an insolvent debtor So if you are insolvent, why will you sell your property on credit when you are actually in need of money.

4.

Evidence of large indebtedness or complete insolvency. Your assets cannot meet your obligations. Obligations exceeds assets.

5.

the transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially, especially if the transfer is gratuitous in nature.

6.

the fact that the transger is made between father and son, when there are present any of the above circumstances. The mere fact that there is a transfer between a parent and a child does not arise that there is a fraudulent transfer. But if it is a transfer between a father and a son and it is accompanied by a sale upon credit by an insolvent debtor (Chua vs. CA), then definitely the presumption will arise that the transfer is to defraud creditors.

7.

The failure of the vendee to take exclusive possession of all the property

So those are the badges of fraud. And if any of those will be found, then the presumption will arise especially if the transfer is made after incurring the obligation and it can be shown that the debtor has no other property which can answer for that obligation except that property which he has transferred, then the presumption will

arise that he intended to defraud the creditors when he made that transfer. 4.) Those which refer to things under litigation if they have been enterd into by the defendant without the knowledge and approval of the litigants or of competent judicial authority Example of this would be a claim for reconveyance, meaning you're asking for the return of real or movable property, if what is involved is real property and you are the complainant, to protect your right, to prevent the defendant in possession of the property from alienating it without your knowledge or without the approval of court, then you may go to the office of the Register of Deeds and have it annotated at the back of the title of the property that this property is under litigation. And we call that notice of lis pendens. Or if what is involved is personal property, then you pray before the court that a writ of attachment be issued or a receiver be appointed over the property which is the subject matter of the litigation, in order to place the property in custodia legis and to take it away from the possession of the debtor. 5.) All other contracts specially declared by law to be subject to rescission Those referred to in Art. 78 with respect to partiton of the estate of the deceased when one of the heirs suffer lesion by more than 1/4 of the value which he is supposed to receive. Others would be those falling under the Law on Sales, 1524, 1526, and 1529 CASES ONG vs CA Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid, by restoration of things to their condition at the moment prior to the celebration of the contract. 14 It implies a contract, which even if initially valid, produces a lesion or a pecuniary damage to someone. On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. 16 They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished from rescission of contracts under Article 1383. Although both presuppose contracts validly entered into and subsisting and both require mutual restitution when proper, they are not entirely identical. While Article 1191 uses the term "rescission," the original term which was used in the old Civil Code, from which the article was based, was "resolution. 17" Resolution is a principal action which is based on breach of a party, while rescission under Article 1383 is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil Code, which expressly enumerates the following rescissible contracts: 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 112




suffer the lesion stated in the preceding number; 3. Those undertaken in fraud of creditors when the latter cannot in any manner collect the claims 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. Obviously, the contract entered into by the parties in the case at bar does not fall under any of those mentioned by Article 1381. Consequently, Article 1383 is inapplicable. May the contract entered into between the parties, however, be rescinded based on Article 1191? A careful reading of the parties' "Agreement of Purchase and Sale" shows that it is in the nature of a contract to sell, as distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price. 18 In a contract to sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. 19 Respondents in the case at bar bound themselves to deliver a deed of absolute sale and clean title covering the two parcels of land upon full payment by the buyer of the purchase price of P2,000,000.00. This promise to sell was subject to the fulfillment of the suspensive condition of full payment of the purchase price by the petitioner. Petitioner, however, failed to complete payment of the purchase price. The non-fulfillment of the condition of full payment rendered the contract to sell ineffective and without force and effect. It must be stressed that the breach contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation. 20 Failure to pay, in this instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring binding force. 21 Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force. CHINABANKING CORPORATION vs. CA Private respondent points out that the dispositive portion of our Decision can not be executed without affecting the rights of Metrobank inasmuch as Alfonso’s right of redemption, which he assigned to Paulino, only had a lifetime of twelve months from the date of registration of the certificate of sale in favor of Metrobank. The rescission of the assignment of the right to redeem would have had the effect of allowing the twelve-month period of redemption to lapse, and thus confer on Metrobank the right to consolidate ownership over the property and to the execution of the sheriff’s final deed of sale. The certificate of sale in favor of Metrobank was registered on December 22, 1987. Under the 1964 Rules of Court which were in effect at that time, the judgment debtor or redemptioner had the right to redeem the property from Metrobank within twelve months8from the date of registration of the certificate of sale.9 Chinabank was a redemptioner, being then a creditor with a

lien by judgment on the property sold, subsequent to the judgment under which the property was sold.10 Upon the expiration of the twelve-month period of redemption and no such redemption is made, the purchaser shall be entitled to the final deed of sale over the property sold on execution. Deed and possession to be given at expiration of redemption period. By whom executed or given. --- If no redemption be made within twelve (12) months after the sale, the purchaser, or his assignee, is entitled to a conveyance and possession of the property; or, if so redeemed, whenever sixty (60) days have elapsed and no other redemption has been made, and notice thereof given, and the time for redemption has expired, the last redemptioner, or his assignee, is entitled to the conveyance and possession; but in all cases the judgment debtor shall have the entire period of twelve (12) months from the date of the sale to redeem the property. The deed shall be executed by the officer making the sale or by his successor in office, and in the latter case shall have the same validity, as though the officer making the sale had continued in office and executed it. Upon the execution and delivery of said deed, the purchaser, or redemptioner, or his assignee, shall be substituted to and acquire all the right, title, interest and claim of the judgment debtor to the property as of the time of the levy, except as against the judgment debtor in possession, in which case the substitution shall be effective as of the date of the deed. The possession of the property shall be given to the purchaser or last redemptioner by the same officer unless a third party is actually holding the property adversely to the judgment debtor. Hence, at the time Chinabank levied on Alfonso Roxas Chua’s share in TCT No. 410603 on February 4, 1991, the said property was no longer his. The same had already been acquired by Metrobank and, later, redeemed by Paulino Roxas Chua. Even without the assignment of the right to redeem to Paulino, the subject share in the property would pertain to Metrobank. Either way, Chinabank would not stand to acquire the same. It is an established doctrine that a judgment creditor only acquires at an execution sale the identical interest possessed by the judgment debtor in the property which is the subject of the sale. It follows that if, at the time of the execution sale, the judgment debtor had no more right to or interest in the property because he had already sold it to another, then the purchaser acquires nothing.12 Otherwise stated, the rescission of the assignment of the right to redeem would have nullified Paulino’s redemption of the property. Thus, Metrobank’s inchoate right to the property would have become complete as of December 1988, when the twelve-month redemption period expired without the right of redemption having been exercised. As stated above, Chinabank was a redemptioner that could redeem the property from Metrobank. It was a judgment creditor with a lien on the property sold subsequent to the judgment under which the property was sold. Hence, what Chinabank could have done was to redeem the property ahead of Paulino. In the alternative, it could have moved for the rescission of the assignment to Paulino of the right to redeem, but within the twelve-month period of redemption. Beyond that, there would be no more right of redemption and, thus, no more assignment to rescind. Assuming that there was no valid assignment of the right to redeem, Paulino, as the son and compulsory heir of Alfonso, could still redeem his father’s share in the property from Metrobank. Under Rule 39, Section 29 (a) of the 1964 Rules of Court, the judgment debtor or his successor in interest may redeem real 113




property sold on execution. Paulino is included within the term "successor in interest." BRICKTOWN vs. TIERRA The core issues would really come down to (a) whether or not the contracts to sell were validly rescinded or cancelled by petitioner corporation and, in the affirmative, (b) whether or not the amounts already remitted by private respondent under said contracts were rightly forfeited by petitioner corporation. Admittedly, the terms of payment agreed upon by the parties were not met by private respondent. Of a total selling price of P21,639,875.00, private respondent was only able to remit the sum of P1,334,443.21 which was even short of the stipulated initial payment of P2,200,000.00. No additional payments, it would seem, were made. A notice of cancellation was ultimately made months after the lapse of the contracted grace period. Paragraph 15 of the Contracts to Sell provided thusly: 15. Should the PURCHASER fail to pay when due any of the installments mentioned in stipulation No. 1 above, the OWNER shall grant the purchaser a sixty (60)-day grace period within which to pay the amount/s due, and should the PURCHASER still fail to pay the due amount/s within the 60-day grace period, the PURCHASER shall have the right to ex-parte cancel or rescind this contract, provided, however, that the actual cancellation or rescission shall take effect only after the lapse of thirty (30) days from the date of receipt by the PURCHASER of the notice of cancellation of this contract or the demand for its rescission by a notarial act, and thereafter, the OWNER shall have the right to resell the lot/s subject hereof to another buyer and all payments made, together with all improvements introduced on the aforementioned lot/s shall be forfeited in favor of the OWNER as liquidated damages, and in this connection, the PURCHASER obligates itself to peacefully vacate the aforesaid lot/s without necessity of notice or demand by the OWNER. 3 A grace period is a right, not an obligation, of the debtor. When unconditionally conferred, such as in this case, the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right. The grace period must not be likened to an obligation, the non-payment of which, under Article 1169 of the Civil Code, would generally still require judicial or extrajudicial demand before "default" can be said to arise. 4 Verily, in the case at bench, the sixty-day grace period under the terms of the contracts to sell became ipso facto operative from the moment the due payments were not met at their stated maturities. On this score, the provisions of Article 1169 of the Civil Code would find no relevance whatsoever. The cancellation of the contracts to sell by petitioner corporation accords with the contractual covenants of the parties, and such cancellation must be respected. It may be noteworthy to add that in a contract to sell, the non-payment of the purchase price (which is normally the condition for the final sale) can prevent the obligation to convey title from acquiring any obligatory force (Roque vs. Lapuz, 96 SCRA 741; Agustin vs. Court of Appeals, 186 SCRA 375). The forfeiture of the payments thus far remitted under the cancelled contracts in question, given the factual findings of both the trial court and the appellate court, must be viewed differently. While clearly insufficient to justify a foreclosure of the right of petitioner corporation to rescind or cancel its contracts with private

respondent, the series of events and circumstances described by said courts to have prevailed in the interim between the parties, however, warrant some favorable consideration by this Court. Petitioners do not deny the fact that there has indeed been a constant dialogue between the parties during the period of their juridical relation. Concededly, the negotiations that they have pursued strictly did not result in the novation, either extinctive or modificatory, of the contracts to sell; nevertheless, this Court is unable to completely disregard the following findings of both the trial court and the appellate court. Said the trial court: It has been duly established through the testimony of plaintiff's witnesses Marcosa Sanchez and Vicente Casas that there were negotiations to enter into another agreement between the parties, after March 31, 1981. The first negotiation took place before June 30, 1981, when Moises Petilla and Renato Dragon, Vice-President and president, respectively, of the plaintiff corporation, together with Marcosa Sanchez, went to the office of the defendant corporation and made some proposals to the latter, thru its president, the defendant Mariano Velarde. They told the defendant Velarde of the plaintiff's request for the division of the lots to be purchased into smaller lots and the building of town houses or smaller houses therein as these kinds of houses can be sold easily than big ones. Velarde replied that subdivision owners would not consent to the building of small houses. He, however, made two counter-proposals, to wit: that the defendant corporation would assign to the plaintiff a number of lots corresponding to the amounts the latter had already paid, or that the defendant corporation may sell the corporation itself, together with the Multinational Village Subdivision, and its other properties, to the plaintiff and the latter's sister companies engaged in the real estate business. The negotiations between the parties went on for sometime but nothing definite was accomplished. 5 For its part, the Court of Appeals observed: We agree with the court a quo that there is, therefore, reasonable ground to believe that because of the negotiations between the parties, coupled with the fact that the plaintiff never took actual possession of the properties and the defendants did not also dispose of the same during the pendency of said negotiations, the plaintiff was led to believe that the parties may ultimately enter into another agreement in place of the "contracts to sell." There was, evidently, no malice or bad faith on the part of the plaintiff in suspending payments. On the contrary, the defendants not only contributed, but had consented to the delay or suspension of payments. They did not give the plaintiff a categorical answer that their counterproposals will not materialize. 6 In fine, while we must conclude that petitioner corporation still acted within its legal right to declare the contracts to sell rescinded or cancelled, considering, nevertheless, the peculiar circumstances found to be extant by the trial court, confirmed by the Court of Appeals, it would be unconscionable, in our view, to likewise sanction the forfeiture by petitioner corporation of payments made to it by private respondent. Indeed, in the opening statement of thisponencia, we have intimated that the relationship between parties in any contract must always be characterized and punctuated by good faith and fair dealing. Judging from what the courts below have said, petitioners did fall well behind that standard. We do not find it equitable, however, to adjudge any interest payment by petitioners on the amount to be thus refunded, computed from judicial demand, for, indeed, private respondent should not be allowed to totally free itself from its own breach.

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Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292) REQUISITES 1. The Debtor-payer must have been insolvent (no judicial declaration needed) 2. Debt was not yet due and demandable. Now another act which can be the subject of rescission can be found in 1382: obligations not yet due. That is what is meant by to whom fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. So it refers to obligations not yet due, yet despite the fact that the debtor is insolvent pays the obligation, so there can also be rescission. And that is why we said that the action for rescission is subsidiary, the person who will be prejudiced by such must show proof before court that he had already exhausted all efforts to recover what is due him, and he failed, and he found out that the debtor has already transferred nearly all his property to answer for the credit that is due him. So it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. (1383) And he cannot ask for more than what is due him. He can only ask to the extent necessary to cover the damages caused. (1384) 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. (1294) CASES SIGUAN vs. LIM In the present case, the fact that the questioned Deed was registered only on 2 July 1991 is not enough to overcome the presumption as to the truthfulness of the statement of the date in the questioned deed, which is 10 August 1989. Petitioner's claim against LIM was constituted only in August 1990, or a year after the questioned alienation. Thus, the first two requisites for the rescission of contracts are absent. Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration of the contract of donation, still her action for rescission would not fare well because the third requisite was not met. Under Article 1381 of the Civil Code, contracts entered into in fraud of creditors may be rescinded only when the creditors cannot in any manner collect the claims due them. Also, Article 1383 of the same Code provides that the action for rescission is but a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. The term "subsidiary remedy" has been defined as "the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission is resorted to." 19 It is, therefore, "essential that the party asking for rescission prove that he has exhausted all other legal means to obtain satisfaction of his claim. 20 Petitioner neither alleged nor proved that she did so. On this score, her action for the rescission of the questioned deed is not maintainable even if the fraud charged actually did exist."

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). Without availing of the first and second remedies, i.e., exhausting the properties of the debtor or subrogating themselves in Francisco Bareng's transmissible rights and actions, petitioners simply undertook the third measure and filed an action for annulment of the sale. This cannot be done. Indeed, an action for rescission is a subsidiary remedy; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. 6 Thus, Art. 1380 of the Civil Code provides: The following contracts are rescissible: xxx xxx xxx (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; Petitioners have not shown that they have no other means of enforcing their credit. As the Court of Appeals pointed out in its decision: In this case, plaintiffs-appellants had not even commenced an action against defendants-appellees Bareng for the collection of the alleged indebtedness. Plaintiffs-appellants had not even tried to exhaust the property of defendants-appellees Bareng. Plaintiffsappellants, in seeking for the rescission of the contracts of sale entered into between defendants-appellees, failed to show and prove that defendants-appellees Bareng had no other property, either at the time of the sale or at the time this action was filed, out of which they could have collected this (sic) debts Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n) Partial rescission is possible; benefits only the creditor who has asked for rescission. Art. 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) Mutual restitution Requisites before Rescission can be Brought 1.

ADORABLE vs. CA

2.

Thus, the following successive measures must be taken by a creditor before he may bring 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)

3. 4.

Generally, plaintiff must be able to return what has been received by virtue of rescissible contract. Except when it is prejudicial to creditors. The thing-object of the contract is not in the legal possession of 3rd persons in good faith. There must be no other legal remedy. The action must be brought w/in proper prescriptive period.

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1385: So what must be returned? The object of the contract, the fruits, the price and the interest. And if you cannot return this then you cannot ask for rescission. It can be carried out only when he who demands rescission can return whatever he will be obliged to return. So just like 1191, there is mutual restitution. And you cannot ask for rescission unless you can return what you have received from the other party. Neither shall rescission take place when the things which are the object of hte 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. Now, if the transfer is gratuitous and you acted in good faith, you received the property believing in good faith that the transfer gratuitously is legal and valid, are you also obliged to return the thing, the fruits, the price and the interest? If you are a transferee in good faith, your obligations are to return the thing but not to pay for the fruits already received. Second, if you have incurred necessary expenses, then you can ask for reimbursement. Third, you return the thing in the condition that it is found. Meaning if there has already been deterioration, then you return the thing in that state. Unless, if the deterioration is caused by your negligence or through fraud after receiving the summons for rescission. But if it was due to a fortuitous event and before you have received the summons, then you will not be liable for the deterioration of the thing which is the subject matter for rescission. Now, restoration or restoration applies only to what under Art. 1381? #1 and 2 and 3, exception is onerous and good faith, and in number 4, exception you are the complainant and you have not annotated it, and the 3rd person who acquired it had no constructive knowledge of the litigation.

rescission of the contract to sell by petitioner without opposition from private respondents who, in turn, sold the property to other persons, private respondent BARRETTO REALTY, as the vendor, had the obligation to return the earnest money of P1000,000.00 plus legal interest from the date it received notice of rescission from petitioner, i.e., 30 August 1988, up to the date of the return or payment. It would be most inequitable if resondent BARRETTO REALTY would be allowed to retain petitioner's payment of P1,000,000.00 and at the same time appropriate the proceeds of the second sale made to another. Art. 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts approved by the courts. 1386: Rescission referred to in Nos. 1 and 3 of 1381 shall not take place with respect to contracts approved by the courts Art. 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 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 the law of evidence. (1297a) PRESUMPTIONS OF FRAUD Gratuitous Alienations - presumed fraudulent: when debtor did not reserve sufficient property to pay all debts contracted “before” the donation.

CASES GOLDENROD vs. CA In University of the Philippines v. de los Angeles, 2 the right to rescind contracts is not absolute and is subject to scrutiny and review by the proper court. We held further, in the more recent case of Adelfa Properties, Inc. v. Court of Appeals, 3 that rescission of reciprocal contracts may be extrajudicially rescinded unless successfully impugned in court. If the party does not oppose the declaration of rescission of the other party, specifying the grounds therefor, and it fails to reply or protest against it, its silence thereon suggests an admission of the veracity and validity of the rescinding party's claim. Private respondents did not interpose any objection to the rescission by petitioner of the agreement. As found by the Court of Appeals, private respondent BARRETTO REALTY even sold Lot 2 of the subject consolidated lots to another buyer, ASIAWORLD, one day after its President Anthony Que received the broker's letter rescinding tne sale. Subsequently, on 13 October 1988 respondent BARRETO REALTY also conveyed ownership over Lot 1 to UCPB which, in turn, sold the same to ASIAWORLD. Art. 1385 of the Civil Code provides that rescission creates the obligation to return the things which were the object of the contract together with their fruits and interest. The vendor is therefore obliged to return the purchase price paid to him by the buyer if the latter rescinds the sale, 4 or when the transaction was called off and the subject property had already been sold to a third person, as what obtained in this case. 5 Therefore, by virtue of the extrajudicial

Onerous Alienations - Presumed fraudulent – when made by persons: 1. Against whom some judgment has been rendered in any instances (even if not final); or 2. Against whom some writ of attachment has been issued. BADGES OF FRAUD (circumstances that a certain alienation has been made in fraud of creditors) 1. The fact that consideration of the conveyance is fictitious or inadequate; 2. A transfer made by a debtor after suit has been began and while it is pending against him; 3. A sale upon credit by an insolvent debtor; 4. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially; 5. Evidence of large indebtedness or complete insolvency; 6. The fact that the transfer is made between father and son; 7. The failure of vendee to take exclusive possession of all the property. A gratuitous conveyance or donation, validly executed is presumed valid unless it can be shown that at the time of execution of conveyance, a creditor/s is/are adversely affected by said transaction.

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Fraud is not sufficient to rescind; for after all transferee may have been in good faith and is now in legal possession of the property. 1387: Presumptions Par. 1: It is absolutely necessary when you prepare a deed of donation for the donor to state that he has reserved sufficient property for himself to answer for his support as well as the obligations that he has incurred prior to this donation. Otherwise, if that is not found then the presumption is that you intend to defraud your creditors. Par. 2: So the first is that, even if it is by onerous title, 1. there is already an on going case filed against you for collection of money, or 2. there is a writ of attachment ( a writ of attachment is issued during the pendency of the case asked by the complainant upon the court that the defendant is about to dispose nearly all his property and which if judgment shall be rendered by the court in favor of the complainant, the writ of execution issued by the court by reason of that favorable judgment will be returned unsatisfied by the sheriff) Par. 3: Badges of fraud Art. 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)

 

“due to any cause” includes fortuitous event. Rescission is merely a secondary remedy --- only if debtor cannot pay. Transfers  If transferee is in good faith; good/ bad faith of next transferee is immaterial;  If transferee is in bad faith; the next transferee is only liable if he is in bad faith. 1388: So in this case, the first acquirer shall be liable, then as we said, he transfers it to T2 and then to T3, the liability will be only upto T3. He will not be liable to return, precisely because he has transferred it, but he will be liable for damages. Because of the impossibility to return what he is supposed to return to the debtor for purposes of answering the liabilities of the debtor. Art. 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) WHO CAN BRING ACTION? 1. The injured party (or defrauded creditor) 2. His heir or successor-in-interest 3. Creditors of (a) and (b) by virtue of Art. 1177 of C.C 1389 Now when do you institute the action for rescission? Must be commenced within four years. For persons under guardianship and for absentees, the four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known.

Now suppose it does not fall under numbers 1 and 2. When shall you start counting the four year period? That was answered in the case of Cheng vs. CA. VOIDABLE CONTRACTS Art. 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) RESCISSION

ANNULMENT

Basis is lesion (damage)

Basis is vitiated consent or incapacity to consent

Defect is external/extrinsic

Defect is internal/intrinsic (in the meeting of mind)

Action is subsidiary

Action is principal

A remedy

A sanction

Private interest governs

Public interest governs

Equity predominates

Law predominates

Plaintiff may be party or 3rd person

Plaintiff must be a party to the contract

There is damage

Damage is immaterial

If plaintiff is indemnified; rescission will not prosper

Indemnity is not a bar to the action

Compatible w/ perfect validity

Defect is presupposed

To prevent rescission, ratification is not required.

To prevent annulment, ratification is required.

There are only two kinds of voidable contracts, and these can be annulled by the court even if there may have been no damage to the contracting parties. So one would be when one of the parties is incapable of giving consent to a contract, 2. where any of the vices of consent is employed in order to obtain the consent by one of the contracting parties. These contracts are binding, unless there are annulled by a proper action in court. They are susceptible of ratification. And voidable or annullable contracts cannot be attacked collaterally. You must institute a direct proceeding asking that the contract be annulled. What do you mean by collateral attack? You say, "By the way, the contract is voidable because one of the parties is a minor". When you say direct, you insitute an action asking the court asking the 117




court to annul the contract on the ground of 1 or 2. Or you can state it in the counterclaim if you are a defendant. And when will you bring the action for annulment? Four years, and the period shall begin 1. 2. 3.

If it were intimidation, violence or undue influence, form the time the defect of the consent ceases; In cases of mistake or fraud, from the time of the discovery of the same; and when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. May the guardian bring also an action for annulment? of course. But if it were the minor, then upon reaching the age of majority, if the incapacitated, then from the time of the cessation of guardianship.

What happens if there is ratification? Ratification cleanses the contract of its defects, and it shall retroact to the day of the inception of the contract. It has retroactive effect, and it cleanses the contract of whatever defects it creates. So it becomes a valid contract. Now ratification may be express or tacit. It is understood as tacit 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. Now who has the right to invoke it? May the capacitated person invoke the incapacity of the other party? Or the person who employed any of the vices of the consent on the ground that the contract is voidable because he used fraud or there was mistake, and he was the one who caused the mistake? No. It can only be brought by the aggrieved party.Who? The minor, the incapacitated, the person upon whom any of the vices of consent were employed. So when is there tacit ratification? For instance, the minor sells the property during minority. Upon reaching the age of majority, instead of asking for the annulment of the contract, he will now rent the very property. Or he buys the property during minority, and instead of having that contract of sale annulled upon reaching the age of majority, he now donates the property. Or during the minority the purchase price has not been fully paid, and upon reaching the age of majority, he asks for the balance of the purchase price. So the guardian may effect the ratification.

The error in petitioners' contention is evident. Article 1390, par. 2, refers to contracts visited by vices of consent, i.e., contracts which were entered into by a person whose consent was obtained and vitiated through mistake, violence, intimidation, undue influence or fraud. In this instance, private respondent's consent to the contract of sale of their conjugal property was totally inexistent or absent. Gilda Corpuz, on direct examination, testified thus: 11 Q Now, on March 1, 1990, could you still recall where you were? A I was still in Manila during that time. xxx xxx xxx ATTY. FUENTES: Q When did you come back to Koronadal, South Cotabato? A That was on March 11, 1990, Ma'am. Q Now, when you arrived at Koronadal, was there any problem which arose concerning the ownership of your residential house at Callejo Subdivision? A When I arrived here in Koronadal, there was a problem which arose regarding my residential house and lot because it was sold by my husband without my knowledge. This being the case, said contract properly falls within the ambit of Article 124 of the Family Code, which was correctly applied by the teo lower court: Art. 124. The administration and enjoyment of the conjugal partnerhip properly shall belong to both spouses jointly. In case of disgreement, the husband's decision shall prevail, subject recourse to the court by the wife for proper remedy, which must be availed of within five years from the date of the contract implementing such decision. In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the conjugal properties, the other spouse may assume sole powers of administration. These powers do not include the powers of disposition or encumbrance which must have the authority of the court or the written consent of the other spouse. In the absence of such authority or consent, the disposition or encumbrance shall be void. However, the transaction shall be construed as a continuing offer on the part of the consenting spouse and the third person, and may be perfected as a binding contract upon the acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors. (165a) (Emphasis supplied) Comparing said law with its equivalent provision in the Civil Code, the trial court adroitly explained the amendatory effect of the above provision in this wise: 12

CASES GUIANG vs. CA Petitioners insist that the questioned Deed of Transfer of Rights was validly executed by the parties-litigants in good faith and for valuable consideration. The absence of private respondent's consent merely rendered the Deed voidable under Article 1390 of the Civil Code, which provides: Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: xxx xxx xxx (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)

The legal provision is clear. The disposition or encumbrance is void. It becomes still clearer if we compare the same with the equivalent provision of the Civil Code of the Philippines. Under Article 166 of the Civil Code, the husband cannot generally alienate or encumber any real property of the conjugal partnershit without the wife's consent. The alienation or encumbrance if so made however is not null and void. It is merely voidable. The offended wife may bring an action to annul the said alienation or encumbrance. Thus the provision of Article 173 of the Civil Code of the Philippines, to wit: Art. 173. The wife may, during the marriage and within ten years from the transaction questioned, ask the courts for the annulment of any contract of the husband entered into without her consent, when such consent is required, or any act or contract of the husband which tends to defraud her or impair her interest in the conjugal partnership property. Should the wife fail to exercise this 118




right, she or her heirs after the dissolution of the marriage, may demand the value of property fraudulently alienated by the husband.(n) This particular provision giving the wife ten (10) years . . . during [the] marriage to annul the alienation or encumbrance was not carried over to the Family Code. It is thus clear that any alienation or encumbrance made after August 3, 1988 when the Family Code took effect by the husband of the conjugal partnership property without the consent of the wife is null and void. Furthermore, it must be noted that the fraud and the intimidation referred to by petitioners were perpetrated in the execution of the document embodying the amicable settlement. Gilda Corpuz alleged during trial that barangay authorities made her sign said document through misrepresentation and coercion. In any event, its execution does not alter the void character of the deed of sale between the husband and the petitioners-spouses, as will be discussed later. The fact remains that such contract was entered into without the wife's consent. In sum, the nullity of the contract of sale is premised on the absence of private respondent's consent. To constitute a valid contract, the Civil Code requires the concurrence of the following elements: (1) cause, (2) object, and (3) consent, 14 the last element being indubitably absent in the case at bar. Art. 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 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) Art. 1392. Ratification extinguishes the action to annul a voidable contract. (1309a) Requisites of Ratification 1. Contract is voidable 2. Person ratifying must know the reason for the contract being voidable (cause is known) 3. Cause must not exist/continue to exist anymore at time of ratification 4. Ratification is made expressly or by an act implying a waiver of action to annul 5. Person ratifying must be the injured party. 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 an act which necessarily implies an intention to waive his right. (1311a) Art. 1394. Ratification may be effected by the guardian of the incapacitated person. (n) Art. 1395. Ratification does not require the conformity of the

contracting party who has no right to bring the action for annulment. 1395: Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. Ratification does not require the consent of the party who has no right to institute the action for annulment. So who can ask for annulment? Those who may be obliged either principally or subsidiarily (guarantors, sureties, mortgagors). 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. So we apply the principle of estoppel with respect to those who are capable, they cannot ask for annulment on the ground that the other party is incapacitated. Now the exception there is if there is active misrepresentation on the part of the incapacitated person. Then the incapacitated person cannot be heard later on when asking for annulment that at the time he entered into the contract, he was incapacitated because there was active misrepresentation. Active misrepresentation, for example: "You are a minor" and you say "No, i am 18 and I have a cedula to show you" but the cedula is doctored. Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313) Retroactive Effect of Ratification  Once ratified, annulment based on original defect cannot prosper.  Rights of innocent 3rd persons must not be prejudiced. Art. 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) WHO MAY ASK FOR ANNULMENT: 

The victim (principal or subsidiary party) EXCEPT: If person not obliged principally/ subsidiarily in a contract may exercise an action for nullity if he is prejudiced in his rights w/ respect to one of the contracting parties.



Creditors of victim cannot ask for annulment except when it prejudice them and the debtor has no other property.

Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which 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) Effects of Annulment 1. If contract is not complied w/, parties are excused from the obligation. 2. If contract has already been performed . . . Mutual Restitution of: 3. The thing with fruits; 4. The price with interest. 119






Cannot be availed of by strangers to contract and innocent third parties cannot be obliged to restore.  Husband cannot barter away his wife’s paraphernal properties except when she consents. 1398: If there is annulment, what will be the obligation of the parties, again, mutual restitution. And what shall it consist? The subject matter, the fruits, the price with its interest. But this will only apply to contracts falling under Number 2. (employment of any of the vices of consent) Art. 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. 1399: Contract entered into by the incapacitated (number 1). He is only obliged to restore in so far as he has been benefited by the thing or price received by him. In relation to that 1241, if he has kept the thing delivered, or if he has disposed the thing and the disposal was to his benefit, those are the exception. No restoration except if he has kept the thing delivered, or if he has disposed of it and was benefited by the disposal. So those are the only instances wherein restoration will be possible with respect to the incapacitated. The defendant in an annullable contract would either be the capacitated or the person who employed the vices of the consent. Now, if he were the one who lost the thing which is the object of the contract which is annullable, then he shall have the obligation to return the fruits received, the price or the value of the thing plus the interest. So those are the object that he would have to return in case annulment is possible but he could no longer do it because it has been lost by fault (or fraud), then he has to return the value, the price and the interest. Now what happens if the thing is lost and the person obliged to return it is the incapacitated, or the person upon whom any of the vices of consent were employed? 1401 says that if the thing is lost through the fault of the person who has the right to institute the action, then the petition for annulment is extinguished. Now, if the lost is fortuitous, then the action will prosper because the law says through the fault or fraud. So it were lost through fortuitous event, however the defendant cannot be compelled to restore what he is obliged to restore because the essence of mutual restitution becomes untenable in as much as there can be no mutual restitution. But it will prosper if the plaintiff if the person who has the right to institute the action for annulment offers to pay the value of the thing that he has lost. Now, what will be the basis of the valuation? The value at the time of the loss of the object. Now the defendant will be obliged to return, but the plaintiff will only be obliged to pay the value. He is exempt from paying the value because the lost is through fortuitous event. Art. 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) Art. 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. 1401 2nd paragraph speaks of the action instituted by the incapacitated. So the loss shall not be an obstacle to the success of the action. If you remember also, if it were the incapacitated who lost or squandered the object he is not under obligation to return it. The law only obliges him to return it if it has redounded to his benefit or he has kept the thing. So here, under the 2nd par of 1401, it shall not be an obstacle to the action, unless the loss is through the fault or fraud of the incapacitated. Now what if the defendant loss the object of the contract through a fortuitous event and a petition for annulment is filed by the party who has the right to institute the action? Is he still obliged to pay the value, interest and fruits? No. Because he is in good faith, and the loss is not due to his fault, then he is only obliged to pay the value no longer the interest. Art. 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) Principle of mutual restitution 1402: As long as one of the contracting parties doesn 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. There is that mutual obligation to restore. And if the thing is lost, and the party who lost it has the right to institute the action, and it is lost through fortuitous event, he can still compel if he offers to pay the value of the object of what he is bound to return. If the thing is lost through the fault or negligence of the defendant or the capacitated or the person who excercised the fraud, then he is obliged to pay the value, plus interest, plus damages because there was negligence. CHAPTER 8 UNENFORCEABLE CONTRACTS



Contracts that cannot be sued upon or enforced unless RATIFIED --- no effect yet. KINDS OF UNENFORCEABLE CONTRACTS 1. Unauthorized contracts 2. Those that fail to comply with the Statute of Frauds 3. Those where both parties are incapable of giving consent to a contract. Art. 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: 120




(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; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract. 

Mere lapse of time, no matter how long, is not the ratification required by law.



W/out ratification, the “agent” assumes personal liability.

STATUTE OF FRAUDS Purpose: to prevent fraud; thus some agreement are required to be in writing.  Waivable (defense)  Personal defense, cannot be assailed by 3rd persons  Does not apply to contracts fully or partially performed.  Does not apply to contract of loan. 1. 2.

2 Ways to Waive This Defense Timely failure to object to presentation of oral evidence to prove the oral agreement. Acceptance of benefits under them (as where contract is totally or partially performed)

Art. 1403;2 (b) - special promise refers to a subsidiary/collateral promise to pay like contract of guaranty. 2(c) – agreements in consideration of marriage – marriage settlement; donations propter nuptias STATUTE OF FRAUDS – laws, statutes or provisions w/c require certain agreements to be in writing before they can be enforced in a judicial action.  statutes are applicable only to executory contracts, not to partially or totally executed or performed contracts.  It may be invoked in actions for damages for breach of said agreement or for specific performance. UNENFORCEABLE CONTRACT There are three kinds of unenforceable contracts. Unenforceable contracts cannot be enforced through court action, unless first ratified. The first two are enforceable thru court action. There can be compulsion through specific performance. Here specific performance will not lie, unless the unenforceable contract is ratified.

Now, unenforceable contracts are valid contracts only that because they are still in the stage where there is no performance yet by either of the parties, there can be no action that can be maintained before the court precisely because the agreement is in its executory stage. That is why you cannot prove the existence of the contract through parol or oral evidence. That is why, say A and B would enter into an agreement. A says to B that I am selling my house for 500K, and B says I will buy your house. That is an oral agreement. Valid? Yes, because contracts are valid in whatever form they are entered into unless forms are necessary for its validity or enforceable. So this one is a purely executory but valid contract. There is an offer and there is an unqualified acceptance. So there is a perfected contract only that there is no execution yet by the parties. Now suppose A now would change his mind and later on sell it to C, can B sue A for breach of contract? Can B go to court and compel A to perform? In that case oral evidence is not allowed to prove the existence of the agreement because this is a purely executory agreement involving the sale of real property. So this will only apply to purely executory contracts. But suppose B says, I have 50K, as earnest money, then even if A does not issue a receipt, that agreement is removed from the ambit of purely executory contracts. There is now what we call as partial fulfillment or partial execution. So in that case if A changes his mind and sells to C, B now can go to court and prove before the court the agreement. And there can be oral proof as to the agreement because of this partial payment. It applies only to purely executory contracts, and not to contract which have been consummated, or partially consummated. So let's say its the other way around. B says sige bilihin ko, and A now got hold of his diary and tore a piece of paper and writes that B agreed to buy my property, located at so and so and covered by TCT# 1111, this is already a sufficient note or memorandum. So in that case, if B changes his mind, A now can compel B to pay the purchase price, there is now a perfection of the contract and the proof is the note. It does not have to be a public document. Unenforceable contracts are not curable by any lapse of time. Unlike voidable which prescribe in 4 years, if you do not institute the action, and the lapse of four years will be deemed a waiver of your right to question the voidability of the contract. Another would be, in rescissible contract, the prescriptive period is also 4 years. But here there is no prescription. It gives rise to a defense against its enforcement. You cannot enforce it thru court action precisely because it is a purely executory contract. But not an action to set aside a contract. So you cannot enforce it through court action, but not an action to set aside. It is a defense against its enforcement. So in this case, if B sues A, then A can say that it cannot be enforced precisely because there was no note or memorandum. But A cannot ask for the setting aside of the agreement. So it a sheild but not a sword. So, what are those contracts which are unenforceable unless ratified? (1403) 1. Those entered into in the name of another person by one who has been given no authority or legal representaion or who has acted beyond his powers. If you remember, we discussed this already under 1317. The agent is given the authority to rent, but not the authority to sell. Then in that case if he sells, then the authority is in excess of his authority and in that case the contract entered into by the agent is unenforceable. How shall the principal ratify it? If he demands for the payment of the purchase price. Or he delivers the DOS and asks for the purchase price. But before the ratification 121




comes, the buyer cannot compel the principal to execute the deed of sale precisely because the agent was in excess of his authority.

interest therein; contract of lease for more than one year must be in writing to be enforceable. Take note of the sale of real property that is why in 1358, sale of real property is definitely excluded. As well as of the interest therein, meaning the real property. When we say interest, does that include boundaries, partition? (Rosencor case)

2. Those that do not comply with the Statute of Frauds. The enumeration in paragraph 2 is exclusive, what is not found there is not considered to be included. a.

b.

c.

an agreement that by its terms is not be be performed within a year from the making thereof. So the agreement must not be performed within a year from the time of its constitution. It will not apply if part of it will be performed within the year although the completion of it will take five years. No part of it shall be performed within the entire 1 year period. Or even if on your part it is to be performed within one year but the other party has already performed his part, even partially. That is no longer covered. A special promise to answer for the debt, default or miscarriage of another. An example of this would be a contract of guaranty. But not a credit extended to a debtor upon the exclusive promise of the promissor. So if the promissor says, you sell me your credit, ako ang bahala. That is not within the purview of this paragraph, because that will be what, the exclusive promise of the promissor, but if he guarantees, then it falls within this paragraph. An agreement made n consideration of marriage other than the mutual promise to marry. Remember in your Family Code that a breach of action to marry is not an actionable wrong. It becomes actionable if the breach is coupled with seduction. What would fall under letter c would be marriage settlements, the ante-nuptial agreements or prenuptial agreements. If you remember your requirements in order that prenuptial agreements will be valid, there are only three: writing, signed by the parties, and executed by the parties before the celebration of the marriage. No where does it provide it be in a public document.

Before the effectivity of the family code, donations propter nuptias are also covered by letter c but with the effectivity of the FC, letter C is no longer applicable because now it states that donations propter nuptias must observe the forms on ordinary donations. And if you do not comply with the formalities of ordinary donations, it is void. Now there is this case of Domalagan vs. Bolifer, sabi ni Domalagan, kunin ko yung 500 ko, because hindi sila nagkatuluyan. You read this case and Locquiao case. d.

An agreement for the sale of goods, chattels or things in action (those movables not susceptible of possession, such as credit, negotiable instruments) , 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 art of the purchase money;

Now, what if you buy a certain good and the price is less than 500, but if you take all together, the price is more than 500. Must it be in writing to be enforceable? How will you now interpret the agreement as such? The determining factor is the intention of the parties. If the intention is that it should be taken as a whole, then it must be in writing, subscribed and sworn by the person charged to be enforceable. e.

an agreement for the leasing for a longer period than one yaer, of for the sale of real property or of an

f.

A representation to the credit of a third person. An example of this is suppose Lorelie would like to borrow money from Mr. Tan, and asks Mr. Vicente, kilala mo ba si Lorelie? Ah Oo kilala ko yan. Is she a good payor. Ah yes. You are not vouching for the obligation, you are merely vouching for the credit standing of the third person. That is a representation to the credit of a third person.

3.

Those where both parties are incapable of giving consent to a contract.

Now what if one of the representatives of the incapacitated person would ratify the contract, what would now be the nature of the agreement? Voidable. If both the guardians would ratify, valid. It becomes valid and enforceable. CASES ROSENCOR vs. INQUING At the onset, we not that both the Court of Appeals and the Regional Trial Court relied on Article 1403 of the New Civil Code, more specifically the provisions on the statute of frauds, in coming out with their respective decisions. The trial court, in denying the petition for reconveyance, held that right of first refusal relied upon by petitioners was not reduced to writing and as such, is unenforceable by virtue of the said article. The Court of Appeals, on the other hand, also held that the statute of frauds governs the "right of first refusal" claimed by respondents. However, the appellate court ruled that respondents had duly proven the same by reason of petitioners� waiver of the protection of the statute by reason of their failure to object to the presentation of oral evidence of the said right. Both the appellate court and the trial court failed to discuss, however, the threshold issue of whether or not a right of first refusal is indeed covered by the provisions of the New Civil Code on the statute of frauds. The resolution of the issue on the applicability of the statute of frauds is important as it will determine the type of evidence which may be considered by the trial court as proof of the alleged right of first refusal. The term "statute of frauds" is descriptive of statutes which require certain classes of contracts to be in writing. This statute does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable. Thus, they are included in the provisions of the New Civil Code regarding unenforceable contracts, more particularly Art. 1403, paragraph 2. Said article provides, as follows: "Art. 1403. The following contracts are unenforceable, unless they are ratified: xxx (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 122




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 purchasers and person on whose account the sale is made, it is a sufficient memorandum; e) An agreement for the leasing of a longer period than one year, or for the sale of real property or of an interest therein; f) A representation to the credit of a third person." The purpose of the statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged.11 Moreover, the statute of frauds refers to specific kinds of transactions and cannot apply to any other transaction that is not enumerated therein.12 The application of such statute presupposes the existence of a perfected contract.13 The question now is whether a "right of first refusal" is among those enumerated in the list of contracts covered by the Statute of Frauds. More specifically, is a right of first refusal akin to "an agreement for the leasing of a longer period than one year, or for the sale of real property or of an interest therein" as contemplated by Article 1403, par. 2(e) of the New Civil Code. We have previously held that not all agreements "affecting land" must be put into writing to attain enforceability.14 Thus, we have held that the setting up of boundaries,15 the oral partition of real property16, and an agreement creating a right of way17 are not covered by the provisions of the statute of frauds. The reason simply is that these agreements are not among those enumerated in Article 1403 of the New Civil Code. A right of first refusal is not among those listed as unenforceable under the statute of frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code presupposes the existence of a perfected, albeit unwritten, contract of sale.18 A right of first refusal, such as the one involved in the instant case, is not by any means a perfected contract of sale of real property. At best, it is a contractual grant, not of the sale of the real property involved, but of the right of first refusal over the property sought to be sold19. It is thus evident that the statute of frauds does not contemplate cases involving a right of first refusal. As such, a right of first refusal need not be written to be enforceable and may be proven by oral evidence. The next question to be ascertained is whether or not respondents have satisfactorily proven their right of first refusal over the property subject of the Deed of Absolute Sale dated September 4, 1990 between petitioner Rosencor and Eufrocina de Leon. On this point, we agree with the factual findings of the Court of Appeals that respondents have adequately proven the existence of their right of first refusal. Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly testified that they were promised by the late spouses Faustino and Crescencia Tiangco and, later on, by their

heirs a right of first refusal over the property they were currently leasing should they decide to sell the same. Moreover, respondents presented a letter20 dated October 9, 1990 where Eufrocina de Leon, the representative of the heirs of the spouses Tiangco, informed them that they had received an offer to buy the disputed property for P2,000,000.00 and offered to sell the same to the respondents at the same price if they were interested. Verily, if Eufrocina de Leon did not recognize respondents� right of first refusal over the property they were leasing, then she would not have bothered to offer the property for sale to the respondents. It must be noted that petitioners did not present evidence before the trial court contradicting the existence of the right of first refusal of respondents over the disputed property. They only presented petitioner Rene Joaquin, the vice-president of petitioner Rosencor, who admitted having no personal knowledge of the details of the sales transaction between Rosencor and the heirs of the spouses Tiangco21. They also dispensed with the testimony of Eufrocina de Leon22 who could have denied the existence or knowledge of the right of first refusal. As such, there being no evidence to the contrary, the right of first refusal claimed by respondents was substantially proven by respondents before the lower court. Art. 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this Book. Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them. So 1405 is the exception. The failure to object to the presentation of oral evidence to prove the unenforceable agreement because it is not in writing. That is one exception. Art. 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. This right is given only when contract is both valid and enforceable. 1406: Remember the case of Martinez vs. CA. The public document is only necessary for the registration with the Registry of Deeds and you can compel the other contracting party to observe the required form, and not for purposes of validity or enforceability. But for purposes of registration. Art. 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. 1407: I have discussed this already. Art. 1408. Unenforceable contracts cannot be assailed by third persons. Only the parties because the defense of Statute of Fraud is personal to the contracting parties.

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CHAPTER 9 VOID AND INEXISTENT CONTRACTS

VOIDABLE

2.

VOID

May be ratified

Cannot be ratified

Produces effect until annulled

No effect

Defect: consent

Defect is ordinarily public policy

incapacity/

vitiated

against

Void from the very beginning; no action is required to set aside, UNLESS contract has been performed

May be cured by prescription

Cannot be cured by prescription

Defense may be invoked only by parties or their successorsin-interest

Available to anybody – 3rd persons provided that their interests are affected

Referred to as conditional nullity

Absolute nullity.

UNENFORCEABLE

And there are 7 (1409). Take note that it is void or inexistent from the beginning. These contracts cannot be ratified. Neither can the right to set up the defense if illegality be waived. There are certain contracts which are void, remember that void contracts do not produce any legal effect and no obligation shall arise from a void contract. Exception to the void contracts that cannot be ratified: The contract is void and yet the law says that it can be ratified. Ano yon? Any encumbrance or disposition of the property by the present/capacitated spouse without the written consent of the incapacitated or absentee spouse or without judicial authority is void. But it shall be a continuing offer between the spouse who did not obtain consent and the third person, and shall be considered as a perfected contract as soon as the written consent of the incapacitated spouse or absent spouse is obtaine or judicial authorization. Another is marriage. What kind? When the authority of the solemnizing officer is absent, but one or both the contracting parties believed in good faith that the solemnizing officer has the authority to do. Believed in good faith lang ang kailangan.

VOID

1. may be ratified

Cannot be ratified

2. there is contract but it is unenforceable;

No contract at all

3. cannot be assailed by third parties

Can be assailed by anybody directly affected.

Art. 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; -- (the object could not come into existence because the object may legally be a future thing) (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. Special Classification 1. Inexistent – essential formalities are not complied with. 2. Illegal/ illicit ones Simulate Contracts 1. Absolute – void for lack of consent

CHARATERISTICS OF VOID CONTRACTS 1. Right to set up the defense of illegality cannot be waived; appealable even if not raised in trial court. 2. Action/defense for declaration as inexistent does not prescribe. 3. Not available to third persons whose interests are not directly affected. 4. Cannot give rise to a contract 5. Produces no effect 6. No action to declare them void is needed 7. Cannot be ratified. VOID/INEXISTENT CONTRACTS

Valid until annulled

relative/

Relative – hidden/intended contract is binding

It cannot prescribe but can be defeated by laches. When is there laches? When you sleep on your rights. You know that the contract is defective, it is void but you did not institute the appropriate action. Because while it may be true that void contracts have no legal effect from the very beginning. However, if there has been performance by one of the contracting parties, there is still a necessity for the declaring of the contract void. There is no need to declare nullity by the competent court if the contract is still purely executory, but if there is performance already, then you have to go to court and let the court declare that the contract is void. CASES NOOL vs. CA The petitioner-spouses plead for the enforcement of their agreement with private respondents as contained in Exhibits "C" and "D," and seek damages for the latter's alleged breach thereof. In Exhibit C, which was a private handwritten document labeled by the parties as Resibo ti Katulagan or Receipt of Agreement, the petitioners appear to have "sold" to private respondents the parcels of land in controversy covered by TCT No. T-74950 and TCT No. T100945. On the other hand, Exhibit D, which was also a private handwritten document in Ilocano and labeled as Kasuratan, private respondents agreed that Conchita Nool "can acquire back or repurchase later on said land when she has the money." 15 In seeking to enforce her alleged right to repurchase the parcels of land, Conchita (joined by her co-petitioner-husband) invokes Article 1370 of the Civil Code which mandates that "(i)f the terms of a contract are clear and leave no doubt upon the intention of the 124




contracting parties, the literal meaning of its stipulations shall control." Hence, petitioners contend that the Court of Appeals erred in affirming the trial court's finding and conclusion that said Exhibits C and D were "not merely voidable but utterly void and inexistent." We cannot sustain petitioners' view. Article 1370 of the Civil Code is applicable only to valid and enforceable contracts. The Regional Trial Court and the Court of Appeals ruled that the principal contract of sale contained in Exhibit C and the auxiliary contract of repurchase in Exhibit D are both void. This conclusion of the two lower courts appears to find support in Dignos vs. Court of Appeals, 16 where the Court held: Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were no longer owners of the same and the sale is null and void. In the present case, it is clear that the sellers no longer had any title to the parcels of land at the time of sale. Since Exhibit D, the alleged contract of repurchase, was dependent on the validity of Exhibit C, it is itself void. A void contract cannot give rise to a valid one. 17 Verily, Article 1422 of the Civil Code provides that "(a) contract which is the direct result of a previous illegal contract, is also void and inexistent." We should however add that Dignos did not cite its basis for ruling that a "sale is null and void" where the sellers "were no longer the owners" of the property. Such a situation (where the sellers were no longer owners) does not appear to be one of the void contracts enumerated in Article 1409 of the Civil Code. 18 Moreover, the Civil Code 19 itself recognizes a sale where the goods are to be "acquired . . . by the seller after the perfection of the contract of sale," clearly implying that a sale is possible even if the seller was not the owner at the time of sale, provided he acquires title to the property later on. In the present case however, it is likewise clear that the sellers can no longer deliver the object of the sale to the buyers, as the buyers themselves have already acquired title and delivery thereof from the rightful owner, the DBP. Thus, such contract may be deemed to be inoperative 20 and may thus fall, by analogy, under item no. 5 of Article 1409 of the Civil Code: "Those which contemplate an impossible service." Article 1459 of the Civil Code provides that "the vendor must have a right to transfer the ownership thereof [object of the sale] at the time it is delivered." Here, delivery of ownership is no longer possible. It has become impossible. Furthermore, Article 1505 of the Civil Code provides that "where goods are sold by a person who is not the owner thereof, and who does not sell them under authority or with 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." Here, there is no allegation at all that petitioners were authorized by DBP to sell the property to the private respondents. Jurisprudence, on the other hand, teaches us that "a person can sell only what he owns or is authorized to sell; the buyer can as a consequence acquire no more than what the seller can legally transfer." 21No one can give what he does not have nono dat quod non habet. On the other hand, Exhibit D presupposes that petitioners could repurchase the property that they "sold" to private respondents. As petitioners "sold" nothing, it follows that they can also "repurchase" nothing. Nothing sold, nothing to repurchase. In this light, the contract of repurchase is also inoperative and by the same analogy, void.

TARLAC TDC finally claims that the City of Manila is estopped from questioning the validity of the sale it executed on July 13,'1911 conconveying the subject property to the Manila Lodge No. 761, BPOE. This contention cannot be seriously defended in the light of the doctrine repeatedly enunciated by this Court that the Government is never estopped by mistakes or errors on the pan of its agents, and estoppel does not apply to a municipal corporation to validate a contract that is prohibited by law or its against Republic policy, and the sale of July 13, 1911 executed by the City of Manila to Manila Lodge was certainly a contract prohibited by law. Moreover, estoppel cannot be urged even if the City of Manila accepted the benefits of such contract of sale and the Manila Lodge No. 761 had performed its part of the agreement, for to apply the doctrine of estoppel against the City of Manila in this case would be tantamount to enabling it to do indirectly what it could not do directly. 52 The sale of the subject property executed by the City of Manila to the Manila Lodge No. 761, BPOE, was void and inexistent for lack of subject matter. 53 It suffered from an incurable defect that could not be ratified either by lapse of time or by express ratification. The Manila Lodge No. 761 therefore acquired no right by virtue of the said sale. Hence to consider now the contract inexistent as it always has seen, cannot be, as claimed by the Manila Lodge No. 761, an impairment of the obligations of contracts, for there was it, contemplation of law, no contract at all. The inexistence of said sale can be set up against anyone who asserts a right arising from it, not only against the first vendee, the Manila Lodge No. 761, BPOE, but also against all its suceessors, including the TDC which are not protected the doctrine of bona fide ii purchaser without notice, being claimed by the TDC does not apply where there is a total absence of title in the vendor, and the good faith of the purchaser TDC cannot create title where none exists. Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. So the right might be lost by the unreasonable passage of time and not by prescription. (1410) 1410: The action of defense for the declaration of teh inexistence of a contract does not prescribe. But as I said, it can be defeated by laches. Art. 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 parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305) Art. 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 125




undertaking; (2) 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 his promise. (1306) 1411and 1412: 1411 refers to a contract that is void because it proceeds from the illegality of the cause or object and the act constitutes a criminal offense. Either both parties are in pari delicto, or only one of the parties is guilty. So what would be the rules if both parties are in bad faith or in pari delicto? They shall have no action against each other and both shall be prosecuted. And if you remember your provisions in the RPC, what would be the general rule with respect to the effects of a crime or its instruments? It shall be seized by the State. An example of which would be, illegal drugs. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given and shall not be bound to comply with his promise. The very common example of this is you deal in drugs. The rule is that when both parties are in bad faith, then the law leaves them where they are and they have no cause of action against each other. No action can be maintained in an illicit transaction. So take note that 1411 speaks of an act which has an illegal cause and the act constitutes a criminal offense. 1412 is also a void contract but the unlawful or forbidden cause does not constitute a criminal offense but nevertheless it is unlawful or forbidden. When the fault is on the part of both contracting parties, again neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking. 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 by 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. That is the distinction between 1411 and 1412. One is that, 1411 refers to a contract which has an illegal cause which act proceeds from a criminal offense, whereas 1412, it is unlawful or forbidden but it does not constitute a criminal offense. Now what would be an unlawful or forbidden cause but does not constitute a criminal offense? Is a contract involving a sale of land to a foreigner valid? No. Is that a criminal offense? No. So if the State will find that out, what happens? Just like when you are a benificiary of CARP, you are prohibited to sell, transfer, encumber the property you acquired by reason of the implementation of CARP within 10 years, and if you violate that undertaking, the government will take back what has been given to you. And if you were the one who bought it, you could no longer get the money back as a form of punishment because there is really that prohibition. So take note of 1411 and 1412. Now, would that apply to inexistent contracts? Inexistent contracts does not necessarily mean a void contract, because when we say inexistent, it does not actually exist, it is purely or absolutely simulated contract. Would that fall under 1411 and 1412, no. If you have read the case of Modina vs. CA and Guan vs. Ong. That will

not fall under here because what has been entered into by the parties are what we call as absolutely simulated contracts. Now we no longer have the Usury Law. The laws on usury have been repealed, and parties can agree with respect to the rate of interest, provided that the rate of interest agreed upon is not unconscionable and inequitous which is for the court to be determine. Moreover, regardless of whether the rate of interest is unconscionable or inequitous, your utang shall subsist. It does not mean that the obligation is deemed extinguished by reason of the rate of interest imposed by the creditor. CASES MODINA vs. CA The principle of in pari delicto non oritur actio 6 denies all recovery to the guilty parties inter se. It applies to cases where the nullity arises from the illegality of the consideration or the purpose of the contract. 7 When two persons are equally at fault, the law does not relieve them. The exception to this general rule is when the principle is invoked with respect to inexistent contracts. 8 In the petition under consideration, the Trial Court found that subject Deed of Sale was a nullity for lack of any consideration. 9 This finding duly supported by evidence was affirmed by the Court of Appeals. Well-settled is the rule that this Court will not disturb such finding absent any evidence to the contrary. 10 Under Article 1409 11 of the New Civil Code, enumerating void contracts, a contract without consideration is one such void contract. One of the characteristics of a void or inexistent contract is that 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 reivindicatoria and any possessor may refuse to deliver it to the transferee, who cannot enforce the transfer. 12 Thus, petitioner's insistence that MERLINDA cannot attack subject contract of sale as she was a guilty party thereto is equally unavailing. But the pivot of inquiry here is whether MERLINDA is barred by the principle of in pari delicto from questioning subject Deed of Sale. It bears emphasizing that as the contracts under controversy are inexistent contracts within legal contemplation. Articles 1411 and 1412 of the New Civil Code are inapplicable. In pari delicto doctrine applies only 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. 13 The statement below that it is likewise null and void for being violative of Article 1490 should just be treated as a surplusage or an obiter dictum on the part of the Trial Court as the issue of whether the parcels of land in dispute are conjugal in nature or they fall under the exceptions provided for by law, was neither raised nor litigated upon before the lower Court. Whether the said lots were ganancial properties was never brought to the fore by the parties and it is too late to do so now. Furthermore, if this line of argument be followed, the Trial Court could not have declared subject contract as null and void because only the heirs and the creditors can question its nullity and not the spouses themselves who executed the contract with full knowledge 126




of the prohibition. Records show that in the complaint-in-intervention of MERLINDA, she did not aver the same as a ground to nullify subject Deed of Sale. In fact, she denied the existence of the Deed of Sale in favor of her husband. In the said Complaint, her allegations referred to the want of consideration of such Deed of Sale. She did not put up the defense under Article 1490, to nullify her sale to her husband CHIANG because such a defense would be inconsistent with her claim that the same sale was inexistent. The Trial Court debunked petitioner's theory that MERLINDA intentionally gave away the bulk of her and her late husband's estate to defendant CHIANG as his exclusive property, for want of evidentiary anchor. They insist on the Deed of Sale wherein MERLINIDA made the misrepresentation that she was a widow and CHIANG was single, when at the time of execution thereof, they were in fact already married. Petitioner insists that this document conclusively established bad faith on the part of MERLINDA and therefore, the principle of in pari delicto should have been applied. These issues are factual in nature and it is not for this Court to appreciate and evaluate the pieces of evidence introduced below. An appellate court defers to the factual findings of the Trial Court, unless petitioner can show a glaring mistake in the appreciation of relevant evidence. Since one of the characteristics of a void or inexistent contract is that it does not produce any effect, MERLINDA can recover the property from petitioner who never acquired title thereover. Art. 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. Art. 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. Recovery even if it is in pari delicto provided  The purpose has not yet been accomplished; or  If damage has not been caused to any third person. 

Applies also if parties are not equally guilty and where public policy would be advanced by allowing the suit for relief.

1414: So suppose Miranda would give Querubin 100K to kill Gloria. Now suppose he later on has a change of heart and tells Quirubin please do not proceed with our plan. In that case if Miranda would decide to repudiate the plan and has a change of heart, then he can now get back what he has earlier given to Querubin before the purpose has been accomplished, and when public interest will be subserved, then the other can recover what he has given either money or property. Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person. 1415: Suppose a minor buys a gram of shabu. Remember the penalty for illegal possession of drugs has been repealed and is now made to depend on the amount of the drugs. But if it were the

incapacitated or the minor, then definitely the law will treat them differently. If you remember the Liguez case (?), Conchita was allowed to get what was promised to her because according to the court, being a minor, she occupies a privileged position under our law. And if you also notice most of the provisions in the RPC regarding minors would always lean to the protection of the minor Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. Contracts: 1. Illegal per se – forbidden for it is against public interest. 2. And merely prohibited contracts  forbidden because of private interest  recovery is permitted provided that:   

contract is not illegal per se prohibition is for protection of plaintiff; public policy is enhanced.

1416: Example of this is donation of all the properties of the donor, so it is not illegal per se, but it is prohibited because one is, it might prejudice the creditor. Second is you may no longer have anything to support your needs when you will be giving all your properties. Especially if donations inter vivos. This provision is actually designed for the protection of the donor. And in that case he can recover what he has delivered. Another example would be homestead lands. Art. 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. 1417: This is true in basic necessities. And you have your friendly neigborhood variety store. So if your sari-sari store sells you more than what is permitted by DTI, you can go to DTI and complain. So here is you can recover the excess of what you have paid. Art. 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. 1418: So when the maximum hours of work is fixed, you can demand for overtime pay. May overtime pay be waived? It depends. If for service rendered, yes. But if you are still going to render service. No, that is against the law. Art. 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.

 

Cannot be waived; Any contract in violation of this article shall be invalid.

1419: Is minimum wage. Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced

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OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA.  


If indivisible, the whole contract is void. If divisible, the legal terms may be enforced if they can be separated from illegal terms.

1420: In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. So an example of that would be a pledge, and there is that stipulation that you cannot redeem what has been pledged and it becomes the property of the creditor, that is a void agreement.So in that case, the loan obligation shall remain but the pledge shall be stricken out. Art. 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected. 1421: So third persons can invoke as a defense the illegality of the contract for as long as they will be affected by such an illegal contract. Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent. 1422: A contract which is the direct result of a previouis illegal contract, is also void and inexistent. Precisely because the previous contract might either be one that has an illegal object or an illegal cause or forbidden cause. In short, the contract that will arise from such forbidden contract would also be void and inexistent . Now there is this case Osmena vs. Commission on Audit. Now the City of Cebu appropriated 5 million for the construction of a modern abatoir but the allocation exceeded the budget. The construction company that won the bidding had already started building the slaughter house, and it demanded for the payment of what it had constructed. The parties and the City of Cebu arrived at a compromise agreement, the obligation as demanded by the constructor is about 2.5 million so they arrived at about 1.5 M as a compromise but it was questioned with respect to the compromise and it went to SC. SC said the compromise agreement is void because it is a derivative of a void contract. Title III. - NATURAL OBLIGATIONS

Art. 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. Voluntary Fulfillment – debtor complies with the same even if he knows that he could not have been legally forced to do so. 

In case of partial voluntary fulfillment, the balance cannot be recovered since on said balance, no legal obligation has yet been created.

In case of Prescription  If prescription is unknown, there can be recovery.  If it is known, no recovery, for this is a case of natural obligation. Example of Natural Obligation 1. Obligation to pay interest for use of money, even if not agreed upon in writing. 2. Duty to support natural or spurious children.

3.

Giving of material and financial assistance to children upon their marriage.



Moral obligation has no juridical tie; though it may be converted into civil obligation. (e.g. acknowledgment of a prescribed debt)

NATURAL OBLIGATIONS Four kinds of obligations according to juridical science: moral obligations, these are obligations which are purely based on conscience or what we call as duty. Natural obligations are obligations not sanctioned by any action (court action). Civil obligations which are obligations enforceable in court, except unenforceable contracts. Mixed is either civil with moral, or moral with natural. But natural obligations may be converted into civil obligations by novation or by acknowledgement or confirmation such as that of a prescribed debt. 1423: Obligations are either civil or natural. Civil obligations give a right of action to compel their performance. Precisely when demand is made and the other person does not perform what is incumbent upon him, the creditor can institute an action to compel the obligor to perform his obligation. But such is not true in natural obligations because natural obligations are not based on positive law but on equity and natural law and being such they 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 and rendered by reason thereof. So if there has been voluntary performance then the person who has performed can no longer recover or demand for the return or the payment of what he has delivered or rendered. Art. 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. So what are the different kinds of natural obligations? One of which is found in 1424. So in all instances the performance must be accompanied by voluntary because if there is no voluntariness in the performance, then the person who perform can demand the restoration or the payment of whatever has been delivered or rendered. So there is always that voluntariness on the part of the person who performs the obligation. Here is the civil obligation has already prescribed, so a debt has already prescribed because no demand was made within the period of 10 years and therefore the creditos could no longer sue the debtor for the non payment. But the obligor is conscience stricken, he voluntarily delivers. So in that case he can no longer demand for the return of what has been delivered. Art. 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. Another example would be 1425. Remember 1236 and 1237. Because the action the has already prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid. He is not under obligation under the law to reimburse the third person because the payment did not redound to his benefit. 128




Art. 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact the he has not been benefited thereby, there is no right to demand the thing or price thus returned.

will now file before the court a special proceeding for the probate of the will. Now if one of the pages was undated, then the court declares the will void. So in that case, the stipulations in the will will no longer govern the distribution of the estate of the deceased. So if what is stated here is a legacy (personal movable property) of a car and the will is void, then suppose the heirs are A, B, and C could now ignore the provisions in the holographic will.

1426. (15 years old to 17) Remember 1241: the minor is not obliged to restore. He is only obliged to restore if he has kept the thing or if it has redounded to his benefit.

Despite the fact, the heirs chose to honor the legacy stated in the will.

Art. 1427. 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. 1427 no longer applies to 18-21, but by analogy it applies to those below 18. Correlate to 1239: delivers a sum of money a sum of money or a fungible thing in fulfillment of an obligation there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. This was mentioned in 1239, you remember that. Art. 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. 1428: This time suppose A files a case against B. But the court decided in favor of B, therefore the complaint of A against B did not prosper so whatever he has prayed for in that complaint could no longer be recovered from B since there was an unfavorable judgment against A. However, if B decides to honor what has been written in the complaint and delivers voluntarily he could no longer asks for the return of what he has delivered or payment for the service he has rendered. Art. 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. 1429: Remember 1311that the heirs is not liable beyond the value of what he has received, so he is not liable for the debts of the decedent which exceeds the amount he received from the decedent. Art. 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.



If the will is void, the legacy is also void and the deceased is considered to have died without a will. 1430: Wills are classified either notarial or holographic. Let us go to holographic or simple will. It has 3 requirements, one is it must be entirely handwritten by the testator, dated by the testator and signed by the testator. The requirement dated and signed applies to all pages of the will. If there are alterations, there must be a signature otherwise the will be void. Now suppose one of the pages was not dated. So if the testator dies what will the heirs do, they

A, B, C as heirs of X. X already died, the will of X contains a stipulation in favor of D which was a legacy. The court declared the will void because one of the pages was not signed by the testator. But B and C now chose to honor the legacy, A did not want to. But he was forced by B and C, so there was force employed upon him, therefore consent was vitiated. Now A died a year later, the heirs of A, Y and R filed now a petition for rescission because the consent of A was vitiated by force. Being the heirs of A will the action for annulment prosper? No. Because while it may be true that they are successors in interest, the vice that was employed upon A is personal upon A and moreover, they merely have an inchoate right over the thing that was delivered to D as a legacy at the time of the delivery. So the action is true with A but not with Y and R. Natural obligations will only produce a binding effect if the performance is coupled with voluntariness. If there is no voluntarines on the performance, then the person who performed it can demand for the return of whatever he has delivered or payment for the service he has rendered. Otherwise, in the absence of voluntariness, it ceases to be a natural obligation. Title IV. - ESTOPPEL (n) A bar w/c precludes a person from asserting or denying anything contrary to that w/c has been, in contemplation of law, established as the truth, either by acts of judicial/legislative officers, by his own deed… Art. 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. CASES METROPOLITAN BANK vs. CA We quote with favor the following pronouncements of respondent Court of Appeals in the Amended Decision, thus: . . . . In the case under scrutiny, we are convinced that We erred in reversing the appealed judgment despite the finding that subject property covered by TCT 106901 � Quezon City had been sold, in a manner absolute and irrevocable, by the spouses, Tomas Chia and Vicenta Chan, to plaintiff-appellee, and on September 16, 1980, the latter complied with its contractual obligation thereunder by paying the total mortgage debt it assumed, amounting according to Metrobank itself, to P116,416.71, as of September 16, 1980. All things studiedly viewed in proper perspective, we are of the opinion, and so rule, that whatever debts or loans mortgagor Chia contracted with Metrobank after September 4, 1980, without the conformity of plaintiff-appellee, could not be adjudged as part of the mortgage debt the latter so assumed. We are persuaded that the contrary ruling on this point in Our October 24, 1994 decision would 129




be unfair and unjust to plaintiff-appellee because, before buying subject property and assuming the mortgage debt thereon, the latter inquired from Metrobank about the exact amount of the mortgage debt involved. The stipulation in subject Deeds of Mortgage that mortgagors' debts subsequently obtained would be covered by the same security became inapplicable, when mortgagor sold to appellee the mortgaged property with the knowledge of the mortgagee bank. Thus, since September 4, 1980, it was obvious that whatever additional loan mortgagor got from Metrobank, the same was not chargeable to and collectible from plaintiff-appellee. It is then decisively clear that Metrobank is without any valid cause or ground not to release the Deeds of Mortgage in question, despite full payment of the mortgage debt assumed by appellee. Petitioner METROBANK is estopped from refusing the discharge of the real estate mortgage on the claim that the subject property still secures "other unliquidated past due loans." In Maneclang vs.Baun, 14 this Court enumerated the requisites for estoppel by conduct to operate, to wit: 1. there must have been a representation or concealment of material facts; 2. the representation must have been with knowledge of the facts; 3. the party to whom it was made must have been ignorant of the truth of the matter; and 4. it must have been with the intention that the other party would act upon it. Respondent GTP, thru Atty. Atienza, requested from METROBANK that he be furnished a copy of the full indebtedness secured by the real estate mortgage. 15 In response thereto, petitioner METROBANK issued a statement of account as of September 15, 1980 16 which amount was immediately settled and paid the next day amounting to P116,416.71. Petitioner METROBANK is thus barred from taking a stand inconsistent with its representation upon which respondent GTP, as an innocent third person to the real mortgage agreement, placed exclusive reliance. Respondent GTP had the reasonable right to rely upon such representations as true, considering that it had no participation whatsoever in the mortgage agreement and the preparation of the statement of account, coupled with the expectation that a reputable banking institution such as petitioner METROBANK do conduct their business concerns in the highest standards of efficiency and professionalism. For an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against a person relying thereon. A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. In the law of evidence, whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it.

MANILA LODGE vs. CA TDC finally claims that the City of Manila is estopped from questioning the validity of the sale it executed on July 13,'1911 conconveying the subject property to the Manila Lodge No. 761, BPOE. This contention cannot be seriously defended in the light of the doctrine repeatedly enunciated by this Court that the Government is never estopped by mistakes or errors on the pan of its agents, and estoppel does not apply to a municipal corporation to validate a contract that is prohibited by law or its against Republic policy, and the sale of July 13, 1911 executed by the City

of Manila to Manila Lodge was certainly a contract prohibited by law. Moreover, estoppel cannot be urged even if the City of Manila accepted the benefits of such contract of sale and the Manila Lodge No. 761 had performed its part of the agreement, for to apply the doctrine of estoppel against the City of Manila in this case would be tantamount to enabling it to do indirectly what it could not do directly. The sale of the subject property executed by the City of Manila to the Manila Lodge No. 761, BPOE, was void and inexistent for lack of subject matter. 53 It suffered from an incurable defect that could not be ratified either by lapse of time or by express ratification. The Manila Lodge No. 761 therefore acquired no right by virtue of the said sale. Hence to consider now the contract inexistent as it always has seen, cannot be, as claimed by the Manila Lodge No. 761, an impairment of the obligations of contracts, for there was it, contemplation of law, no contract at all. The inexistence of said sale can be set up against anyone who asserts a right arising from it, not only against the first vendee, the Manila Lodge No. 761, BPOE, but also against all its suceessors, including the TDC which are not protected the doctrine of bona fide ii purchaser without notice, being claimed by the TDC does not apply where there is a total absence of title in the vendor, and the good faith of the purchaser TDC cannot create title where none exists. The so-called sale of the subject property having been executed, the restoration or restitution of what has been given is order. Art. 1432. The principles of estoppel are hereby adopted insofar as they are not in conflict with the provisions of this Code, the Code of Commerce, the Rules of Court and special laws. Art. 1433. Estoppel may in pais or by deed. I.

Estoppel in Pais (Equitable estoppel) i. By conduct or by acceptance of benefits; ii. By representation or concealment; iii. By silence; iv. By omission; v. By laches (unreasonable delay in suing)

II. Estoppel by Deed ( Technical estoppel) i. Proper (written instrument may also be in the form of a bond/mortgage) ii. Estoppel by judgment as a Court record – when court is in res judicata. Prevents the parties from raising questions that could have been put in issue and decided in previous case. Estoppel in Pais Arises when one, by his acts, representations or admissions or by his silence when he ought to speak out, intentionally or thru culpable negligence, induces another to believe certain facts to exist, and such the other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts. 1.

3 Elements of Laches Conduct on the part of defendant, or of one under whom he claims, giving rise to the situation of w/c the complaint is made and for w/c the complaint seeks a remedy.

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Delay in asserting the complainant’s rights, the complainant having had knowledge or notice of defendant’s conduct and having been afforded an opportunity to institute a suit. Lack of knowledge or notice on the part of the defendant that complainant would assert the right on w/c he bases his suit. Injury/ prejudice to defendant in the event relief is accorded to complainant, or the suit is not held to be barred.

Estoppel by Deed A bar w/c precludes a party to a deed and his privies from asserting as against the other and his privies any right or title in derogation of deed, or from denying the truth of any material fact asserted in it.   

There must be a written contract; If deed/instrument is null and void, estoppel will not apply. If a person notarizes (and is not a party to), the instrument, estoppel does not apply.

ESTOPPEL Estoppel is a bar that precludes a person from denying or asserting anything contrary to what he has ascertained earlier. A very common example of estoppel would be one that came out of a bar exam. This guy was walking a dog around the neighborhood. Now a neighbor asked the person whose dog he was walking. And he said, mine. A week later the same dog bit the neighbor. The neighbor went to the person and asked for reimbursement and the person said it is not my dog but a friend of mine's. I just walked the dog. Well, that is estoppel. He cannot assert something different from what he has represented earlier. Estoppel by silence or inaction. This is sometimes referred to as estopple by standing by or laches. The principle behind that is one who is silent when he ought to speak cannot be heard later on to speak when he ought to be silent. If there is a need to rebutt or affirm, then rebutt or affirm it otherwise you will be estopped later on from denying or affirming it. 1431: So estoppel works against the person representing that he is this type of person and later on he would say that it was just a joke if the other person has relied on your statement or representation. Now there is also what we call as estoppel by acquiesence. But estoppel is different from laches which is the failure to institute the action within the reasonable period of time. It is not based on positive law unlike prescription. Estoppel cannot be also predicated on an illegal act. Meaning the person who has acted on a particular illegal act, cannot be estopped. For example a person who is in need of money because a loved one is hospitalized and he goes to a money lender, and the money lender says my rate of interest is 20% per month. Despite that, he borrows. And later on when payment is to be made, he would now question the interest. The creditor cannot say that you are estopped from questionning the interest, because that is predicated in an illegal act. So estoppel will not lie against the debtor. Now other kinds of estoppel we have, corporation by estoppel. Like two or more persons would represent themselves to a person(stranger) that they are officers of a corporation and by reason of that misrepresentation, the third person would enter into a transaction with these people who are in fact not a corporation, then those who misrepresented themselves are already estopped from denying that actually no corporation existed. Then we have judgment by estoppel, (Tijam vs. Sibunghanoy): One of the parties knew that the court trying the case has no jurisdiction but despite knowledge he entered into trial. Unfortunately the ruling of the court was not favorable to the person who knew. So later he

invoked the fact that the lower court had no jurisdiction, SC said he was estopped. We also have estopple in pais and estoppel by deed. Estoppel in pais is what we call as equitable estoppel. In cases of contracts, we know that a check is not a legal tender. But if the creditor accepts the check without any objection, he cannot be heard later on to say that the check is not a legal tender because of his acceptance of the check. Estoppel by deed or technical estoppel. Now a house made of strong material is an immovable. But the parties in an agreement may treat the house as a chattel, meaning movable. If the question arises later on about the contract, the parties cannot be heard later on to say that the contract is void because the object is not actually a movable but an immovable property. Yan, technical estoppel. Art. 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. In this kind of estoppel, prejudice is not essential. Art. 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. Prejudice is not essential Art. 1436. A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor. Presumption does not apply if alleged tenant does not admit expressly or impliedly the existence of lease contract (such as when landlord did not, attach or plead in his complaint the contract of lease.) 1434: Here, the person is nt the owner of the thing alienated but he sold it. Later on however he acquired ownership of the thing. he cannot be heard later on that at the time of the alienation, he was not actually the owner but merely a representative. 1435 is the exact opposite of 1434. But a tenant will not be heard to dispute the title of the landlord. And the presumption is conclusive. It is not a disputable presumption. Neither can a bailee dispute the title of the bailor. Art. 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 facts; and (4) The party defrauded must have acted in accordance with the misrepresentation. 1437 applies to an immovable property and a third person is misled by a person with respect to the ownership or real right over the immovable. The latter is precluded from asserting his legal title or interest provided all the requisites are present. 1. There must be fraudulent representation or wrongful concealment of facts known to the party estopped; 2. The part precluded must intend that the other should act upon the facts as misrepresented; 131


OBLIGATIONS AND CONTRACTS From the lectures of Atty. Lielanie Espejo, CPA. 3. 4.


The party misled must have been unaware of the true facts; The party defrauded must have acted in accordance with the misrepresentation.

This applies to an immovable. If it were a movable, you apply 1435 and 1436. CASES

estate of the latter's mother nothing more. That rule is that the holder [Alejandro Montelibano y Ramos] of a prior equitable right has priority over the purchaser [Rosendo Hernandez y Espinosa] of a subsequent estate (whether legal or equitable) without value, or with notice of the equitable right, but not as against a subsequent purchaser for value and without notice. (Ewart on Estoppel, p. 199.) CRISTOBAL vs. GOMEZ

HERNAEZ vs. HERNAEZ The spouses, Pedro Hernaez and Juana Espinosa, died, leaving several legitimate descendants. Neither of their estates had been divided up to the date of the institution of this action, but were both under administration. Their son, Domingo Hernaez y Espinosa, sold all his interest in both his father's and mother's estate to his son, Vicente Hernaez y Tuason, on November 6, 1901. Notwithstanding the fact that Domingo Hernaez y Espinosa had thus parted with all his interest in the estates of his two parents, he executed a document of sale in favor of Alejandro Montelibano y Ramos on February 27, 1907, in which he purported to convey all his undivided interest in his mother's estate. On the same date he executed another document of sale in which he purported to convey to Jose Montelibano Uy-Cana four-eighteenths of his interest in his mother's estate. Both of these sales were made with the connivance of his son, Vicente Hernaez y Tuason. Hence, although Vicente Hernaez y Tuason had actually purchased all of his father's interests in the estates of Pedro Hernaez and Juana Espinosa as early as November 6, 1901, and was, on February 27, 1907, the undoubted owner thereof, he is effectually estopped from asserting his title as against either of the vendees mentioned in the documents of sale dated February 27, 1907, to which we have just referred. (Code Civ. Pro., sec. 333, No. 1.) Bigelow on Estoppel (p. 607) says: . . . it is now a well-established principle that where the true owner of property, for however short a time, holds out another, or, with knowledge of his own right, allows another to appear as the owner of or as having full power of disposition over the property, the same being in the latter's actual possession, and innocent third parties are thus led into dealing with such apparent owner, they will be protected. On August 19, 1912, Jose Montelibano Uy-Cana sold his interest in the estate to Alejandro Montelibano y Ramos. By this transfer, the latter stood owner of all the interest of Domingo Hernaez y Espinosa in the estate of Pedro Hernaez, and fiveeighteenths of his interest in the estate of Juana Espinosa as against Vicente Hernaez y Espinosa. It is admitted that Rosendo Hernaez y Espinosa, another son of the deceased spouses administrator of the estates, was notified of Montelibano's purchases on January 8, 1913, when he received notice of Montelibano's motion, entered in the administration proceedings, asking that he (Montelibano) be substituted as assignee of the interests of various heirs of the estate which he had acquired by purchase. Notwithstanding this knowledge, Rosendo Hernaez y Espinosa entered into a contract of sale with Vicente Hernaez y Tuason, whereby the latter purported to convey all the interest, which he had acquired from his father, in the estate of the deceased spouses, Pedro Hernaez and Juana Espinosa. It will be remembered that he purchased his father's share of the estate on November 6, 1901; that he is estopped from asserting title to any interest in his grandfather's estate and in five-eighteenths of his grandmother's estate. Rosendo Hernandez y Espinosa purchased with full knowledge of these facts. He, therefore, acquired thirteeneighteenths of the interest of Domingo Hernaez y Espinosa in the

A point unconnected with the other issues in the case is raised by the fourth assignment of error in the appellants brief. This has reference to the title to parcel C, the lot located in Bacoor. There can be no doubt that the ownership of this piece of property was originally vested in Epifanio Gomez by virtue of a composition title from the Government; and said title has never passed from him except by virtue of the contract of sale of 1891 in favor of Luis R. Yangco. Nevertheless, the defendant has submitted in evidence a notarial document emitted on December 31, 1904, by Epifanio Gomez, in the character of notary public, wherein he certifies that Marcelino Gomez had requested him to draw up a notarial act showing the properties of which Marcelino Gomez was known to be the true owner: upon which follows an enumeration of properties possessed by Marcelino Gomez. Among these we find the lot in Bacoor, being the parcel C described in the complaint. The appellant relies upon this instrument as proving title in Marcelino Gomez, and it is contended that Epifanio Gomez and his successors are estopped from claiming said lot. This contention is untenable. It is true that we have here the written admission of Epifanio Gomez would have been estopped from asserting ownership in himself. Nevertheless, it is clear enough this document Epifanio Gomez, in conclusion with his brother Marcelino, was merely laying the basis of a scheme to defeat Yangco's rights under his contract of purchase of 1891, or perhaps to defeat other creditors of Epifanio Gomez, a plot which, in view of subsequent occurrences, they did not attempt to carry into effect. No estoppel can be invoked by Marcelino Gomez or his successors, based upon this document, for the reason that he was not misled by the false statement contained therein. Art. 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. Estoppel resulting from acceptance of benefits (knowledge of true facts) 1438 applies to a situation wherein you allow your friend to borrow your jewelry and pawn. And later on also made use of the portion of the proceeds of the loan. And later on you had a change of heart and tells the owner of the pawnshop that you are the owner. that is estoppel. Because there is estoppel in the acceptance of benefits. Art. 1439. Estoppel is effective only as between the parties thereto or their successors in interest. CASES NILO vs. ROMERO Jurisdiction over the party may be acquired by voluntary appearance in court which has jurisdiction over the subject matter. There is no dispute regarding the fact that summons were served upon 132




defendant City, thru the representative named in said complaint; that for some negligence on the part of its employees, the answer of the city to the complaint was filed out of time; that the city of Davao, as represented by the City Engineer, was duly assisted by the City Attorney, thru Special Counsel Medialdea; that the City Attorney did his best to depend the rights of the City, as shown by the effort he exerted to lift the default order by a motion for reconsideration. The appearance of the City Attorney for and in behalf of the City of Davao constituted a voluntary appearance, sufficient in law to confer upon the court jurisdiction over it. If defendant City believed that it was wrongly represented, its City Attorney should have filed a motion to dismiss, base on such ground. Unfortunately, however, he did not. The doctrine of estoppel now operates against respondent City of Davao. The erroneous designation of representative, when the defendant itself is named, to our belief, not sufficient to set aside the proceedings had in the case. Taking into account the actuation of the defendant City of Davao, assisted by its Special Counsel and/or City Attorney, and the judicial pronouncements on the subject, we see no reason why the technical error in procedure obtaining in the present, can be a sufficient ground to invalidate the default proceedings. No serious arguments can be offered to debut the fact that the default judgment had already become final and executory. Respondent judge himself has issued the corresponding writ execution. Once a decision has become final and executory, the court loses jurisdiction over the case and the parties, except to correct clerical errors and/or to enforce it. Of course, the rules (Rule 38) provide the remedies that a party may pursue, like a Motion for Relief from Judgment. However, before such motion can be properly acted upon, certain requirements are provided for which respondent City of Davao failed to comply with. From October 20, 1955, the defendant was declared in default or from March 19, 1956, when the motion for reconsideration of the order declaring the defendant in default was denied, until November 17, 1958, when the petition for relief from judgment was filed, the periods provided for in Rule 28 have long elapsed (Moran Comments on the Rules of Court, 1957 Ed., Rules 38, sec. 3, p. 526). From the date of the order of default (October 20,1955) to the date of judgment of default (October 28, 1958), more than tree (3) years had supervened, without the respondent City of Davao having filed apportunely any pleading to protect itself, thereby rendering itself guilty of laches it is alleged in the petition for relief from judgment that the property, subject of the complaint, being the national highway, the Republic of the Philippines should have been included as a party defendant. This did not pass beyond a mere allegation. In its answer, the defendant set up only one defense and that is prescription of action. And the trial court found that the defendant used said road for its inhabitants. 1439: Estoppel is effective only as between the parties thereto or their successors in interest. But not to third persons. Third persons can invoke the principle of estoppel. Now estoppel does not lie against the state. Neither does prescription lie against the state. That is the general rule.

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Obligation and Contracts Reviewer Ateneo de Davao 2017

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